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South Korea Fears Japan Trade Dispute Could Scuttle Shipyard Merger

South Korean officials are concerned that Seoul’s increasingly strained trade relations with Japan could derail the country’s planned megamerger of the country’s two big shipbuilders.

Hyundai Heavy Industries Holdings Co. plans to seek antitrust approvals from Japan, China, Singapore and the European Union to combine operations with Daewoo Shipbuilding & Marine Engineering Co. , according to people with direct knowledge of the matter.

The merger would create the world’s biggest shipyard, with control over some 20% of the global market, and would compete with yards in those countries for new ship orders worth billions of dollars.

If any of those regulators turn down the approval request, the merger could be canceled.

“None of the approvals are certain, but the one from the Japanese government is especially tricky,” one person involved in the process said. “Trade relations between Seoul and Tokyo are quite tense and it’s not the best time to ask Japan on such matters.”

Japan and South Korea have been locked in an escalating trade dispute taking in major businesses in both countries since South Korea’s supreme court last year ordered Japanese companies to pay damages for forced labor of Koreans during World War II.

The tension intensified in July after Tokyo imposed export controls of three materials crucial to Korea’s manufacturing of semiconductors and display screens for electronic devices. In August, Tokyo removed Seoul from a list of trusted trade partners with preferential status, while South Korea withdrew from a regional military intelligence-sharing agreement that includes Japan.

A Japanese official involved in the matter said members of Japan’s Fair Trade Commission, which will review the merger application, believe the tie-up would make it more difficult for local yards to compete.

“There is no foregone conclusion, but some regulators feel it’s too big of a market share,” the official said. “There is a lot of skepticism on this.”

Japanese regulators do not comment on requests before reaching a conclusion.

Shipbuilding is recovering from a maritime-sector downturn that sent new orders plummeting as operators in the container, tanker and dry-bulk vessel sectors scaled down their fleets.

The business is a vital part of the economies in Asian countries such as South Korea and China, employing hundreds of thousands of people. Seoul and Beijing have repeatedly bailed out or subsidized yards that have suffered steep financial losses over a multiyear shipping slump.

Chinese state-owned operations are undertaking their own consolidation, and Hyundai Heavy agreed in June to buy DSME in a $1.6 billion deal with Korea Development Bank, DSME’s controlling shareholder.

“The merger is for survival,” HHI Chief Executive Ka Sam-Hyun said. “Korean yards have stayed alive for too long on state support and nobody wants more bailouts.”

Japan is the world’s third-largest shipbuilding country after China and South Korea. Its yards are at the forefront of designing a new generation of vessels that would run on batteries or biofuels as the shipping industry moves to comply with stricter pollution regulations.

“There is still opposition from within the yards with workers fearing job losses and benefit cuts, but the main hurdle is regulatory approvals from abroad and especially from Japan. If they say no, it could all come crumbling down,” a senior Korean maritime executive said.
Source: Wall Street Journal

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