have long held that Chinese are more likely to live up to the spirit of a contract, than to the actual language in the agreement. Usually I prefer this, but there are times when they don’t live up to either the spirit or the word. The world has just had a big demonstration of that.
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| Who is paying the bills now? (photo: Jurgen Lehle) |
You may not have followed the saga of COSCO, a state-owned Chinese shipping company, and its refusal to pay its bills according to contract. The way the shipping business works is that the big shipping companies usually don’t own most of the vessels in their fleets. The ships are under long-term lease from financial companies that don’t know much about operating ships, but have the money to pay for their construction. It’s the same sort of arrangement that most airlines use to get their aircraft. The logo on the tail or the house flag at the masthead, don’t tell you anything about who actually owns the ship or the airplane.
COSCO, more accurately China COSCO Holdings, did a very bad deal – and wants out of it. COSCO is a power in dry-bulk shipping, the vessels that carry bulk commodities. The price of such shipping definitely impacts the prices you pay either in your company or your home. In 2008, COSCO decided it needed more ships. Unfortunately, 2008 was a period of very high prices in the shipping industry. Dry-bulk carriers were relatively scarce and the finance companies who owned the ships could drive an extremely hard bargain. COSCO, like the rest of us, did not know where prices would head and decided that the high prices (up to $80,000 per day) were worth paying to ensure their cargo lift capacity.
Fast forward three years. Dry-bulk vessel prices have plunged. Spot prices for new charters were as low as $16,716/day last month. COSCO lost its bet big time. (It wasn’t that good a bet in the first place, but decision-making by state-owned companies is a story for another day.)
Rather than simply swallowing hard and paying the prices it thought it could afford in 2008, COSCO decided to welsh on the deal. They simply stopped paying for their ships and effectively said to the leasing companies, sorry but it’s your problem now. Except that it wasn’t. The leasing companies – the legal owners of the ships – put the word out to the police in ports around the world, and – in at least three cases – COSCO vessels were seized in foreign ports. Arrested, as it were, for non-payment on a valid contract. True, it was an industry problem, because COSCO’s refusal to pay called into question the credit-worthiness of the leasing industry. But the industry called the Chinese bluff – and COSCO was the first to blink when the idea sank in that no one would ever lease ships to them again.
So, COSCO has reluctantly begun to pay on its 2008 contract again. Even at $80,000 a day.
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