Talking Point

Holed below the water line

Cosco’s boss steps down but is he to blame for its financial woes?

HONGKONG

Problems not contained? Poor results have seen Beijing remove Cosco’s boss

In the 1950s China was a country without ocean-going ships, much as it had been 500 years earlier when the Ming Dynasty ordered the destruction of Admiral Zheng He’s fleet. This time round it was a legacy of the country’s civil war: after Chiang Kai-shek’s Nationalist Party was beaten in the field, he fled to the island of Taiwan taking with him all the vessels capable of longer voyages.

So it was a major strategic decision when Mao Zedong and fellow Communist Party leaders founded Cosco in April 1961. That same month the China Ocean Shipping Company (to give it its full name) made its maiden journey. It did so on a discarded passenger ship it had purchased for £260,000 (or about Rmb1 million in 1961). Built in 1930 by Harland & Wolff of Belfast it was called the Highland Princess, but Cosco renamed it the Guanghua, which means “brightening China”.

From the outset Cosco served a political purpose. The Guanghua’s maiden voyage, for example, was to Indonesia. It ferried back over 1,500 ethnic compatriots threatened by Indonesia’s anti-Chinese movement. This wasn’t about profit: the 20-day passage was free.

From small beginnings, Cosco has sailed on for the next half-century to become a global shipping giant. It now owns or controls over 800 modern merchant vessels with an annual carrying capacity of 400 million tonnes. The fleet size ranks the world’s biggest by dry bulk and fifth largest by container. Cosco’s shipping lines cover more than 1,600 ports worldwide, of which 32 terminals are operated under the Cosco flag.

Who is Cosco’s helmsman?

At the centre of this sea change is Cosco’s long-serving chairman Wei Jiafu. Captain Wei, as he likes to be called, started as a radio officer with the company in 1967 and climbed the ranks quickly, soon making ship’s captain. By the time Wei took the helm as Cosco’s boss in 1998, he had also added an MBA and a PhD to his managerial credentials (for international experience he ran Cosco’s Singapore office, as well as the Sino-Tanzanian Joint Shipping Company).

Years of seamanship (Wei’s personal story includes an episode in which he claims to have been taken hostage by pirates in the Malacca Strait) left him with a weathered complexion that became well-recognised in global shipping circles. His reputation was an international one: Trade Winds, an industry publication, ranked him last year as the fifth most important person in world shipping; Clarkson Research Services has described him as “the face of Chinese shipping”; and Wei could even find friends in Washington – John Kerry, now Secretary of State, proposed a resolution in Congress in 2009 to salute Wei’s contribution to the state of Massachusetts. Kerry’s gratitude was based on Cosco’s investment in Boston Port that helped to save more than 9,000 workers from unemployment in 2000.

But Wei’s fortunes have taken a sharp turn for the worse in recent years. Last week, the Old Captain’s storied career finally came to an end. The Organisation Department of the Communist Party said in a statement that Wei would step down as Cosco’s chairman immediately. Cosco’s president Ma Zehau has taken on the chairman’s role.

Wei is 63, three years older than the standard retirement age for state firm bosses. But in retrospect, he might be regretting staying on for those additional three years. That’s because he is retiring with the dubious honour of turning Cosco into China’s most loss-making state-owned firm.

How serious are Cosco’s financial woes?

WiC readers should be familiar with Cosco’s predicament. Cosco Holdings, the shipping heavyweight’s listed flagship, reported a Rmb10.4 billion ($1.7 billion) loss in 2011, and another Rmb9.6 billion loss a year later.

Save for a miraculous turnaround over the next few months, investors are bracing themselves for three consecutive years of significant losses. The company had reported Rmb2 billion of red ink for the first quarter this year, shortly after warning investors that its 2013 full year loss could top $1.5 billion.

To put this performance into perspective, Cosco Holdings’ combined losses since 2011 now total $5 billion – as big as the company’s current market capitalisation. Such dismal results led to a campaign by minority shareholders to throw Captain Wei overboard (see WiC182).

Worse still, stock market regulations in China stipulate that listed firms with two consecutive years of losses have to stick a “ST” tag in front of their company name. It is an inglorious ticker for investors designating “special treatment” and indicating that major restructuring is required. If a third consecutive year of significant net losses occurs, bourse rules require the stock is delisted.

The “special treatment” label will have been a jarring for Wei. “The king of the ocean has become the king of ST firms,” a retail investor wrote in a weibo thread discussing his departure. “Even special treatments from the central government failed to help ST-Cosco,” another added, quipping that Cosco’s performance had been dismal despite being coddled by Beijing’s leaders.

Comments such as these underline a dramatic reversal in the public perception of both Cosco and Wei, once symbols of China’s emergence as a maritime power. Perhaps confused by this reputational about-turn, the domestic media has been greeting Wei’s retirement with a mixture of cheers and jeers.

The Beijing Times described him as “the most embarrassing chairman”, while Sina Finance called Wei “the stranded Captain”. But as the Southern Metropolis Daily noted, Wei was awarded over 30 domestic accolades from 2003 to 2010, only to be end up being blamed as Cosco’s “sinner of a thousand years” when the tide turned. It thinks some of the criticism is unfair.

Are Cosco’s peers suffering too?

