Notice of the People’s Government of Province on Printing and Distributing the Shandong Province Shipbuilding Industry Adjustment Revitalization Plan

Lu Zheng Fa [2009] No. 43

All people’s governments of all cities and all counties (county-level cities and districts), all departments and directly-subordinated agencies under the provincial government, and all major enterprises and institutions of higher learning in Shandong Province:

The Shandong Province Shipbuilding Adjustment Revitalization Plan (hereinafter referred to as the “Plan”) is hereby printed and distributed to you. Please carry out this Plan earnestly.

Currently, Shandong Province (hereinafter referred to as the “Province”) is in the key stage of shipbuilding development. The impacts of the global financial crisis on the real economy have brought both severe challenges and important opportunities of structural adjustment for shipbuilding development. Formulating and implementing this Plan is of significant meaning for carrying out the national Shipbuilding Industry Adjustment and Revitalization Plan, keeping the healthy and stable development of the shipbuilding industry in this Province, and accelerating industry optimizing and upgrading.

All localities and departments shall, with the Deng Xiaoping Theory and the Three Represents ideology as the guiding ideas, deeply carry out the Scientific Outlook on Development, unify their thoughts and actions onto the decisions and arrangements of the Party Committee and the Government of this Province, further intensify their sense of opportunity, take initiative to make reasonable and practical steps to boost technical progress of shipbuilding enterprises, facilitate the implementation of major projects, accelerate shipbuilding industry structure adjustment, optimize the shipbuilding development environment, thus to ensure that the goals of the Shandong Shipbuilding Adjustment and Revitalization Plan is achieved as scheduled.

All localities shall waste no time formulating specific implementation schemes and take concrete measures to organize the implementation work in accordance with the goals, tasks and policy measures determined in this Plan. All relevant departments under the provincial government shall formulate and improve various supporting policy measures and provide good guidance and support with respect to implementation of this Plan according to the specific division of work and working requirements of this Plan.

This Plan also sets out a list of selected major supporting projects under construction or proposed to be built, which will be printed and distributed separately. All localities, competent departments and relevant enterprises shall also carry out the said list properly.

People’s Government of Shandong Province April 20, 2009 Shandong Province Shipbuilding Industry Adjustment Revitalization Plan (2009-2011)

Shipbuilding is a capital technology and labor-intensive industry and a comprehensive industry providing technical equipment for purpose of waterborne shipping, ocean development, and national defense construction. Being much related to other industries and being a powerful driver, shipbuilding has significant promoting force to the development of upstream and downstream industries such as iron and steel, machinery, electronics, chemical, shipping, ocean development, etc. Currently, this Province is in the key stage of leapfrog development to become a large shipbuilding province. The impacts of the global financial crisis on the real economy have brought both severe challenges and important opportunities of structural adjustment for shipbuilding development. This Plan is formulated in order to actively respond to the current situation, ensure the completion of the “Eleventh Five Year” tasks as scheduled, and lay a good foundation for the “Twelfth Five Year” development, thus to realize shipbuilding adjustment and revitalization in this Province.

I. Status Quo and Situation

(I) Status Quo.

1. In this Province, there are 73 shipbuilding and repair enterprises, 5 ocean engineering equipment manufacturers, 7 yacht manufacturers, and 34 supporting enterprises, all of which are included in industry statistics, and 100,000 people working in this industry. In 2008, the amount of backlog orders were 9,110,000DWT, that of new orders 2,040,000DWT, that of ships completed 1,030,000DWT, and the realized output value was RMB 40.3 billion, showing a year-on-year growth of 71%; the amount of added value was RMB 7.9 billion, showing a year-on-year growth of 24%; and the sales revenues were RMB 37.4 billion, showing a year-on-year growth of 71%.

2. Currently, there is one 500,000t-grade shipbuilding dock, two 300,000t-grade shipbuilding docks, one 100,000t-grade shipbuilding dock, one 80,000t-grade shipbuilding docks, one 50,000t-grade shipbuilding berth, and one 300,000t-grade, 150,000t-grade, 100,000t-grade and 50,000t-grade repair dock respectively. This Province currently has a 4,000,000DWT shipbuilding capacity, which is planned to become 6,000,000DWT at the end of the “Eleventh Five Year” period.

