Korean Shipbuilding Industry
By mid-2016 the creation of a national defense company based on business consolidation is emerging as a hot issue in South Korea amid the restructuring of its shipbuilding industry. The Korea Aerospace Industries (KAI) was established in 1999 through a similar process that integrated the aerospace business units of different enterprises led by the South Korean government. Daewoo Shipbuilding & Marine Engineering and Hyundai Heavy Industries are engaged in the production of large naval vessels and submarines and STX Offshore & Shipbuilding and Hanjin Heavy Industries produce smaller naval vessels. The likelihood of the combination was on the rise as Daewoo Shipbuilding & Marine Engineering’s restructuring plan has been known to include the spinoff of its defense segment.
Ever since Hyundai Heavy Industries jumped into shipbuilding in 1968, the sector has become one of Korea’s flagship export industries, which accounted for 10% of all Korean exports. In 2003 Korea topped all three areas of shipbuilding – new orders, order backlogs, and shipbuilding tonnage. Seven Korean companies were among the world’s ten largest shipbuilders in 2008 based on order backlogs.
In contrast to most other countries that had existing oceangoing shipbuilding capabilities, Korea was a relative newcomer to the global shipbuilding market. The Government of Korea targeted shipbuilding in order to generate foreign exchange earnings in the early 1970s. Subsequently Korean shipbuilders increased their available capacity fivefold during 1975-90, from 0.4 million cgt to 1.8 million cgt, in order to establish a global presence and provide a new industry for its people. The increase coincided with declining global ship prices, which Korean industry officials claim to have further pressured downward by their desire to become a global player.1* Korea has begun to follow the lead of Japan in raising prices on its ships; Korean ships are now highly competitive with those of other shipbuilding nations on the bases of price, quality, and delivery dates.
By the mid 1990s there was considerable concern among global competitors over the significant increase in Korean shipbuilding capacity, which equaled that of all the Western builders combined. French builders pointed out that Korean shipyards employed 45,000 people, compared with 36,000 in 1991, while combined employment in West European yards had fallen from 93,500 to 79,000 over the same period. In light of this, the potential elimination of West European subsidies is especially problematic. For example, French yards had been downsizing for some years, and German yards are undergoing substantial restructuring, partially as a result of difficulties stemming from reunification. Most of the former East German yards were in need of substantial investment for modernization.
During the 1970s and 1980s, South Korea became a leading producer of ships, including oil supertankers, and oil-drilling platforms. The country's major shipbuilder was Hyundai, which built a 1-million-ton capacity drydock at Ulsan in the mid-1970s. Daewoo joined the shipbuilding industry in 1980 and finished a 1.2-million-ton facility at Okp'o on Koje Island, south of Pusan, in mid-1981. The industry declined in the mid-1980s because of the oil glut and because of a worldwide recession. There was a sharp decrease in new orders in the late 1980s; new orders for 1988 totaled 3 million gross tons valued at US$1.9 billion, decreases from the previous year of 17.8 percent and 4.4 percent, respectively. These declines were caused by labor unrest, Seoul's unwillingness to provide financial assistance, and Tokyo's new low-interest export financing in support of Japanese shipbuilders. However, the South Korean shipping industry was expected to expand in the early 1990s because older ships in world fleets needed replacing.
In the 1990s, South Korean shipyards tripled their shipbuilding capacities, while ignoring demand levels in order to achieve market leadership, which they achieved in 1999. This led to overcapacity and destructive prices for the international shipbuilding market. Even the economic and financial crisis in South Korea, which began in 1997, did not lead to a change of course, although the country had been granted substantial international financial support under the condition that it incorporated the principles of a free market economy. Shipyards that were heavily indebted and had been declared bankrupt were not closed down, but freed of debt by the State without capacity restrictions in return. The devaluation of the South Korean currency gave the yards an additional competitive advantage. In 1999, prices from the South Korean yards had been reduced to down to 40 % below production costs, according to an EU Commission report. And since the EU was pursuing a policy to reduce the State aid granted to European shipbuilding companies, the lower prices of the Asian companies meant significant market shares for the South Korean shipyards.
Korean shipbuilders generally considered price to be the most important factor in a purchaser's decision to buy a Korean ship, whereas Japanese and European shipbuilders do not feel this to be true for the majority of their ships. Korean firms tend to build the least complex and therefore the least expensive ships (primarily tankers). European shipbuilding industry representatives generally agreed that in terms of the relative importance of the factors affecting the purchase decision of its customers, price was ranked after quality and delivery time.
Thanks to a historically high level of ordering in 2000, prices recovered to some extent, but the significant drop in orders in 2001 led to a new reduction in prices (total orders were 21 % lower in 2001 than in 2000 based on cgt). While the decline in the world economy in 2001 mainly affected the liquid bulk and the container segments, the events of 11 September had a strong impact on the cruise industry, which saw three bankruptcies and a significant drop in bookings.
The year 2010 saw very stagnant business for shipbuilders worldwide including the three major shipbuilding companies in Korea- Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding and Marine Engineering. But with the global economy on the rebound, orders for ships are back on the rise. While the demand for transport ships, such as bulk carriers, is decreasing, market requirements for specialized ships with advanced engineering features, such as super-sized container ships or liquefied gas tankers, are increasing.
Korea’s shipbuilding industry, the former global industry leader, was on the brink of collapse by 2016. In April 2016 Korean shipbuilders were dealt a shocking blow of failing to win a single order for the first time in history. China, armed with low prices, won orders in April for 720,000 compensated gross tonnages or CGT, representing 48% of all new orders worldwide. Japan, which had less than a 10% global market share a mere decade ago, has now expanded its market share to 30% through a weak yen and help from local shipping companies.