A troubled financial situation isn’t unique to Cosco. The Baltic Dry Index stood as high as 11,793 points in May 2008. In a truly dire decline since, the measure for commodity-shipping rates had fallen to as low as 647 in February last year. It has rebounded above the 1,000-point threshold recently although shipping expert Basil Karatzas told WiC last month that the worst may not be over for global shippers (see issue 191).

China Shipping Development, the dry bulk carrier unit of China’s second biggest shipping firm, had reported a $78 million loss for the first three months of 2013. China Shipping Container Lines, another state-run shipping firm, also made a $112 million loss in the first quarter.

The shipbuilders are struggling too. Shares of China Rongsheng plunged to a record low last week after a fresh warning that it will suffer a first-half loss. There have also been reports of worker protests as Rongsheng tries to lay off workers. Company executives have been pleading for a local government bailout.

Nevertheless, Cosco’s results have dwarfed the combined losses of its domestic peers.

Citing industry insiders, the Century Weekly reckons Cosco’s management is “more incompetent than it cares to admit” with problems arising from strategic miscalculations and bungled investments with hedging tools.

“Cosco’s huge loss was a result of blind expansion during good times … and a lack of long-term strategy and preparation against cyclical risk factors. A number of cycles have passed, and its business still relies on the mercy of heaven,“ an analyst familiar with Cosco’s track record told the magazine.

Are its critics too harsh?

The financial figures are bad enough, but the public mood in respect to Wei himself has been soured by some misjudged and some might say insouciant remarks.

For instance, at the Boao Forum in February, Wei dodged questions on Cosco’s performance and lashed out at the stock exchange rules that could see Cosco’s enforced delisting. Cocking a snook to investors, Wei said Cosco’s mission wasn’t just about money but its “social responsibility” and its “making a contribution to humankind”.

“If the company is performing as badly as a few people say, how would it be possible for me to attend the BRICS Summit with government officials in Durban?” Wei argued loftily, after he had joined a senior level conference in the South African city. The inference was that Wei was backed at the highest political level. “As long as Cosco is fully understood by the Party leaders and the State Council, it’s enough for me,” he insisted.

That didn’t go down too well. “He made it clear that all he cares about are the state leaders, not the board or the shareholders,” the South China Morning Post wrote.

The Economic Observer agrees. Cosco’s only hope of a turnaround, according to the newspaper, is to separate its profit-seeking role from its ‘social responsibilities’. Then again, that’s a tough ask.

In a shareholder meeting this year, Wei did apologise to investors for Cosco’s performance. But again, the Old Captain hinted that he wasn’t in a position to explain the full situation to shareholders. “If all investors could get hold of the information that I know, they would understand me,” Wei said.

Still a ward of the state?

Shipping has traditionally been seen as a strategic industry that contributes directly to national security. For example, much of China’s economy depends on imported commodities. Policymakers want a Chinese fleet capable of bringing in these supplies, as well as transporting finished goods to international markets in its container fleet. In this respect Cosco is less a company than a facilitator of national trade and industry. Its quasi-military role occasionally surfaces too. For instance in 2008, it emerged that Cosco had shipped Chinese-made arms to Zimbabwe (after protests across southern Africa, it transported them back home again).

This close association with the Chinese state may now be having a commercial impact too, especially in countries worried about China’s more expansive commercial and political ambitions (particularly its neighbours). They might prefer to divert their cargoes onto ships not owned by the Chinese government.

In broader terms – along with other shippers – Cosco has struggled with a near perfect storm in the past few years. Nor did it sail into the tempest in perfect condition. Back in 2008, when the BDI was trading at five-digit levels, freight costs were often more expensive than the commodities being shipped. China’s economic planners wanted to control a bigger portion of the global fleet. In what now looks like an appalling strategic error, Cosco was encouraged to expand its merchant fleet instead of selling ships when prices were high.

According to Century Weekly, Cosco signed leases for over 200 vessels. Some of these leases have yet to expire and the fees that they charge have been a large contributing factor to its recent losses.

What is Cosco’s way forward?

To most onlookers, government financial support seems to be the obvious way out. Another is to steer more China business onto more Chinese vessels. For years, Wei has been lobbying for the so-called “national goods for national shippers” policy. As matters stand, domestic shippers have few captive customers to speak of. Fellow state firms such as the steelmakers – importers of vast quantities of iron ore – chase the cheapest freight rates rather than behaving patriotically and insisting on Chinese shipping.

As of late 2012, up to 30% of iron ore imports, and 90% of oil imports, were shipped to China by foreign vessels, according to the Economic Daily. Meanwhile major customers such as coal miner China Shenhua are setting up their own fleets to cut transportation costs.

Will Cosco be delisted?

It is an embarrassing scenario for a state heavyweight. But it may still happen. Cosco’s share price in Shanghai has plunged more than 95% from its all-time high in October 2007. It is also two-thirds lower than its offering price. A delisting would be inglorious. Nevertheless, it would allow the controlling shareholder – Sasac, the entity with oversight of China’s largest SOEs – to take private the world’s second biggest shipping firm at a distressed valuation.

An opportunistic nationalisation may not go down well with other Cosco shareholders.

But according to Wang Lan, a columnist with Century Weekly, a delisting is a win-win situation for most. Cosco would have no need to make public its losses. Government subsidies could then be made available, potentially with less public scrutiny.

“Sometimes the government’s national strategy doesn’t align with the interests of investors,” Wang wrote. “A man cannot do two things at one time, please delist Cosco.”


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