3. Ship-supporting products mainly include high/medium-speed diesel engines, boilers, large bent axles, steel plate, etc. The localized loading ratio within this Province is 30%. In 2008, the realized output value of supporting industries was RMB 17 billion, showing a year-on-year growth of 36%; the added value was RMB 4 billion, showing a year-on-year growth of 19%; and the sales revenues were RMB 16 billion, showing a year-on-year growth of 35%.

4. The ocean engineering equipment production capacity has reached 400,000 standard tons and main products include floating production storing and offloading ship (FPSO), self-elevating drilling platform, semi-submersible drilling platform, and ocean engineering vessel. In 2008, the realized output value was RMB 7.8 billion, showing a year-on-year growth of 89% and the sales revenues were RMB 7.5 billion, showing a year-on-year growth of 77%, taking a leading place in .

5. This Province has indigenous design and R&D capabilities for ocean fishing vessels, semi- submersible drilling platform and some supporting products and products such as marine high/medium- speed diesel engine, structural steel plate and anchor chain are Chinese famous brands. However, this Province has weak ship R&D and design capabilities.

6. In the “Three major shipbuilding and repair bases” , and , and the “Six shipbuilding clusters” Qingdao Economic and Technological Development Zone, Jimo City, Yantai Economic and Technological Development Zone, Penglai City, Weihai Economic and Technological Development Zone, and Rongcheng City, the construction has been accelerated and the scale effects are beginning to take shape, but the indigenous innovation capabilities are still weak, and problems such as small scale, dispersed layout and weak foundation are still prominent.

(II) Situation.

1. New Ship Orders Decreased Sharply. Affected by the financial crisis, the shipbuilding market declined abruptly and new ship demand dropped sharply. In the fourth quarter of 2008, the amount of new orders in China was 2,610,000DWT, showing a year-on-year decrease of 77%, and that in this Province was 40,000DWT, showing a year-on-year decrease of 93%. In the next 3 years, the shipbuilding market will enter into a downturn.

2. Greater Risk in Ship Delivery as Prescribed. Bulk carrier is the ship type that has suffered the most severe impacts caused by the financial crisis. In 2008, bulk carrier accounted for about 83% of backlog orders in this Province. With the effects of the crisis going deeper over time, there will be greater risks such as order withdrawal by ship owner and delayed ship acceptance.

3. Structure Adjustment is Accelerated. Affected by the reversed transmission mechanism of the market, shipbuilding enterprises are forced to conduct structure adjustment and accelerate technical progress and new product development to re-establish their competitive edge in the market. The shipbuilding industry is facing a reshuffle, in which shipbuilding enterprises not competitive enough will be forced out of this market.

II. Guiding Ideology, Guidelines & Principles and Goals

(I) Guiding Ideology. Under the guidance of the Scientific Outlook on Development, with firm confidence and positive attitude, take concrete measures to carry out policy measures of the Central Government and the Provincial Government concerning shipbuilding development, promote the implementation of the “Eleventh Five Year” Shipbuilding Development Plan, exert great efforts in industrial structure adjustment and technological innovation, give a boost to industry upgrading and transformation in development mode, and solve prominent problems confronted currently in development to ensure the operational quality and benefits and promote the stable and fast development of the shipbuilding industry of this Province.

(II) Guidelines and Principles.

1. Explore the Market Vigorously and Avoid Market Risks. Stabilize the old market, explore the new market, surrender profit rather than market, try to break even but not lose any client, ensure sustained rise of new ship orders, expand market share gradually, to realize stable growth. Improve product quality, ensure ship delivery on time to minimize the risk of the financial crisis.

2. Change Development Mode and Accelerate Structure Adjustment. Change from purely going for large scale to emphasizing quality and benefit, change from simply depending on factor input to underlining technological innovation, and change from the single business mainly comprising shipbuilding to combination business comprising shipbuilding and repair, ocean engineering equipment and supporting items. Accelerate the implementation of the “New, Special and Good" Program, adjust the structure, and improve qualities.

3. Optimize Industrial Layout and Realize Cluster Development. Accelerate the construction of the “Three Major Bases” and the “Six Shipbuilding Agglomeration Areas”, foster leading enterprises, and establish a sound shipbuilding industry system which should be characterized by concentrated layout, industrial agglomeration, and perfect functionality.

