Gummed-up global supply chains may be a headache for consumers and economic policy makers trying to tame inflation. For the world’s shipbuilding industry, they are proving to be a boon — particularly in China.

It’s already a bumper year for this globally dominant area of Chinese industry, with newly received ship orders up by more than 200 percent in the first three quarters of this year, according to data from the China Association of the National Shipbuilding Industry. Such figures are cementing the country’s position as the world’s leading commercial shipbuilder, with a market share of more than 40 percent, based on 2019 data from United Nations Conference on Trade and Development (UNCTAD).

Yet China’s shipbuilding prowess is creating concern outside the country, particularly in the U.S., because of the blurred lines between China’s civil and military capabilities. Companies such as state-owned China State Shipbuilding Corporation (CSSC), the world’s biggest shipbuilder, have not only taken a leading role in commercial shipbuilding, they have also played a vital role in making China’s navy the world’s largest with some 355 ships and submarines, according to the U.S. Department of Defense.¹A number of research institutes affiliated with CSSC have been placed on the U.S. Entity List, which bars companies operating in the U.S. from exporting goods to the institutes without prior approval.

CSSC — which has about 350,000 employees and $130 billion in assets — has won shipbuilding orders from companies in Europe, the Middle East and Asia in recent years. In April, it received its largest order yet, a contract for container ships valued at $1.5 billion. The buyer is believed to be Mediterranean Shipping Company, a Swiss-Italian firm. Some, though, argue that buyers should now pay more attention to where the proceeds of such contracts end up.

“That profit is likely in some way, either directly or indirectly going to benefit the ongoing development and modernization of the Chinese Navy,” says Matthew Funaiole, director with the iDeas Lab at the Center for Strategic and International Studies, a D.C.-based think tank.

The rise of China’s shipbuilding is a notable success for Beijing, which designated it as a strategic industry in 2006, bolstering it with supportive policies. That support has enabled Chinese companies to benefit from economies of scale, which in turn have allowed them to compete effectively on price with rivals in countries like Japan and South Korea.

“[The shipbuilding companies] benefit from extremely favorable loans [and] they’re protected in many ways by the Communist Party,” says Brent Sadler, senior fellow for naval warfare and advanced technology at the Heritage Foundation’s Center for National Defense. “They are very aggressive and opportunistic to seize where the profit margins may be. It’s a hybrid, it’s a mix of state-controlled as well as capitalist marketing. And it’s worked so far for them.”

The industry is also playing a key role in Xi Jinping’s efforts to align China’s economic and security efforts, under the country’s so-called Military-Civil Fusion strategy. CSSC, for example, is open in describing itself as having “national defense construction” among its core missions. 

“China is able to leverage its dominance of the commercial shipbuilding market to benefit its Navy because it does use that capacity to build Navy ships, even if they might be a little bit lower quality than a U.S. warship might be,” says Bryan Clark, senior fellow and director of the Center for Defense Concepts and Technology at Hudson Institute. 

The Chinese shipbuilding industry’s military ties have already drawn U.S. attention. The Trump administration in 2020 banned U.S. individuals and companies from holding shares, either directly or via investment funds, in CSSC and 30 other Chinese companies with alleged military ties. President Biden broadened the ban in June, adding more entities to the list and addressing legal concerns over the initial Trump administration effort.

Even so, orders for Chinese-built ships have continued to pour in this year, even from unexpected quarters. In September, a subsidiary of CSSC that builds both civil and naval ships received an order worth $1 billion from Taiwanese container shipping company Evergreen Marine Corp, its largest contract ever with a Chinese shipbuilder. That order has come despite rising cross-Strait tensions this year, and the build-up of the Chinese Navy which analysts see as a growing threat to Taiwan’s current status.

“There’s a market incentive for shipping companies to look to China”, says CSIS’s Funaiole. “This is one of those situations where the market or market trends might be pushing companies in a direction and not necessarily taking into consideration some of these broader security issues.” 

The U.S. is making some effort to increase its own capabilities. The Shipyard Act, a bipartisan bill to provide support to American shipyards, was introduced in the Senate in April: It proposes a $25 billion provision to repair, reprove and optimize shipyards that support the U.S. Navy fleet — an infrastructure improvement that would help the Navy deal with its repairs backlog and potentially help private shipyards to support increases in its fleet size.  

But in contrast to the thriving Chinese shipbuilding industry, American commercial shipbuilding has been struggling in recent years. Whereas Chinese shipbuilders, with their dual military and civil purpose, maintain enough capacity to keep building ships even if commercial shipbuilding demand softens, U.S. shipbuilding companies usually specialize in one or other area.  

“The U.S.’s…shipbuilding industry [was] sized down to the demand and wouldn’t be able to expand quickly,” says the Hudson Institute’s Clark. “The commercial shipyards are likely to start closing over the next few years unless there’s something done to increase the number of ships that are being built in the United States.”

---