The merger between China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Company (CSIC), finalised in November 2019, continues to evolve. The new enterprise, which continues under the banner of CSSC, has reportedly now completed the reorganisation of its equipment-manufacturing, shipbuilding and chemical enterprises, and integrated its assets. There were significant drivers behind the merger, and observers are now waiting to gauge its impact domestically and internationally.
Mergers and re-mergers
The merger inevitably hit the international headlines given the extraordinary recent output of China’s shipbuilding industry, not least in helping to transform the capabilities of the People’s Liberation Army (PLA) Navy. The joining of the two companies is in fact a re-merger. The previously consolidated CSSC was split into two in July 1999 as part of a government effort to turn large and cumbersome state-owned enterprises (SOEs) into competitive defence-industrial organisations. The resulting split was essentially geographical in nature: CSIC oversaw shipyards in the north and west of the country while CSSC took responsibility for those in the south and east. Meanwhile, in the civilian sector, the two conglomerates competed for domestic and international capital. Competition also extended to their subsidiary companies, whose areas of business often overlapped.
The degree of competition between CSIC and CSSC in the defence sector was more limited, however, because military shipbuilding is a more structured process than its civilian equivalent given the close relationship, in terms of procurement, between the PLA and China’s defence industry. CSIC and CSSC both became large conglomerates, though the former was the bigger of the two. In 2016, for example, CSIC had about 150,000 employees and CSSC 68,000. CSIC also oversaw a larger number of parent companies, comprising shipyards, marine-equipment factories and research and development (R&D) institutes.
Despite this apparent unwieldiness, both conglomerates achieved financial growth in recent years. Their defence-related revenues grew between 2015 and 2019, with a particular spike between 2018 and 2019 when CSIC’s grew by 17.6% year-on-year and CSSC’s by 13.1%. The companies’ 2019 figures show the difference between their respective defence-related revenues: CSIC’s, at US$11.3 billion, was roughly double that of CSSC, at US$5.5bn, in a year when other SOEs with defence business saw their revenue from the sector decline by 22.7%.
Why did CSIC and CSSC (re-)merge?
The merger between CSSC and CSIC, creating the new CSSC single-entity conglomerate, was in fact the result of various global- and national-level trends. First, the merger should be seen as a response to a decline in global commercial shipbuilding. According to IISS methodology, defence-related shipbuilding accounted for only about one-fifth of the separate conglomerates’ business. By consolidating resources and combining efforts, CSSC is reportedly able to outmatch South Korea’s shipbuilding giants as the world’s largest shipbuilder, accounting for 20% of global market share and US$110bn in assets.
However, despite the relative scale of CSSC’s civilian and defence activities, the merger has defence implications. In order to restructure major assets, CSSC raised US$561.3 million in new fundingfrom 11 investors (including the National Military-Civilian Integration Industry Investment Fund Co. Ltd). It also purchased the total or limited equity of major parent companies involved in defence-related shipbuilding. Jiangnan Shipbuilding, Shanghai Waigaoqiao Shipbuilding, and CSSC Chengxi became wholly owned subsidiaries of CSSC. Guangzhou Shipyard International and Huangpu Wenchong Shipping Co. Ltd became a CSSC holding subsidiary and equity-holding subsidiary respectively.
All this was aimed at further restructuring in order to increase the competitiveness of the group’s military and civilian shipbuilding and repair activities. More importantly, as a result of the merger, CSSC now oversees all of the R&D institutes and shipyards formerly overseen by the separate CSSC and CSIS enterprises.
This rationalisation will be even more important in the face of a slowing Chinese economy. CSSC’s leadership has stated that it intends to focus on innovation in strategic, cutting-edge and disruptive technologies, by strengthening the group’s basic- and key-technology research. In August the new conglomerate also established its own Science and Technology Commission, comprised of senior experts and academics from the Chinese Academy of Sciences to act as consultants in support of scientific decision-making. The Chinese government will be announcing the next Five-Year Plan (FYP) – the 14th – in 2021, which will set new short-term targets and directions for China’s defence modernisation and will orientate China’s defence industry. The merger might therefore be well timed to take advantage of the new FYP.
The merger was also a response to concerns over longstanding corruption within CSIC. The former chairman of CSIC, Hu Wenming retired one month before the formal merger took place. Along with other CSIC administrators, Hu had previously been investigated for ‘serious violations of discipline and law’ and ‘is currently undergoing disciplinary review and supervision and investigation by the State Supervision Commission of the Central Commission for Discipline Inspection’.
The finalisation of the merger was followed swiftly by the onset of the COVID-19 pandemic, the effects of which included a further significant dampening of the maritime sector globally. That has only added to questions over whether the new CSSC will be able to overcome a slowing Chinese economy, sluggish global shipbuilding growth and its own internal challenges. The effect on the new company’s performance will only be known next year, when its revenue for 2020 is declared.