4. Open Wider to the Outside World and Improve Competitive Capacity. On the principle of mutual benefit and win-win result, strengthen cooperation with large international shipbuilding enterprises in the aspects including whole ship design and manufacture, high-tech product R&D and establishing modern shipbuilding mode, and give support to enterprises in their effort to explore the international market.

(III) Overall Goals. Accomplish the task goals set out in the Shandong Shipbuilding “Eleventh Five Year” Development Plan, and by the end of 2011, the production capacity of ocean vessels, inland vessels and ocean engineering equipment to reach 6,000,000DWT, 1,000,000DWT and 500,000 standard tons respectively; the amount of ship completions toreach 4,000,000DWT, 800,000DWT and 350,000 standard tons respectively; local ship assembly ratio of marine equipment to increase by 2 to 5 percent on an annual average basis, the local matching rate of marine raw materials to reach 80%, and all major economic indicators to grow by over 20% annually.

III. Development Focuses

(I) Help Key Enterprises Develop Faster. Give greater support to and help 10 shipbuilding enterprises including Qingdao Beihai Shipbuilding Heavy Industry Co., Ltd., Huanghai Shipbuilding Co., Ltd., Penglai Zhongbai Jinglu Shipbuilding Co., Ltd., Weihai Shipyard, Weihai Sanjin Shipbuilding Co., Ltd., Qingdao Yanfan Shipbuilding Co., Ltd., Penghai Bohai Shipbuilding Co., Ltd., Rushan Shipbuilding Co., Ltd., Xixiakou Group Shipbuilding Co., Ltd. and Shandong Hangyu Shipbuilding and Repair Co., Ltd. develop faster, and ensure they deliver ships on time. Help 5 enterprises including Yantai CIMC Raffles Offshore Co., Ltd., China Offshore Oil Engineering Qingdao Co., Ltd., CNPC Offshore Engineering Qingdao Co., Ltd., Qingdao Wuchuan Heavy Industry Co., Ltd. and Penglai Jutal Offshore Engineering Heavy Industries Co., Ltd. develop the ocean engineering equipment manufacturing vigorously and further increase their market share. Help 10 supporting enterprises including Weichai Power Co., Ltd., Diesel Engine Parent Company, Jigang Group Co., Ltd., Qingdao Marine Boiler Plant, Qingdao Headway Marine Technology Co., Ltd., Dezhou Hengli Electrical Machinery Co., Ltd., Qingdao Fan Plant Co., Ltd., Shandong Tongyu Group Co., Ltd., Weihai Yihe Special Equipment Co., Ltd. and Iron & Steel Group Zibo Anchor Chain Co., Ltd. accelerate their technical renovation and technological innovation and improve their market competitiveness. Help 5 yacht manufacturers including Qingdao Lixing Vehicle & Vessel Industry Development Co., Ltd., Qingdao Matsumoto Yacht Co., Ltd., Qingdao WaterWish Boat Manufacturing Company, Weihai Zhongfu Xigang Ship Co., Ltd. and Shandong Conglin Group Yacht Plant develop faster and cultivate new growth points.

(II) Accelerate the Implementation of a Batch of Technical Renovation Projects. Importance attached to the implementation of 13 shipbuilding technical renovation projects, including the shipbuilding and repair facilities of Penglai Zhongbai Jinglu Shipbuilding Co., Ltd., 3 ocean engineering technical renovation projects, including the deepwater wharf of Yantai CIMC Raffles Offshore Co., Ltd. and No.2 Bridge Crane, 12 ship-supporting technical renovation projects, including the high-power medium-speed diesel engine production capacity construction project of Zibo Diesel Engine Parent Company, and 2 yacht projects.

(III) Accelerate the R&D of High-Tech and High Value-Added Products Importance attached to the R&D of 20 high-tech and high value-added products, including large-sized ro-ro passenger ship, large- sized car carrier, large-sized heavy cargo ship, refrigerated container ship, luxury yacht, public service vessel, ocean fishing vessel, inland container ship, deepwater semi-submersible drilling platform, deepwater floating production storing and offloading device (FSO, FPSO), multifunctional supply ship, large-sized hoist pipe-laying ship, deepwater ocean engineering equipment mooring system, automatic ballast adjustment system for ocean engineering equipment, medium-speed diesel engine for high-power ship, deck machinery, accommodation outfit, communication navigation and automatic control, ballast water treatment system, and special steel for ocean engineering equipment, etc.