Korea overtook Japan in 2001 to take the top spot in the global shipbuilding industry and overcome the 2008 global financial meltdown to take 70% of the world’s shipbuilding orders for 2009 and 2010. As a result, Korea’s shipbuilding industry became the most robust in the world and rose to the number five spot, powering Korea’s rise as a maritime powerhouse.
Now they face an onslaught of merciless restructuring. Shipbuilding orders for Korea suddenly dropped two years later. In 2012, orders for Korean shipbuilders amounted to only 37.8 billion dollars, while China received 39.2 billion dollars in orders. To make matters worse, the U.S.-based management consulting firm, Boston Consulting Group, projected that Korea’s three biggest shipbuilding companies – Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries – would only receive orders amounting to between 15 and 21 billion dollars out of 70 billion dollars’ worth of shipbuilding orders worldwide. The BCG’s projection is only half the combined goal of 38 billion dollars presented earlier in the year by Korea’s three shipbuilding giants. Such a dismal prediction has worsened the sense of crisis spreading throughout the industry.
The British shipping market service provider, Clarksons Group, announced on 03 May 2016 that the order backlog for Daewoo Shipbuilding and Marine Engineering’s Okpo shipyard amounted to 118 vessels, or around 7.82 million CGTs. This is the world’s largest backlog for a single shipyard. Also, the recent Korea-Iran summit has renewed discussions on Iran’s 1.2-billion-dollar shipbuilding order for Hyundai Heavy Industries’ Mipo shipyard.
According to a report by Clarksons Research released on 02 June 2016, Germany won the largest number of orders in May 2016, to build eight ships or 590-thousand compensated gross tonnage(CGT). Rumania came in second and Vietnam third. China took fourth place with 83-thousand CGTs, followed by Japan posting 77-thousand CGTs. Among five South Korean shipbuilders, only Hyundai Mipo Dockyard and Daesun Shipbuilding and Engineering won orders totaling 56-thousand CGTs. Hyundai Heavy Industries and Samsung Heavy Industries obtained no orders. Daewoo Shipbuilding and Marine Engineering also failed to receive orders for building commercial ships, apart from defense contracts. Samsung Heavy Industries, in particular, had not won a single order for five straight months.
An industry insider said that although the severe order drought is a worldwide phenomenon, South Korean shipbuilders are in a worse situation than Chinese and Japanese makers that secure orders with the support of their governments and business partners at home.
To what extent should Korea's ailing industries be downsized? That was the question hanging over the government's corporate restructuring drive, especially in shipbuilding, a once golden sector that's been struggling to stay afloat in the midst of slowing global demand and low oil prices. The argument is that they need to only keep the operations optimal in size and strip back all the other parts that are considered oversupplied.
After the nation's three largest shipbuilders -- Hyundai Heavy Industries, Daewoo Shipbuilding and Marine Engineering and Samsung Heavy Industries -- submitted their restructuring plans to creditors in May 2016, some experts called for tougher measures.
Stiff competition from Chinese shipyards that now dominate the market for simple dry bulk ships and oil tankers has been a leading cause behind the eye-watering losses seen by Korean shipbuilders. The strength of Korean shipbuilders lie in high value-added ships like liquefied natural gas carriers and large container carriers. So it's important for Korea to expand its market presence in that field.
Others argued that the industry had room to revive itself and that the plans that already included layoffs and multi-billion dollar asset sales had to focus on riding out the current slump to maintain a competitive edge against Chinese rivals. That could become the case for more complex vessels as well, if the current corporate restructuring drive pushes for too steep of a cut in the country's production capacity.
On 11 June 2016 Korea's three major shipbuilding corporations -- Hyundai Heavy Industries, Daewoo Shipbuilding and Marine Engineering and Samsung Heavy industries -- won approval from their creditors and the Ministry of Strategy and Finance for their individual self-rescue plans. The three rescue plans, worth a combined 8.8 billion dollars, were expected to help the companies regain their financial stability.
But some experts said it was too early to determine whether the plans will actually work, as demand for new ships has been on a constant decline. Global ship orders have fallen to 77 ships for the first quarter of this year, which is a 71 percent drop compared to the same period last year. Domestic ship orders have fallen by an even greater gap of 94 percent. In light of such troubles, credit analysts have cautioned that continued sluggish demand could lead to an even more serious drop in the credit ratings of the three already struggling companies.
On 01 July 2016 the Ministry of Employment and Labor finally designated Korea's shipbuilding sector as a special employment support industry after a review process of less than 50 days. The Special Employment Support Program applies to a combined 78-hundred companies, which also includes shipbuilding companies and their subcontractors. The program will go in effect starting July 1st for one year until 30 June 2017. The support program is worth 750 billion won, or 640 million U.S dollars, and participant companies will be required to cooperate with a government-directed restructuring program.
Missing from the list of beneficiaries were the country's three largest shipbuilders -- Hyundai Heavy Industries, Daewoo Shipbuilding and Marine Engineering and Samsung Engineering. The labor minister said the three companies all have the capacity to continue their business operations without additional support as of now, and noted that none of them have finished their internal negotiations with their labor unions regarding potential layoffs.
Korea's big three shipbuilders reported losses of 6.4 trillion won, or 5.5 billion U.S dollars, in offshore plants for 2015 alone. The three companies' labor unions have characterized the government's omission as a punishment directed at averting a massive strike the unions have been organizing to protest the possible layoffs.
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