Sea Control - Sea Control 364 - How Foreign Companies are Subsidizing China's Navy

Episode Date: July 21, 2022

Links1. "In the Shadow of Warships: How foreign companies help modernize China’s Navy," by Matthew P. Funaiole, Brian Hart, and Joseph S. Bermudez Jr., Center for Strategic and International Studies, April 2022.

Hey folks, it's Jared today. I'm joined by Matthew Fanaioli and Brian Hart, and we'll be discussing the ways in which foreign companies are financing Chinese Navy construction. This episode was edited and produced by Marie Williams. I'd like to pause here to highlight our local chapters, whether you're in South Korea, Egypt, Singapore, France, New York, India, or the Caribbean. Chances are there's a SimSec local chapter near you. You can find a full listing of our local chapters and contact information on the website at simsec.org. So if you're interested, please reach out. And finally, I want to take the opportunity to recommend our partners in the SimSec Podcast Network, The Bilge Pumps. You can find Alex, Jamie, Drack, and a pot of iron brew bottles wherever

you download your podcasts. With that, Kimber's Men. Aloha, showmates, and welcome back aboard Sea Control. My guests today are Matthew P. Fanioli and Brian Hart, and we'll be discussing their report for the Center for Strategic and International Studies entitled In the Shadow of Warships, How Foreign Companies Help Modernize China's Navy. So gentlemen, thanks for joining us today. Brian, let's start with you. Would you mind introducing yourselves to the audience? Sure. Yeah. So I'm a fellow with the China Power Project at CSIS. So we kind of work on a lot of different elements of studying China's power from different angles. But my background is most heavily in kind of the foreign policy

and military and security space. Thanks. And Matthew, how about you? Yeah, I'll jump in right after there. And thanks, Jared, for having us on. We're excited to be here for the podcast. So I have sort of two roles at CSIS. On one hand, I'm the director of our Ideas Lab,

which is our multimedia studio and our sort of incubation innovator where we kind of think about new ways to tackle policy challenges. And then I'm also a senior fellow with the China Power Projects of the same program that Brian works on, which is why this has been one of the areas

that we've been focusing on so closely and been co-authoring on. Well, thank you both again for joining us. As a reminder to the listeners, all opinions are our own and not reflective of any institutions with which we might be otherwise associated. So, Matthew, I'm going to come back to you for the first question. Ask, why did you choose to focus on China State Shipbuilding Corporation? We'll refer to it from this point on as CSSC for your report. Yeah, it's actually kind of funny because it wasn't where we first started with this

line of research. This is this is something that we've been kind of digging into for, I don't know, many years. I think 2018 is when we really started to have a look at what was going on at Chinese shipyards. And it was it was driven really from trying to understand what was going on with China's aircraft carrier program. So that was the genesis of this. And there's a lot of rumors circulating. There's things that people were sort of saying no one really confirmed if work on the third aircraft carrier had started or where it was being built. So we started using satellite imagery to look at different shipyards in China, and we were able to confirm through imagery that it was being built at Zhannan. So that was kind of the very early start. So we're talking like, you know, let's say late, late 2018-ish.

And we kind of kept an eye on what was going on, right? We're following the development of it, you know, putting out research, trying to get a sense of where it was in its development. and then it was I think it was like May or June 2020 where they're and if folks who follow this closely probably saw this it was like the aircraft carriers disappeared right no one knows where the aircraft carrier is gone and what it what had really happened is that the prefabricated components of it had been moved from one side of the shipyard to the other so where people thought it was going to be it wasn't there anymore and that that started to be something of of interest to Brian and I because like well where were they moving it right you know we had thought they had built this custom facility specifically for the carrier but then we were able to you know get some imagery

get some other intelligence on it and realize that it actually been moved to one of the dry docks where they had been building commercial vessels previously we'd seen a lot of commercial activity over there and that got us thinking okay what's what's really going on here right and the last year or two we've been you know looking at chanong we've been looking at some other shipyards and what we keep seeing in these places is that if there was a line between military and commercial, that sort of vanished, right? They're using the same facility, the same fabrication halls. It's all overlapping, and that's sort of encapsulated in watching the sort of development of the third aircraft carrier. So how does this get back to CSSC? Well,

John Ong, where the carrier is being built, is operated by, and it has a few different names here, but we just call it John Ong Shipbuilding Group. They operate the shipyard. They're a subsidiary of CSSC. So when we saw this activity at Zhanlong, we said, okay, let's have a look at other shipyards that are operated by CSSC subsidiaries and get a sense of what's going on there. And that's the genesis of this report. That's why we started looking at it. So kind of came into it from the side, from a sort of different angle, but it got us really trying to get a better sense of what's going on in the industry and what's going on with China's military modernization. So more broadly, what percentage of shipbuilding is being done in China?