(IV) Make Accelerated Breakthroughs in a Batch of Key Generic Technologies. Strengthen fundamental research and strive to make breakthroughs in 3 basic technologies including ocean engineering equipment design and manufacture, 5 basic technologies including ship design and manufacture, and 2 basic technologies including yacht design and building.

(V) Accelerate the Construction of Many School-Enterprise Talent Training Platforms. Support Weihai Vocational College and Yantai Vocational College in their effort to establish talent internship & training base jointly with backbone enterprises. Support Qingdao University of Science and Technology and Qingdao Shipyard in their effort to establish an integrated ship design and manufacture information development platform. Support Penglai Zhongbai Jinglu Shipbuilding Co., Ltd. and Jiangsu University of Science and Technology in their effort to jointly establish a ship engineering & technology R&D platform. Support Shandong Tongyu Group Co., Ltd. and Yanshan University in their effort to establish a full-fiber bent axle and shafting R&D platform. Support Zibo Diesel Engine Parent Company and in their effort to establish a dual-fuel engine (marine) design and development platform. Support Engineering University in its effort to establish a shipbuilding and ocean engineering equipment research center in cooperation with this Province. Support Shandong Jiaotong University, Ocean University of China and Harbin Institute of Technology (Weihai) in their effort to establish a shipbuilding and ocean engineering talents education & training base.

(VI) Highlight the Development of Ship Parts and Other Supporting Industries and Accelerate the Construction of Ship Production Processing and Distribution System. Take concrete measures to carry out the Notice of the Office of the People’s of Shandong Province on Forwarding the Opinions of the Provincial Economic and Trade Commission Regarding Accelerating the Development of Ship- Supporting Industries in Shandong Province, (Lu Zheng Ban Fa [2008] No.7) based on the “three major bases” and “six shipbuilding cluster areas”, highlighting the development of ship parts industries to form industry clusters. Accelerate the construction of production centers of immediate products including ship blocks, modules and superstructures; processing and distribution centers of bulk materials including marine plate, pipe material, cable and coating; and specialized processing centers regarding ship parts casting, forging, heat treatment and chemical treatment processes.

IV. Policy Measures

(II) Promote Merger and Restructuring of Enterprises. Combine the market mechanism with government promotion to make substantive steps in carrying forward structure adjustment. Exert greater effort in attracting investment, give support to foreign-funded shipbuilding enterprises in their efforts to cooperate with local shipbuilding enterprises and establish strategic alliances, and promote the transfer of shipbuilding industry to this Province. Support qualified enterprises in their efforts to make overseas mergers and acquisitions to establish large-sized shipbuilding enterprises. Support backbone shipbuilding enterprises in their efforts to develop jointly with other enterprises in upstream and downstream industries to withstand market risk and financial risk together. Support competitive enterprises in their effort to forge powerful alliances among them or reorganize small and medium-sized enterprises and difficult ones and foster large enterprise groups to increase industry concentration.

(II) Boost the Implementation of Key Projects. Grasping the opportunity of new-round national investment growth, stock adjustment be boosted by making use of increment to promote accelerated development of key enterprises. Construct and implement planned projects properly and avoid low-level redundant construction and dispersed construction. Introduced advanced technical equipment from abroad and make good use of overseas intellectual resources to promote industry upgrading and transformation. Establish key project scheduling mechanism and accountability system, enhance supervision over implementation of key projects, and ensure progress and quality of project construction.

(III) Exert Great Efforts in Market Exploration. Guide enterprises to take the opportunity of market pattern adjustment brought by the financial crisis, explore emerging markets vigorously, and exert greater efforts in exploring overseas markets including Middle East, Southeast Asia, Russia, Brazil, East Europe and North Arica to increase international market share. Grasping the opportunity brought by the state’s effort to develop transportation business and phase out old and outdated ships, actively explore the domestic market and develop and manufacture marketable products to improve domestic market share. Adapt to the development requirements of the international shipping market, actively exploit the ship repair market, and enhance high-tech and high value-added repair and modifying capabilities to further expand market share.

(IV) Accelerate the Establishment of the Modern Shipbuilding Mode. Take concrete measures to carry out the national and provincial guiding opinions on accelerating the establishment of the modern shipbuilding mode, in order to establish a modern shipbuilding mode led by design, centered on general assembly shipbuilding, and oriented to intermediate products. Promote general assembly shipbuilding, digitized shipbuilding and refined management, generalize the application of advanced information technology and suitable technologies, optimize production design and operation procedures, improve production efficiency, control shipbuilding cost, fulfill backlog orders, and ensure ship delivery on time.

