Executive’s Arrest Is Latest Sign of Trouble for China’s State-Owned Shipper COSCO

09.24.2013 18:28

Executive’s Arrest Is Latest Sign of Trouble for State-Owned Shipper

Former GM of COSCO subsidiary detained over questionable leasing deals, just the most recent bad news for the embattled company

By staff reporter Liu Ran

(Beijing) – The recent arrest of an executive of a subsidiary of China Ocean Shipping (Group) Co. (COSCO Group) has spelled more trouble for the state-owned shipping firm, which has been grappling for years with the heavy losses incurred by another member of the corporate family. Meng Qinglin, former general manager of COSCO Dalian Ocean Shipping Co. (COSCO Dalian), was taken away for questioning by the Communist Party’s discipline watchdog over alleged corruption related to vessel-leasing deals, COSCO Dalian said on August 27.Three days later, COSCO Group’s chairman, Ma Zehua, said “there are indeed some problems” with COSCO Dalian, but he did not elaborate.

A source close to the situation said investigators found that Meng made COSCO Dalian’s subsidiary, Dalian Yuanchang Shipping Co., lease overpriced bulk carriers. Yuanchang’s former general manager, Gao Fusheng, has been arrested. Gao was brought to the company by Meng and the two were close, a company insider said.

Meng retired from COSCO Dalian in January at age 60. COSCO Group executives said at a company meeting where his retirement was announced that they “fully appreciated” his contributions, even though many probably knew that he had set up a company of his own while still at work, the source close to the situation said.

It is against the company rules to have a side business, but “from the highest to the lowest ranks in the corporate group, everyone turned a blind eye,” the source said. Meng continued to run his private business after retirement and made a fortune by leveraging his old industry connections, he said.

It is unclear whether other employees of COSCO Group and its subsidiaries were involved in Meng’s case.

Some say more company employees have taken advantage of their positions to advance their own interest. “The corruption of a leader is in no way limited to only one person,” a source in COSCO Group said.

Company Culture

This is not the first time the company’s subsidiaries have been hit by corruption scandals. In 2012, Xu Huixing, former general manager of Guangzhou Ocean Shipping Co. Ltd. was arrested for taking at least 2.4 million yuan in bribes.

In 2011, Song Jun, former vice general manager of Qingdao Ocean Shipping Co. Ltd., was caught illegally possessing 37 properties and more than US$ 7 million. He was charged with embezzlement, taking bribes and obstructing the collection of evidence.

Some of Song’s illegal income was traced to ship leasing and acquisition contracts the company signed jointly with a Taiwanese businessman from October 2006 to June 2010. Song made several million U.S. dollars off the deals.

Managers can easily profit from corporate procurement, especially when they control an agent company that brokers deals, an analyst said. Meng is believed to have done the same through his side business when he served COSCO Dalian, the source close to the situation said.

Industry observers say the commission paid to an agent company for brokering a ship-leasing agreement is usually 1.25 percent of the contract’s value. The agency can also make money by charging more than the lessor sought. Prices for rentals in the industry fluctuate widely, and apparently minor changes would not trigger an alarm in the shipping company but would mean a huge gain for the agent company.

In COCSO Group and its subsidiaries, front-line workers who directly handle vessel acquisition and leasing contracts are required to report large transactions to several executives before they can sign them, a company insider said. In practice, however, this requirement is not strictly implemented. When a department head colludes with a front-line worker, “it is very easy to pull off a scam.”

Another COSCO Group insider said a lot of cheating and fishy activities are happening in the company in other areas, including refueling, maintenance and insurance claims. It is hard to tell legitimate operations from those where corrupt managers pursue their own agenda at the same time because the company has no rules drawing a line between them, he added.

An executive of a shipping company said the root of the corruption lies in the institutional deficiency of state-owned enterprises (SOEs), which lack restraints on executive power. Also, no one really cares about the company’s assets, he said.

Trouble in the Family

The shipping giant has made headlines in recent years for the wrong reasons. Its most important subsidiary, Shanghai- and Hong Kong-listed China COSCO Holdings Co. Ltd., has repeatedly disappointed investors.

COSCO Holdings controls 90 percent of the entire group’s operations. It lost money in 2011 and 2012, and will be forced to temporarily suspend trading on the Shanghai Stock Exchange if it is in the red again this year. Posting losses next year would mean delisting.

In the first six months of this year, COSCO Holdings lost almost 1 billion yuan, one-fifth of the amount it lost for the same period last year. This is after it sold equity holdings in two subsidiaries for 4.9 billion yuan, which offset the loss of 4.7 billion yuan incurred from daily shipping operations.

COSCO Holdings attributed its backsliding on oversupply in global shipping capacity, but many analysts blame management missteps. In 2007 and 2008, COSCO Holdings signed a number of expensive leasing contracts for dry bulk carriers. Some of the contracts are still in effect, but the shipping revenue they generate falls significantly short of covering rental expenses, a source close to the company said.

“In 2007, COSCO Holdings already had the world’s largest fleet of dry bulk carriers,” an executive at a shipping company said. “It wanted to expand its influence globally in the sector and pursue more stable returns.”

This ambition underlay the company’s shift from emphasizing the ownership of vessels to the size of fleet, regardless whether ships were owned or leased, the executive said. A large fleet has merits, but it is wiser to use leased vessels only as a supplement because self-owned ships have advantages when costs and crew loyalty are considered, he said.

At the end of 2008, COSCO Holdings was leasing 233 vessels and owned 210. This situation was “obviously too aggressive” and risky, the executive said.

Another executive at a shipping company said COSCO Holdings was also driven by a strong speculative motive when it leased the ships. It was hoping that prices would rise in the leasing market, so it could make money subleasing, he said, something a small shipping company might do.

As a state champion, COSCO Holdings should have known better than to take on such risk, the executive said. In addition, COSCO Holdings bungled the terms of the contracts, making it impossible to cancel them when the market soured, he said.

Shipping agents that need operators of international liners to transport cargo said COSCO charges too much compared with many of its foreign and domestic rivals. They also said a condescending streak – something many SOEs are criticized for – may have turned off potential clients.

“It is the same old SOE story for COSCO,” one shipping agent said. It shows “no sense of serving customers” and “is reluctant to help us solve even the slightest problems in delivery,” he said.