Yeah, it's a pretty significant, I mean, it's a condensed industry, right? So there's a lot of consolidation there. So there's only a couple of players. So you have China, Japan, and Korea. And for China, it's around, and there are different ways of getting this estimate. So we usually use the UNCTAD numbers. And Brian, you can jump in if you want to use the, because I know we've done a little bit of digging on the Chinese sort of official shipbuilding numbers, but the UNCTAD figures put it at around 40% happening in China, and then 31-ish, 32% happening in South Korea, and another 22% in Japan. And then the rest of the world is, you know, six-ish percent. And of that, say, 40% in China, more than half of it, so say, you know, 21%, 22%, that's just

CSSC. So China's the global leader insofar as merchant shipbuilding is concerned. And then CSSC is the biggest chair of China's chair, making up about half of China's output. And Brian, I don't know if those numbers reflect what the official government numbers are, if there's any difference in there, but I always sort of refer back to the UNCTAD figures. Yeah, we've used the UNCTAD numbers a lot. And the ones Matthew just cited were from 2020. So we have looked at some some numbers from China's, uh, shipbuilding industry, uh, group, which is kind of a collection of shipbuilding companies. Uh, and so they're reporting shows pretty similar numbers. I think they have 2021 for years that show China still kind of at the top in terms of, you know, new

orders and production. Um, the number's a little bit different from untad, but they all, they all kind of line up to show China in a very prominent position. Um, and just one thing on, on CSSC that, you know, from a research perspective, um, that's been kind of frustrating to kind of map out is, CSSC is just a sprawling huge company with, you know, they list their subsidiaries and, you know, research organizations under them. And it's more than 100 different subsidiaries. And so trying to map that all out and figure out the links between them, figuring out the ownership of shipyards is kind of just a mess that it's been, you know, frustrating, but also kind of fun to kind of tackle from a research side. You both mentioned UNCTAD a couple times. What is UNCTAD? Sorry,

i'm not familiar with that yeah it's just it's one of the many un organizations that sort of brings in i think it's un conference on trade and development if i had to put all the the letters to the to the uh um acronym so it's just one of those many many sort of un bodies that tries to bring together data on on these different things and you know just to sort of brian's point it's you CSSC merged into its current form in like 2019 or so. It was a merger of the two largest shipbuilders in China. So we ended up getting into this. Brian sort of joked about mapping you out.

It's difficult. We also get into this acronym initialism problem with trying to follow what's going on. Because you have CSSC, and it merged with CSIC to form CSSC. So CSSC's name is consistent. And then we're working on this at CSIS. Yeah. So at any point in this, right, people are going to it's got a C in it. We're probably talking about shipbuilding in China, but it can get a little bit confusing at following it all together. So, Brian, which other companies and countries are giving contracts to CSSC?

And feel free to throw out as many that start with C as you can. So when we when we kind of looked at this, you know, we found some sources online that really, you know, kind of track Chinese shipyard orders. in kind of surprising detail. And so, you know, kind of using that open source information, we've kind of been able to piece together which kind of companies around the world are buying the most. So, you know, of course, a lot of these are, you know, Chinese shipping companies, you know, whether that's container shipping companies or companies shipping, you know, oil or natural gas, you know, we see a lot of companies from China and Hong Kong doing that, But we also see a ton of foreign companies.

