Photo: Captain Wei Jiafu
Source: Oriental Morning Post

By Yan Kai (严凯) and Li Juan (李娟)
Issue 627, July 8, 2013
Corporation, page 31
Translated by Zhu Na
Original article: [Chinese]

After 15 years, Captain Wei Jiafu (魏家福), the man who has steered China's largest shipping company through difficult waters, has relinquished control of China Ocean Shipping (Group) Company (COSCO or 中国远洋运输（集团）总公司) over to Ma Zehua (马泽华), a man who is only three years younger than him.

On July 1, the Central Organization Department of the Chinese Communist Party announced that, due to age considerations, Wei Jiafu will no longer serve as chairman and party secretary of the state-owned shipping giant. Ma Zehua's promotion from the position of general manager was also announced at the same time.

A source close to COSCO's senior management told the EO that given that Ma is already 60 years old, which is close to the official retirement age, the new head is only likely to remain in the position for a transition period during which his task will be to steer COSCO out of the difficulties it is currently in.

Farewell "Old Capitan Wei"

On June 28, Captain Wei met with Greek President Karolos Papoulias at the presidential palace in Athens. On the previous day, the Greek government had awarded the captain the Grand Cross of the Order of the Phoenix Medal in recognition of Wei and COSCO's contribution to Greece. Three days after being awarded the ceremonial honor, Wei officially stepped down from his position at COSCO.

Before his departure, another "title" that had been bestowed on Wei was that of being "head of the listed central SOE that has registered the largest losses in the history of China's stock market" (史上A股最大亏损上市央企的掌门人).

Under his charge, one of COSCO Group's subsidaries, the Shanghai and Hong Kong listed China COSCO Holdings Co. Ltd. (China Cosco or 中国远洋) , has posted huge losses over the past few years.

In 2009, China Cosco registered losses of 7.54 billion yuan, in 2011 it lost 10.45 billion yuan and in 2012 the company was 9.56 billion yuan in the red, which resulted in it being downgraded to "special treatment" or *ST stock on the Chinese stock market, meaning that the company could be delisted if it continues to lose money.

Meanwhile, China Cosco has also seen its share price fall by more than 95 percent over the past 6 years, from a peak of 68.4 yuan a share in 2007 to today's 3 yuan.

Although he has now left the company, opinions about Captain Wei's performance at COSCO are mixed. His supporters think COSCO achieved a great deal during the 15 years that Wei was at the helm. A shipping industry expert who wasn't willing to reveal their name told the EO that you can't ignore the fact that over the past 15 years, COSCO had developed into the largest dry bulk cargo transporting group in the world and that its container business had also expanded considerably.

Wei has been involved in the shipping industry for 40 years and had become one of the youngest captains working for COSCO when he was promoted at the age of 28.

In November 1998, when Wei was appointed president of the company, COSCO's annual profit was only 518 million yuan, and its main shipping business was loosing money. After Wei took over, he initiated reforms aimed at internationalizing the company and making it more responsive to the market. Currently, COSCO's annual cargo capacity is over 400 million tons and the company's ocean routes connect to 1,500 ports in more than 160 countries and regions.  

However, it was a management decision made in 2008 that has led to COSCO's dismal performance over recent years.

China Cosco Shipping (Group) signed long-term contracts to rent many ships in 2008 when the shipping market was booming and prices were at a historic high, but ship rental costs then fell and the company found itself locked into expensive ship-rental contracts.
 
In 2008, when the Baltic Dry Index (BDI), an economic indicator used by the shipping industry to track the price of transporting major raw materials by sea, fell by more than 70 percent to between 3,000 and 4,000 points, Wei and other executives decided that COSCO should try and take advantage of the situation and buy at the bottom of the market.

An individual working in a mid-level management position with COSCO told the EO that management, including Wei Jiafu, believed that it was a good time to buy and that it would lay a solid foundation for the future development of the company.

Therefore, China Cosco decided to enter into contracts to charter ships from other companies. In 2008, the rental price for the type of ship that China Cosco chartered was as high as $80,000 a day, but it dropped to $33,000 in 2010.

This resulted in a blow out in the company's rental costs for dry bulk vessels in 2008. That year the company spent 33.46 billion yuan chartering ships, 12.05 billion yuan more than 2007, but the actual leased capacity grew by only 7.5 percent.

Unfortunately for China Cosco, the Baltic Dry Index continued to fall and the 3,000 point level was nowhere near the bottom. The index continued to fall another 70 percent to around 600 points by the end of 2008. As the company had entered into mid-term contracts of 3 to 5 years with many shipping companies, the impact of this decision has continued to impact on COSCO's business all the way through to 2013.

Ma Zehua's Mission

Ma Zehua is the person who has been assigned to straighten out the mess left behind by his predecessor.

A person close to COSCO's senior management said that currently the main task for Ma and the new management team is to halt the losses and thus ensure that the group's listed subsidary won't be delisted.

People in the industry who are familiar with the new chairman say that he is an experienced international shipping expert.

Given his age, Ma will likely only remain at COSCO for three years at the most.

Compared to the outgoing Wei, Ma is said to be more mild and low-key.

The same industry analyst quoted above told the EO that COSCO needs a more sophisticated and steady person to run the enterprise. In this sense, Ma has been appointed to serve this role.

Another person with close ties to COSCO's senior management said that Ma has actually already initiated reforms at COSCO since he was appointed as general manager back in 2011.
In terms of dealing with the blow out in the cost of chartering ships, Ma's approach will be to attempt to restructure the lease contracts.

In addition, COSCO carried out systematic reform of its dry bulk cargo business. Through the establishment of the China COSCO Bulk Shipping (Group) Co., Ltd, COSCO has managed to unify operation and management of the existing three bulk shipping companies.

Another source within the company told the EO that after Ma becomes chairman, he is unlikely to make any major adjustments to the company's current strategies.

Halting the Losses

The task of making a profit in 2013 will be the biggest challenge facing Ma.

Shen Zhengyuan (申正远), a researcher at CIConsulting, said that Ma will first focus on reducing and halting losses, meanwhile he will also try to deal with the problem of expensive ships. In terms of expansion, COSCO will take a more cautious and prudent approach.
 
In the first three months of the year, China Cosco's revenue reached 15.23 billion yuan, but the company still registered losses of almost 2 billion yuan, though this was a  27 percent drop on the amount of money the company lost in the first quarter of 2012. Currently the trends in the international shipping market remain the same and there has been no obvious improvement.

A source from COSCO said that in addition to introducing internal controls, in order to find an answer to China Cosco's loss-making problems in a short time, the company needs to start selling assets. "Although it is not the most reasonable method, it's still the quickest."

In fact, starting from the beginning of this year, China Cosco has already begun to sell some assets. Though some analysts have criticized the sales, saying the company was "drinking poisoned wine in order to quench a raging thirst."

There is no news about what assets China Cosco might sell next and the company has not made any public comment. However, a source from China Cosco told the EO that the room for selling assets is not big and that the possibility of selling dry bulk cargo assets or port assets is very small.

Links and Sources
Economic Observer Online: Ships Blocked from Chinese Ports
Economic Observer Online: Shipowners Call for New Policies to Save Sinking Shipping Industry
Economic Observer Online: SASAC Steps in to Save Bleeding SOEs