Carnival Corp.’s plans for China came into sharper focus with the signing of a preliminary memorandum of understanding to build a cruise ship there jointly with one of China’s state-owned shipyards.

If built, the vessel would become the first modern cruise ship to be constructed in China.

The memorandum with the China State Shipbuilding Corp. (CSSC) was announced shortly after Carnival said it had relocated its COO, Alan Buckelew, to Shanghai.

A jointly built ship could form the foundation for a new Carnival brand in China, designed from the keel up to appeal to the tastes and preferences of the Chinese market.

Carnival CEO Arnold Donald announced the initiative at a cruise expo in Tianjin, one of the biggest cruise ports in China. He said it was a “breakthrough day” for Carnival and called it a “landmark agreement.”

Chinese planners have decided that cruising is among the ways China can diversify its export-led economy and boost domestic consumption. Building a cruise ship would also mean jobs for shipyard workers and new knowledge and infrastructure in that area.

Carnival’s contribution to the joint venture would be its “ship design and shipbuilding expertise,” according to the announcement. It would focus on the “vision, definition and overall specifications” for the ship, similar to the way it works with European yards.

Smoothing China's entry into the shipbuilding sector would benefit Carnival in its increasingly pitched battle with Royal Caribbean International to establish a beachhead in the world's most populous country.

The Chinese Ministry of Transport estimates that 4.5 million Chinese will cruise by 2020.

Royal scored a coup earlier this year by deploying a new ship, the Quantum of the Seas, to Shanghai starting in May. More recently, parent company Royal Caribbean Cruises Ltd. (RCCL) said it will sell the aging Celebrity Century to Ctrip, a leading Chinese online travel seller, and form a joint venture with Ctrip to manage the ship's operations.

RCCL, too, signed a memorandum of understanding to set up the venture "and potentially broaden the relationship."

Carnival Corp.'s entrants in the race to win Chinese passengers include Costa Cruises, the first non-Chinese cruise line to base a ship in China back in 2008, and more recently Princess Cruises.

But it may be angling for a third brand that would be pitched as a mass-market product, the segment that Carnival Cruise Lines targeted in North America when it began sailing in 1974.

In an interview at the Tianjin conference, Buckelew said Carnival Corp. is talking to many companies in China about starting a domestic cruise line. That brand could potentially become Carnival Corp.'s largest overall, Buckelew told the trade journal Cruise Industry News.

Because of time differences, Buckelew could not be reached by deadline for further comment.

Maurice Zarmati, a veteran Carnival executive who was most recently a consultant for Costa, said the idea makes sense.

"It is certainly an intuitive statement," he said. "If it worked in the United States, why wouldn't it work in China?"

Carnival Corp.'s move to build in China raises the risk that it will transfer vital technology and expertise to that country, which can then use it to compete with foreign companies, a pattern seen in other industries.

Carnival Corp. didn't address that issue in its announcement, but it did say the memo includes the possibility that the joint venture could become a three-way endeavor with Italy's Fincantieri.

The largest of Europe's cruise builders, Fincantieri has been a favored supplier for Carnival Corp. for years.

Cristiano Mucella, a spokesman for Fincantieri in Italy, said that for the moment it would have no comment on Carnival Corp.'s announcement, but he added: "We see that we are Carnival's reference shipbuilder, so it is natural that they think of us for such an important project."

Europe's cruise shipyards have already been consolidating as lines have restrained their growth in recent years. Germany's Meyer Werft yard is acquiring 70% of STX Finland, for example. A new competitor in China could further reshape the landscape. But the European yards enjoy the advantage of long experience in a specialized area of cruise shipbuilding and established relations with a wide network of suppliers and subcontractors.

Zarmati said acquiring the skills to build ships on time and on budget is an "evolution. ... It doesn't happen overnight."

To date, China's domestic cruise industry has been operating on dated tonnage such as Carnival's old Jubilee, built in 1986 in Sweden, which now sails as the Henna for HNA Tourism Cruises from Sanya and Tianjin.

China State Shipbuilding is one of two conglomerates in that sector, handling projects in the east and south of China. Based in Beijing, it has traditionally produced cargo vessels such as oil tankers and bulk carriers, as well as military ships.

Naval defense contractors in the U.S. have struggled when they attempted to build to the different standards and procedures of the passenger cruise industry.

However, China has made cruise shipping a priority in the past few years. Accelerating its entry into the global cruise arena has become a key goal, and Carnival said the new venture would "support pro-growth cruise policies designed to spur new economic development from tourism in China."

Adam Snitzer, an industry consultant at Peak Revenue Performance in Miami Beach, said he thinks there could be an upside for North American travel agents if ships start getting built for China.

"I think China is the industry's next great frontier," Snitzer said in an email interview. "It has a very realistic chance of solving any residual overcapacity issues, which it turn could lift cruise pricing in North America and Asia."

Carnival said that in addition to shipbuilding, the memorandum of understanding also spells out a framework for possible cooperation with CSSC in other areas, including port development, training, supply chain logistics and potentially forming a domestic cruise company.


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