(V) Promote Enterprises’ Technical Innovation. Support qualified shipbuilding enterprises and supporting enterprises in their efforts to go public, encourage and help qualified enterprises to establish above-provincial corporate technical centers and engineering & technological research centers, or to establish industry-specific technical centers, engineering & technological research centers jointly with world-famous enterprise groups, R&D design institutes and relevant colleges to forge production-study- research alliances. Encourage foreign merchants to invest in and build ship design and R&D centers to undertake ship design & manufacture outsourcing services. Guide enterprises to adopt new technologies, new processes, new equipment and new materials for energy conservation and environmental protection to promote enterprises' energy conservation and emission reduction. Let colleges and scientific research institute take initiative to promote professional talents training and production-teaching-research combination and build top-caliber talent teams for scientific and technological innovation.

(VI) Expand Financing Channels for Enterprises Financial institutions to actively carry out the national monetary policy, expand credit scale, and broaden capital channels to provide investment credit support to backbone enterprises. Take concrete measures to carry out the Notice of the Office of the People’s Government of Shandong Province on Printing and Distributing the Interim Measures of Shandong Province for Ship-in-Process Mortgage Financing (Lu Zheng Ban Fa [2007] No. 4), improving the ship-in-process mortgage financing mechanism and ensuring capital supply for enterprises. Reduce or waive ship-in-process mortgage assessment fee to reduce burden on enterprises. Explore doing the business of mortgaging the right to use dock, shipway, gantry crane and other large equipment and sea areas to reduce enterprises’ financing costs.

(VII) Give Greater Support Concerning Fiscal and Taxation Policies. First, take concrete measures to carry out preferential fiscal and taxation policies. Exert greater efforts in policy publicity and implementation, actively guide enterprises to make good and full use of preferential fiscal and taxation policies, and strengthen supervision and inspection over policy execution, so that the preferential policies will be employed fully, properly and flexibly. Fiscal and taxation departments at all levels to fully play their role, actively studying and formulating supporting fiscal and taxation policies and tax administration measures to boost industry adjustment and revitalization. Second, actively integrate earmarked fiscal funds, give vigorous support to enterprises in their effort of indigenous innovation and technical progress, and try hard to improve core competitiveness of enterprises; give vigorous support to energy conservation & emission reduction, structure adjustment and technical transformation and try hard to promote change of economic development mode. Third, governments at all levels to innovate fund raising mode and adjust fund expenditure structure to provide corresponding financial support for projects put under emphasized support determined by the state in accordance with relevant national regulations. Fourth, take concrete measures to carry out value-added tax transition policies stipulated in the new national tax law. Fifth, continue to make good use of capital rewards and subsidies to facilitate enterprises' technical transformation, new product R&D, energy conservation and emission reduction, supporting certification, school-enterprise cooperation, talent training base construction, and park and coordination supporting center construction.

(VIII) Facilitate Enterprises' Internal Management. Implement famous-brand strategy, encourage and help enterprises to exert greater efforts in certification, and try hard to foster superior product clusters. Strengthen finance-centered basic management, improve investment and operational risk international control system, compress two occupied fund items, and avoid financial risks. Generalize the enterprise resource planning (ERP) management mode to uplift enterprises' information management levels. Consummate enterprises' measuring and testing systems and strengthen equipping management and data detection for production processing, energy conservation & consumption reduction and measuring instruments, thus to uplift enterprises' refined management levels. Pay special attention to enterprises’ safety management to ensure safety in production.

(IX) Strengthen Economic Operation Monitoring and Coordination. Carefully study the negative effects of the financial crisis, guide shipbuilding enterprises to keep an eye on new moves of ship owners regarding funds and finances, and pay attention to financial conditions of small and medium-sized ship owners; analyze the extent of impacts caused by the financial crisis on the areas where ship owners are located; prevent and control default risks by increasing down payment percentage; measure the probability of default of credit risk and include restrictive clauses in contracts. Establish and improve economic operation monitoring, risk early warning and trade dispute legal aid mechanisms to help shipbuilding enterprises mitigate risks.