And, you know, I'll let Matthew kind of mention some of the figures more specifically and what what we see at different shipyards that we're tracking. But, you know, some of the most surprising things that we saw, you know, we kept seeing in satellite imagery of Jiangnan CMA CGM, which is a huge French multinational shipping company. uh and i think even and more surprisingly we saw you know um taiwan's evergreen uh with you know building several ships at zhangnan and other shipyards so you know cma cgm has purchased we've tracked at least three dozen ships from them um you know evergreen marine corp from taiwan we've seen at least uh three dozen as well looking at more than 40 actually we've seen companies from You know, Japan, dozens of companies from Japan, Germany, Singapore, Canada, France, all of these countries and their companies are purchasing ships from Chinese shipyards, at least the ones that we're tracking. So the numbers are really, really substantial and paint a picture of, you know, a lot of linkages between those foreign companies and these major Chinese shipyards.

And it kind of runs the gambit just to jump in there of the size of company, right? So if you if you kind of loaded up a list of top 10 shipping companies by size of their fleet or however you want to kind of gauge that, you have some you have some big players in there. Right. So Evergreen would be in there. You know, other companies would sort of be on that sort of list of the top 10 MSC. So they would show up in there as well. And they've bought some some sort of vessels from China, not a ton. But then it gets into these sort of smaller companies. Right. So even outside of the top 10. So it's not just the big shippers that are looking to China, and it's not all of them, some of them are looking to China. But then you have these sort of smaller ones. So Brian mentioned a bunch of the sort of, you know, different countries where you're coming. And what I guess stood out to us the most is, okay, so, you know, Qatar buys a ship from China, okay, all right, we're not that that concerned about it. But when we start seeing, you know, France and Japan and Taiwan in the UK, in Germany and Switzerland, when we start seeing countries like that that are throwing money into this, it's like an opaque environment. Right. You know, you're going to get a ship out of it. And that's that's great.

You know, you're going to get a deliverable at the end of the day, but you don't really know how that money is sort of overlapping or supporting or, you know, funneling in either directly or indirectly into China's military modernization, which is you know pushing China forward as far as its assertiveness and in all the sort of other things that go with that so for for us the big thing here is you people are going to buy things from China I mean we're not trying to say people are going to stop buying things from China but in a space where there is a blurring between military and commercial and you are a wealthy democratic state you should be asking some questions or at least asking for some transparency about what's going on because you're you're signing a shipbuilding contract with a company And that same company has a shipbuilding contract, well, not necessarily a contract, but there's a shipbuilding order to also deliver warships for the Chinese Navy.

So there are some questions or at least some due diligence that really needs to come into play here. So in addition to building halls, you know, Chinese shipbuilders are also gaining access to foreign technology. What types of technology are we talking about and which companies are involved? Yeah, so this is the space where, you know, when we grow the research, like next iteration of research, this is probably where we need to spend the most time. So we came into it looking at satellite imagery. So we've been looking very much at the physical side of things, like what can we see, right? We can see things in satellite imagery. We can track contracts, you know, if they're in the open source space. It's a lot harder to track these technology partnerships for a lot of reasons,

right? They may or may not be mentioned. They may or may not show up in public filings. There may be a press conference, which is great because we know something's going on, but it's one of those sort of harder things to track. And they oftentimes are also going back further than when we're looking. So, you know, a couple of sort of quick examples and, you know, Brian, if you want to jump in with the Siemens example after this. So JTT, which is a sort of French company, it's one of the ones that we started seeing show up. We were looking through joint ventures from European companies with, with Chinese shipyards. And we kept seeing JTT show They're a French company. And I'm not I'm not a specialist on LNG containment systems, but they have developed technology for LNG containment, some sort of membrane insulation technology that helps with giving China a competitive advantage in that space.

And so you have this sort of interesting way of kind of thinking about the process here. So JTT is establishing partnerships with different Chinese shipyards to help give them access to technology that gives them an upper hand on the marketplace. And then they're incorporating those into the designs for ships that they're selling to other European companies, right, other French companies. So you kind of have, in this specific example, you have a French tech company, you have a Chinese shipyard, and then you have a French shipping company, kind of having that little French and Chinese sandwich there where you see the technology helping to sort of support what's going on the shipbuilding end. Other things, you know, there's a joint venture between a CSSC subsidiary and Carnival. So, you know, this is where this is sort of happening. We haven't seen any military activity there or haven't seen military activity there yet. But Brian mentioned CSSC is huge, right? It's not even just shipbuilding. It's renewable energy and sort of other spaces as well.

