[FOCUS] Integrated corporation proposed to jointly manage Hyundai and Daewoo shipyards

Lim Chang-won Reporter Posted : 2019-01-31 18:20 Updated : 2019-01-31 18:20
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[Yonhap Photo]

SEOUL -- After years of painful restructuring, South Korea's shipbuilding industry embarked on consolidation led by Hyundai Heavy Industries (HHI), the world's largest shipbuilder, to create an integrated corporation which is unrivaled in scale, know-how and technology.

The shipyards of HHI and Daewoo Shipbuilding & Marine Engineering (DSME) will be run under the same roof of a new corporation controlled jointly by the holding company of the Hyundai shipbuilding group and Korea Development Bank (KDB), a state policy lender which has a 55.7 percent stake in DSME.

HHI will be split to create a corporation that would oversee affiliated shipyards. KDB will provide 1.5 trillion won ($1.34 billion) in paid-in capital for third-party allocation of DSME and another one trillion won if needed, in return for acquiring new shares to be issued by HHI.

"We reached a consensus with Hyundai Heavy Industries, which focuses shipbuilding, on the necessity of industrial restructuring and went ahead with M&A," KDB head Lee Dong-gull told reporters. The deal was temporary, Lee said, describing Samsung Heavy Industries as another potential buyer.

The deal is aimed at enhancing the competitiveness of South Korea's shipbuilding industry, HHI said in a statement, adding it would help the two shipbuilders acquire the world's best technology and know-how. "This means that we will have the power to lead the global shipbuilding market, which is entering an eco-friendly technology era in earnest."

HHI said it would benefit from consolidating research and development, eliminating redundant investment, and reducing material costs through economies of scale. Productivity would increase by sharing technology, design, parts and services, it said.

However, DSME's labor union fearing layoffs warned of strong action to oppose consolidation, saying the deal could lead to massive restructuring. HHI's union also opposed the deal.

With a massive injection of state money estimated at 10 trillion won, DSME has been kept afloat in return for a sweeping rehabilitation program to ease its liquidity crisis caused by dwindling orders and a prolonged business slump. The shipbuilder turned a profit in 2017 after six years of loss. It is forecast to log an operating profit of 800 billion won on sales of 8.9 trillion won in 2018.

Initially, experts suggested the shipyard should separate its defense section or merge with competitors to rehabilitate South Korea's embattled shipbuilding industry. However, policymakers have refused to do so, fearing a backlash from politicians, provincial government officials and voters.

In 2019, South Korean shipbuilders anticipate a business recovery on solid demand for liquefied natural gas (LNG) carriers. They bagged orders to build 60 LNG ships last year. Daewoo Shipbuilding aims to win $8 billion worth of new orders this year, compared to $6.81 billion last year.

HHI has reduced its debt dramatically through painful restructuring, but it is still in the red mainly due to high fixed costs. In 2017, Hyundai Robotics was separated and renamed as the group's holding company for non-shipbuilding units so that the shipyard in the southeastern city of Ulsan can focus on shipbuilding and engine making.

This month, HHI's holding company agreed to sell a 19.9 percent stake in its refinery arm, Hyundai Oilbank, to Saudi Aramco for 1.8 trillion won.