Barely Afloat

In the Hutong
Beijing Youth Politics College
0047 hrs

China COSCO Holdings, parent company of China’s largest state-owned steamship company, has reported a return to net profit in 2013, thereby saving itself from delisting. It was not a turnaround in markets or management genius that engineered this seeming turnaround, but financial legerdemain.

Through a series of one-time transactions (it sold chunks of itself to its own parent company), the company is showing a positive bottom line. But things aren’t looking good for 2014, the company is running out of financial tricks, and slow recoveries in Europe and the United States are likely to combine with the companies huge capacity surplus to keep the firm a non-performer.

Waiting for Profits

As a state-owned enterprise, the company has the implicit backing of the government: COSCO can afford to wait for things to turn around, unlike global competitors like Maersk, Neptune Orient Line, Hanjin, Mitsui OSK, and Evergreen.

Government coffers are not bottomless, however, and there is no guarantee that a turnaround in the industry will be sufficient to suck up all of the extra tonnage COSCO has added in recent years. Companies are moving manufacturing of large, bulky items closer to markets, and COSCO’s overshoot on dry-bulk capacity (for carrying everything from wheat to iron ore) may leave new ships idle for a long time.

At some point, Beijing is likely to have to take ships off of COSCO’s hands, or at least remove them from the commercial market. The obvious choice would be to sell the oldest ships to ship breakers. Yet COSCO’s older ships have already been turned into scrap, leaving a fleet that is much younger than before.

And none of this addresses the growing ranks of costly thumb-twiddlers at China’s shipyards. It is hard to keep upgrade an industry when demand is imploding.

PLAN for it

In short, arrows continue to point in a direction we suggested a while ago. China’s navy needs ships of every type. China’s admirals would rather spend their precious cash on boats that shoot rather than boats that schlep, but they need both. COSCO’s surplus of capacity offers the government an opportunity to create an entity that provides full-time contract sealift to China’s armed services, something akin to the Military Sealift Command in the United States.

The spare dry-bulk carriers would probably not be much help: the cost of refitting these to accommodate troops or military cargo would probably not be far off the cost of purpose-built ships. Container and Roll-on/Roll-off vessels, on the other hand, could serve as pre-positioning ships for extended operations outside of Asia (to support China’s UN peacekeepers, for example), shuttle ships for China’s precious few underway replenishment vessels (that by definition need to stay close to their assigned battle groups), or as amphibious support ships.

A move like this seems inevitable, and when it happens it will quietly signal that the People’s Liberation Army Navy has matured, and is clearly thinking about how to start projecting power as well as how to prop up its struggling merchant fleet.

And Here Come the Microfilm Regulations

In the Hutong
Beijing Youth Politics College
1603 hrs

A few weeks ago, we noted that the growing phenomenon of microfilms – motion pictures produced inexpensively with digital technology and distributed online – was becoming too popular to long avoid the attention of regulators.

Now, it appears, those regulations have come. As the Associated Press notes:

This week’s update of a two-year-old regulation on the supervision of online dramas and microfilms has raised fears of stifling creativity. The broadcast administration now requires content makers to register with their real names, production companies to obtain operating licenses and report their content before it is put online, and video-hosting companies to keep records of uploaded content.

This places microfilm producers in one of two boxes: they will either be legit, or they will go guerrilla, and if they do the latter, the best avenues of distribution will be closed to them. Of all of the regulations, the last is the kicker. Video hosting companies, who thrive because the government chooses not to look too closely at whether their most popular content has been approved for broadcast, will anxious to avoid antagonizing their regulator.

Depending on how stringent the regulations are and the spirit under which they are enforced, there are two likely outcomes to these regulations: a vastly larger and more creative film industry; or the world’s largest guerrilla film market. If the government simply uses the licensing regime to turn microfilms producers into legitimate small businesses, they create a tax base and the wherewithal to fill the digital pipeline with legitimate, local entertainment. They also take a step toward turning China into the global film powerhouse the government aches to create.

At first blush, this outcome seems unlikely: why regulate if you are trying to grow an industry? In China, though, because a business license is granted for one or more specific activities, the act of regulation actually creates a channel to legitimize a business, and thus afford it the ability to operate above board. Further, if the government only requires “reporting” of content and not approval prior to posting, this alone represents a major step for filmmakers.

Even under such a regime, the government will continue order the removal of any film that steps beyond the bounds of Party propriety into forbidden topics or prurient content. That door of control remains open to them, as it is today.

If, on the other hand, the government is niggardly with microfilm licenses, or if it lays upon producers onerous approval requirements as a part of the reporting process, the result will be a community of guerrilla filmmakers and sites that distribute their works. At that point, there will be no regulating the content, and filmmakers will feel free to take on even themes that would discomfit the party.

Under a draconian implementation of these laws, distribution will not stop: it is, actually, easy to envision people sharing forbidden films via email, torrent, thumb drive or other means, from person to person, much as samizdat literature did in the Soviet Union during its final decades.

The rational choice seems to call for a robust, regulated film business that builds China’s soft power and draws its eyeballs away from foreign content. We will know within six months how this will all shake out.

Walter Lippmann on China

“The small American businessman has long complained about how difficult it is for him to survive in the competition with the large American corporation,” [Walter] Lippmann warned. “What will he do when he has to face the competition of totalitarian monopoly organized on a continental scale?”

Alan Brinkley The Publisher: Henry Luce and His American Century

Lippmann was talking about the Soviet Union at the time, but his words do resonate today.

Happy New Year, everyone, from Silicon Hutong.