And so one of the joint ventures that they've set up is for, all right, well, we're building ships. We might as well figure out how to build cruise ships to cater to the Asian market. And again, not necessarily anything nefarious specifically in that connection, but if that's profitable, right, if it's driving interest and it's driving revenue, that's funneling up to CSSC, which is a company that's on the list of, hey, if you're an American company or entity, don't do business with CSSC because they are helping to modernize the PLA. So the technology spans both specific things in the shipbuilding space that may or may not have dividends in the military space, but then also some of these other areas that we would not even be thinking about.

So tourism and I think renewable energy, it's all sort of like pieced together. CSSC is so big. There's so many connections there. You could do an entire PhD and probably not map out every sort of connection between the subsidiaries and U.S. entities. And Brian, I know you dug a little bit into Siemens and they have like a longstanding history with Chinese shipyards. Yeah. So, I mean, the one thing I'll say about all this is, you know, they're really, CSSC, the parent company is really not shy about, you know, showing on its public image as being

both a company that's constructing, you know, Chinese naval vessels, but also these commercial vessels. And they, so if you go, I've spent, you know, probably way more time than anybody has business doing on the CSSC website. And, you know, they'll put, you know, as soon as you open up the website, you see a giant photo of, you know, an aircraft carrier that's been built by a CSSC subsidiary. And then you click to another page and you'll see, you know, tanker vessels that they're building at another shipyard owned by CSSC. And if you go and kind of look through, you know, some of their pages on technological innovation, and they're very open about, you know, doing partners with

with foreign companies. You know, if, if you look on there, they have, you know, the giant Siemens logo listed as, as one of the many partners, you know, that, that they're doing business with from around the world. And so, you know, for a giant company, you know, very prominent global company like, like Siemens to be linked, you know, to this place, which is also advertising its, its role as a, as a ship builder for the Chinese Navy, you know, CSSE certainly isn't, you know, covering that up. So anybody who wants to see that can kind of go, go look at it. And so, you know, just from my standpoint, if you're thinking about, you know, the companies that you want to be linking yourself to, you know, you know, I think Matthew and I have thought about

these companies should probably just, you know, be doing their due diligence and thinking about, you know, who, who they're providing technologies or purchases to and, and thinking about what that means if for nothing else than their image. Cause you know, like I said, it, CSSE is certainly not shying away from it i think the image part's huge though right because it's we're at this point now where we're having this discussion about what's the right type of relationship to have with china what's the right type of business partnership between you know an american or a european company and a chinese counterpart for it and yeah i mean csc is not shy about this i mean they will they'll be like we are building warships for the chinese navy and we are the best at building

warships for the chinese navy also we work with leading technology providers in europe and you're kind of like how do you just put that out there i mean maybe it's just that no one's looking at their website or like people aren't reading chinese or whatever the case is but i mean it's it's pretty prominent um information so the fact that people are starting to pay attention to this we have some catching up to do right some catching up on on what we want to do for siemens they've been working with chinese shipyards for like two decades so they have this sort of long-standing relationship that goes back even further to us being concerned about the Chinese Navy. And now they probably should be in a space of, all right, well, how do we reevaluate that? What does that

relationship look like in the sort of modern context where we have this increasing geopolitical competition with China? Well, I think a lot of those relationships are probably going to get looked at a little bit more closely, certainly in Germany after the Russia-Ukraine conflict. Is that an accurate statement yeah i think you're it again we don't really know necessarily what the sort of end result is there but there's this ongoing dialogue of uh you know our russia and china being pushed closer together what does that mean you know i think we do have to be cautious and not you know falling too much into the trap of like all right it's going to be russia and china versus us you know it's a very you know something of a backwards way of thinking about things right

