Amid dark times in the global shipbuilding industry, another of China’s major players appears to be on the verge of bankruptcy. China Rongsheng Heavy Industries Group used to be the largest private shipbuilder in the country, but is now seeking potential buyers to help get it out of deep financial problems.

In the past few months, many workers have left Rongsheng’s plant in Nantong, East China’s Jiangsu Province, which stopped production after it delivered a ship to Brazilian iron ore giant Vale in January, Caixin magazine reported on March 9.

The once-busy plant in Nantong used to have as many as 30,000 workers, but now “only several thousand of them are still there,” a Rongsheng employee who declined to be named told the Global Times on Tuesday.

The employee has been working at Rongsheng for more than five years, but said he will also be leaving the company soon. Having watched the ups and downs of Rongsheng, he said he will not be staying in the shipbuilding industry either. “It has been such a sad story for the industry,” he said.

No more plain sailing

Rongsheng was founded by entrepreneur Zhang Zhirong in 2005, when the shipbuilding industry was booming. The initial designed annual capacity of the plant in Nantong was as much as 3.5 million dead weight tons, nearly the same as the total annual capacity of State-owned China State Shipbuilding Corp at that time, according to the Caixin report.

But the global shipbuilding industry found itself in a severe recession when the world economy was hit by the financial crisis in 2008. Many private shipbuilders went bankrupt in the ensuing years, but even then few people thought the same fate would befall Rongsheng.

Due to the hard times in the industry, many ship buyers lowered their down payments on orders from shipbuilding firms. In 2012, the down payment on ship orders was between 10 percent and 20 percent of the total contract value, compared with the pre-crisis level of 60 percent.

The rest of the cost had to be covered by shipbuilders until the buyers made full payment when the ship was delivered, analysts said.

Many shipbuilders became very cautious about accepting new orders under these circumstances, given the huge amounts of capital needed to build a ship. But Rongsheng did the opposite and increased its orders. The Caixin report said that Rongsheng gained the most orders among all shipbuilders in China from 2010 to 2012.

The large amount of orders helped to boost investors’ confidence in the company, which floated on the Hong Kong Stock Exchange in November 2010. But the move also put huge pressure on the company’s capital chain, experts said.

Recent media reports have said that the company owes banks around 20 billion yuan ($3.2 billion) at present.

“Good order figures may have helped the financing, but Rongsheng should have been more cautious about expanding during an overall industry downturn,” Wang Danqing, a partner at Beijing-based ACME Consultancy, told the Global Times on Tuesday.

The Rongsheng employee said that poor management has also been a major factor behind Rongsheng’s predicament. Deliveries of many of the orders have been delayed, giving ship buyers the option of abandoning the order and claiming compensation.

Seeking a way out

Rongsheng has been trying to diversify in order to get over the current difficulties, and is now preparing for a move into the energy sector. The company announced on Friday that its board of directors had agreed to change its name to China Huarong Energy Co, according to a filing with the Hong Kong bourse.

Wang Shaojian, Rongsheng’s chief financial officer, told the media he was “confident” in the prospects for Rongsheng in the energy sector. The company has already started making moves in this regard. In August 2014, it announced that it had acquired a 60 percent stake in a subsidiary of New Continental Oil & Gas (HK) Co in Kyrgyzstan, giving Rongsheng equity in an oil field in the country.

“It [the transition] is a risky move, and the prospects are not that optimistic given that they are two quite different industries,” Shanghai-based independent industry expert Wu Minghua told the Global Times on Tuesday.

Wu noted that Rongsheng may lack the expertise and talent required for the oil industry, adding that it will have to compete with even bigger rivals in the sector.

Rongsheng is also trying to streamline its business. It said in a filing on Tuesday that it has signed a memorandum with a potential buyer for it to acquire Rongsheng’s shipbuilding and ocean engineering business, as well as its debts.

Recent media reports said that Jiangsu-based Yangzijiang Shipbuilding Holdings is considering acquiring Rongsheng’s shipbuilding business.

Yangzijiang Shipbuilding declined to comment on the matter when contacted by the Global Times on Wednesday. Rongsheng also declined to comment, saying that it is now in a “quiet period,” prior to further announcements.

Survival of the fittest

Wu noted that securing financing is the major problem for private shipbuilders and he estimated that around one-third of China’s private shipbuilders are suffering from a capital crunch at present.

In 2014, new orders in China’s shipbuilding industry amounted to 59.95 million dead weight tons, down 14.2 percent year-on-year, according to data from the China Association of the National Shipbuilding Industry (CANSI) in January. The association also predicted that new orders may decline further in 2015 given the overall cooling economy.

Experts noted that most of the new orders have gone to State-owned shipbuilders, as it is easier for them to get loans from banks. Data from the CANSI also revealed that the industry is becoming more consolidated, with the top 10 companies having a 50.6 percent share of the market in 2014, up 3.2 percentage points compared with that in 2013.