Major Chinese shipbuilder Rongsheng Bows to Demand Slump and has laid off about 40% of its workforce in recent months

July 3, 2013, 12:12 p.m. ET

Chinese Shipbuilder Bows to Demand Slump

COLUM MURPHY And DINNY MCMAHON

BEIJING—A major Chinese shipbuilder has laid off about 40% of its workforce in recent months, in a sign that China Inc. CHA 0.00% is under increasing strain from the slowdown in the world’s No. 2 economy.

Lei Dong, secretary to the president ofChina Rongsheng Heavy Industries Group Holdings Ltd., 1101.HK -10.17%said the company has let go of about 8,000 people, of whom more than half were subcontracted workers and the remainder full-time Rongsheng employees. He said there are currently about 12,000 employees at the shipbuilder, which is based in Rugao, Jiangsu province, north of Shanghai.Mr. Lei said in an interview that the layoffs weren’t a sign of financial trouble at the Hong Kong-listed company but rather the result of a restructuring geared to making more-specialized vessels used in the offshore oil and gas industry. Rongsheng’s traditional business is building bulk carriers designed to carry products such as iron ore.

China’s shipbuilding industry is among a range of businesses—from autos to steel—plagued by overcapacity. Many companies in those industries expanded capacity in recent years even as global demand began to weaken. That has resulted in high debts levels for many firms at a time when revenue has plummeted.

The Rongsheng job cuts are notable because China’s industrial giants and state-owned enterprises for the most part appear to have weathered the economy’s deceleration without resorting to major job cuts. Such companies often enjoy subsidies from local governments and credit from the state-run banks.

Economists are watching closely as China’s growth slows—the first quarter’s 7.7% expansion compared with a year earlier was the slowest since the first quarter of 2009. Officials have estimated that China’s slowdown following the 2008 global financial crisis resulted in as many as 23 million migrant workers in China losing their jobs.

China’s official unemployment level, which analysts take with a grain of salt, currently stands at 4.1%, unchanged since the third quarter of 2010.

But layoffs appear to be mounting at some of China’s smaller private-sector firms, according to labor experts, as a number of companies in the export powerhouse provinces of China’s southeast either close down or move production overseas in response to rising labor costs. In a sign of the pressures employers face, China Labour Bulletin, a Hong Kong-based labor group, recorded 201 cases of labor disputes in China during in the first four months of 2013, almost double the number of cases in the same period last year.

According to financial filings, thousands of jobs also have vanished in China’s solar-components sector, which is dominated by nonstate players. Many local firms, having boosted production aggressively, are struggling to repay massive debts in the face of a global supply glut and plunging prices.

While Rongsheng isn’t state-owned, it has benefited from the sort of official support typically reserved for state companies. According to its 2012 earnings report, the shipbuilder received more than 1.27 billion yuan ($205.49 million) in government subsidies last year, which it says were for research and development and for personnel training. The company posted a net loss of 532 million yuan in 2012.

According to its 2012 report, the company received orders for only two ore carriers last year, down from 24 ship orders in 2011. Rongsheng also makes marines engines, but it is a noncore business.

The company has to repay more than 15 billion yuan in loans this year, according to the earnings report.

“I do think there is financial stress on Rongsheng and this is a symptom,” saidBarclays BARC.LN -0.80% analyst Jon Windham, citing a massive buildup of company debt over the last two years. “This is a dramatic deterioration in its balance sheet in two years.”

The company’s debt at the end of 2012 was 25.12 billion yuan, about 150% its 2010 level.

“The Chinese shipbuilding industry is still facing unprecedented challenges,” Rongsheng said in a written statement, adding that it is restructuring to focus on new markets in order to deal with the slump. “We are confident we can handle any possible situation which may occur in the meantime.”