You're not going to be able to undo globalization overnight. And the world economy is not going to function if the US and China don't trade with one another, right? It just won't. So it's again, what are the boundaries for that? Where do we think that things are okay or problematic? And if they're problematic, what's the system of actually exploring next steps, right? How do we sort that out? I think for Western companies, the ideal would be better transparency. I mean, China's not the only ship building sort of player that has companies with both a domestic sort of military angle for it and sort of foreign ship building component. Right. Or not even just the only company in that space. You think about Boeing. Right. They obviously have a military arm and they also they obviously have a commercial arm. but the problem comes into play is that yeah other companies do this but we have a sense of where the lines are like we know what the military arm is we know what the commercial side of it looks like and you know to be frank we're not as concerned about if it's happening in korea as if we are

for happening in china right like the country matters pretty pretty significantly so if there was a blurring in japan or in in south korea that's not a problem for the united states or Maybe you still from a business side want to have transparency, but what you do in those two countries. But it's this lack of transparency on top of the geopolitical component that just makes it this really massive challenge and really difficult to understand how exactly do we get where we need to be. But I think it starts with communication, right? Figuring out, okay, this is an issue. We've identified it's a problem. Let's at least talk about what we do next. I'll add one thing there, too. I mean, to Matthew's point, it's really also about, you know, transparency about this. So, you know, we've looked loosely, not nearly as closely as we have at China, but we've looked at some of the shipbuilders in Korea and Japan. And I've, you know, looked at the websites of, if I recall, it's been a while since I've done this, but, you know, I think it's Hyundai Heavy Industries is a major shipbuilder in Korea. And there they have, they are, you know, they have a major shipyard that is building both like naval and commercial vessels. But on their website, you know, they have, you know, lengthy information showing like, this is the portion of our shipyard that produces, you know, naval vessels. And it is separate from the portion in that produces commercial vessels.

And they talk about how their staff is done differently and that there are different security protocols on the naval side. So they're being much more transparent about, you know, those different differentiations in their production lines. And so, you know, if you are buying from a from a Korean shipbuilder, you can be a little bit more confident or at least know what you're getting into. So I think one of our principal concerns is that with China, there's so much opaqueness and lack of transparency that it's really hard to kind of get a sense of what you're kind of wading into when you make these purchases. So are these dealings with foreign companies potentially aid in China's military modernization then? And how does that fit into a broader Chinese strategy of military-civil fusion? Yeah, so I'll kind of start off here talking just about military-civil fusion or MCF. So, I mean, this is this is kind of a broad effort that's it's been, you know, within the Chinese thinking for decades in terms of how how China can, you know, help to modernize its military while linking that up with its civilian, you know, commercial growth.

So this is not something new. It's had different names over the past decades, but really under Xi Jinping, we've seen this transformation to this concept of military civil fusion. And Xi Jinping has significantly leveled this concept up to kind of a national strategy, and he's kind of taken personal ownership of it, too. So Xi Jinping is chair of the party's Central Commission on Military-Civil Fusion. And so, you know, any indication that he's personally linked to it, you know, suggests that this is a really important strategy for what China is doing. And basically, by and large, MCF is just a strategy that really it goes beyond just the kind of military civil integration that we've kind of seen in countries like the United States, where we've tried to, you know, have spin on and spin off from the commercial side and the military side to, you know, kind of have those two sides mutually benefiting each other. So this, you know, this is something we've seen, you know, across different countries, but China's really focusing on going beyond that and raising this to the point of raising it to a national economic strategy and linking China's military modernization up with its, you know, broader economic and social development. So it's really much more, it's much bigger level than just some of the simple, you know, oh, maybe this thing that we produce from Google can spin off and be used for something in the military or, you know, anything. It's much deeper than that from the Chinese leadership's perspective.

And so we've seen, you know, we've seen CSSC talk openly about the importance of military civil fusion in the work that they do. The former chairman or CEO of one of the former two companies that merged to form CSSC in its current form spoke openly in an interview a few years back about how they very much take military-civil fusion as a goal of their company. And they see themselves as part of a vanguard that's kind of promoting MCF within China. And they talk openly about wanting to apply technologies from the commercial side to the military side to aid in China's development. So, you know, again, there's no cover up here. They're very, you know, honest and open about their intentions of having some of these spinoffs, you know, go from the commercial side and use that to apply it to their military side. What alternatives do companies have to doing business with Chinese shipbuilders? yeah um well this is the this is the tough part right so as you know as a researcher or as a policy expert it's a lot easier to point a figure at a problem or identify a problem to come up with a you know a practical solution here so okay what's the silver lining well the silver lining

