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S. Korea: Reshaped shipbuilders

On Jan. 31, the state-run Korea Development Bank (KDB) temporarily agreed to sell its controlling stake in Daewoo Shipbuilding & Marine Engineering to Hyundai Heavy Industries.

Should Hyundai Heavy take over Daewoo, it will reshape Korea’s shipbuilding sector from the “Big-3″ to a”Big-2” system ― Hyundai Heavy and Samsung Heavy Industries. KDB will also sound out whether Samsung Heavy intends to bid for Daewoo. If Samsung does not, as is likely now, KDB and Hyundai will sign a formal contract on March 8.

Unions at both Hyundai and Daewoo, which had been alienated from the process of the deal, are strongly opposed to the move, however. According to data from the Korea Offshore and Shipbuilding Association, Hyundai and Daewoo account for a respective 52.7 percent and 27.6 percent of orders received by local shipyards. That means some workforce redundancies will likely be inevitable if the two companies merge.

At a time when global shipbuilding is mired in a slump and latecomers pose stiff challenges, however, the sector can hardly avoid overall reorganization. If the industry is to maintain its competitive edge amid a global glut of vessels, it must begin by reducing the number of shipbuilders.

In the past, the domestic shipbuilding sector used to be bent on price dumping amid the cutthroat competition. This was due to their strategy of maximizing order receipts by sacrificing profitability. The plan worked when shipbuilding was a labor-intensive industry marked with low added value. However, those days have long gone. Now the sector calls for building high value-added vessels and floating structures, which requires technology-intensive capital and labor. The ongoing shipbuilding restructuring is the process to adjust to these changes in ways that heighten added value.

The merger and acquisition in the domestic shipbuilding sector is unavoidable in this regard. But opinions differ over the extent to which the government can intervene in the process of such restructuring. It is also time for policymakers to give answers not just to the issue of M&As among giant shipbuilders, but the question of how to operate small- and medium-sized berths.
Source: Korea Times

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