here is that yeah it's a consolidated industry and there's only a few players but thankfully the other two major players are u.s allies so that at least means that there's some common ground to start having a conversation about this now that's fine that that's that's good but you know in dealing with democracies right this is the you know one of the strengths and weaknesses of it is that governments can't generally just dictate what their companies do right not at least in the in the same way that that china can with its with its soe so um the u.s isn't a big isn't a big shipping shipping company right so we're not necessarily involved in this our companies aren't necessarily super involved in it. And we're not a major shipbuilder. But we probably have

some of the biggest concerns with China, especially as it relates to naval modernization. So from the US perspective, it's dealing with foreign companies and foreign countries and both foreign companies that are in the shipbuilding space and also foreign companies that are in the shipping space. So it's a lot of things to try and manage and have the conversation. So that's the the bad side of it the good is that there's a conversation here that i think you know maybe the ukraine situation makes it more um immediate or or more readily available um that there's this all right democracies need to figure out ways of working together to deal with some of the geopolitical challenges that they're facing and it starts with having you know that that type

of dialogue, having an open dialogue with it. We're seeing this in other industries as well. So, you know, solar PV is the one that really stands out to me. And we've done some research on this where, again, the U.S. isn't the biggest market player here, but has some of the biggest concerns with things like polysilicon getting sourced from Xinjiang and what that means as far as the supply chain. And that sort of driving factor from D.C., the policy conversation has the solar PV industry in the US and in Europe starting to ask questions about what should the best practices be and where do we need transparency and how do we figure out how to make the supply chain more resilient. So the government, you know, the DC struggles here, it can't just flip a switch

and change the way that people are doing business, but it can start to raise these questions. And just by having the conversation, they're elevating it to the point where companies, again, need to start going and saying, okay, is this acceptable? Market forces are driving us to China. There's, you know, maybe we have to deal with the, you know, the real world considerations of we want a ship and China's going to build it for us quickly and cheaply, and it's going to be a pretty good vessel. And if that's the case, well, how do we, how do we try to incentivize what Japanese and Korean counterparts can do so that they can be more a part in the conversation? But there's just such a demand for ships, right? Everyone is trying to grow their fleet that

it's going to be hard, right? With their capacity is going to have to pretty significantly expand if we're actually going to get into a place where people are taking these more strategic considerations into account before they're actually purchasing vessels from China. Well, unfortunately, that's all that we have time for today. I'd like to thank my guests, Matthew Funioli and Brian Hart. Matthew, where can we find you online and what are you working on next yeah um so more of this uh we like i mentioned earlier we're going to be digging into the to the um into the sort of technology side of it and we do a lot of work on uh sort of satellite imagery analysis and trying to track what's going on in china and with china's military modernization so

you know css uh css.c i'm getting i'm even getting the acronyms confused now at this point this is the confusing thing with working on it um but css.org has has most of the stuff up that we're kind of looking at and also chinapower.csas.org, which is our program website, which will have a lot of information on there as well. But yeah, a lot more to come on sort of China military modernization, how it relates to, you know, shipbuilding in this case, but a lot of other corollaries as well. And, you know, thanks again for having us on. Yeah, absolutely. And Brian, where can we find you and what's your next project? Yes. So I'm like Matthew, I'm also on Twitter. So I'll just plug myself. So I'm at Brian T. Hart on Twitter. So if anybody's interested in

following along with nerdy takes on Chinese foreign policy and, you know, military modernization, feel free to follow me there. So besides the fun, you know, really cool stuff that that Matthew and I are doing on kind of naval modernization and kind of tracking China's military activities, you know, the work that I do for China Power, we have a couple of features coming up on our website next, looking kind of at the evolution of the China-Russia relationship. So if anybody's interested in how, you know, how close China and Russia are these days, we'll have some work coming out on that in the next couple of weeks. I'd also, you know, don't want to miss out mentioning that Matthew and I have on this piece and several previous pieces have had the third

co-author who's Joe Bermudez, who is kind of our senior fellow for imagery analysis at CSIS. I just call him our imagery guru. So he's been incredibly fun for Matthew and I to work with and others at CSIS to kind of learn from him and his ability to analyze imagery has just been awesome to work with. So he couldn't join us today, but I did want to plug him. Absolutely. Well, thank you both again for joining us. To listeners, thanks for tuning in. We'll see you next time. A pot of rum and a pot of gin A pot of wine, both white and red Put it on the shimbo now

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