Orders dry up for S. Korean shipbuilders

A part of the structure of a ship (bottom centre) is lifted by giant crane at Hyundai Heavy Industries' Shipyard in Ulsan, South Korea.
A part of the structure of a ship (bottom centre) is lifted by giant crane at Hyundai Heavy Industries' Shipyard in Ulsan, South Korea. PHOTO: REUTERS

Once dominant globally, their survival is now at risk due to falling demand, regional rivalry

SEOUL • After more than a decade of global dominance, South Korea's shipbuilders face an unprecedented crisis that threatens the very survival of one of the flagship industries of Asia's fourth-largest economy.

South Korea's "Big Three" shipbuilders were once considered the holy trinity of Korea Inc - controlling nearly 70 per cent of the global market after seeing off their European and Japanese rivals in the 1980s and 1990s.

Year after year, the shipyards of Hyundai Heavy Industries, Daewoo Marine and Shipbuilding, and Samsung Heavy Industries churned out massive cargo ships, oil tankers and offshore drillers for shipping firms and energy giants around the world.

But a prolonged slump in oil prices and the global economic slowdown sapped demand for tankers and container ships, while overcapacity, regional rivalry and competition from cheaper Chinese shipbuilders squeezed profit margins.

The three firms racked up a collective loss of 8.5 trillion won (S$9.9 billion) last year, while outstanding orders among all South Korean shipbuilders hit their lowest level in 11 years in February.

"Orders are drying up. We are faced with an unimaginable situation at which our dock may soon be empty," Hyundai Heavy chairman Choi Kil Seon said in a letter to employees in March. "Even banks are so reluctant to lend to us. This is the harsh, undeniable reality we are facing today."

Hyundai - the world's top shipbuilder by sales - has reported a net loss for two straight years, totalling 5 trillion won. It posted its first net profit in more than two years in the first quarter of this year, but Mr Choi said that was largely thanks to lower raw material prices and a weaker Korean currency.

The company became "oversized and complacent" during the boom years of the 2000s, he said, urging "bone-crushing efforts" to compete against Chinese shipbuilders that won more than half of all new global orders this year. "If we can't compete against Chinese... our jobs will be eliminated," he said.

Mr Yang Jong Seo, analyst at the Export-Import Bank of Korea, said the next two years would be the "worst years ever" for the shipbuilders as they embark on a period of painful, state-led restructuring.

In return for state aid and debt extensions, Seoul's financial regulators have pressed for more asset sales, mass layoffs, pay reductions and streamlined business plans.

"I think the situation will hit the bottom in the latter half of 2017 and revive in 2018. The key question is whether the shipbuilders can manage to stay alive until then," Mr Yang told AFP. "If they end up falling apart, I'm afraid the pillar of the global shipbuilding industry will really shift to China."

The knock-on effect of any such collapse would be enormous. The southern port of Ulsan and Geoje island - home to the three shipbuilders' main docks - are the bedrock of a regional economy that relies heavily on the industry for tax revenues and consumer spending by nearly 200,000 workers.

Hyundai shed more than 1,000 jobs at its Ulsan shipyard last year and is reportedly planning to lay off around 3,000 workers this year. Its suppliers that hire tens of thousands of workers are being pushed to the brink of collapse.

The situation is even bleaker at No. 2 shipbuilder Daewoo. The firm has failed to win a single order so far this year, after suffering a record net loss of 5.5 trillion won last year.

Daewoo - partially owned by the state-run Korea Development Bank - has proposed laying off 3,000 workers by 2019 but the government is demanding an even bigger job cut.

"The whole city is a big community of shipbuilding workers and their families. And we are all feeling the pinch," an official at the Geoje city council told AFP.

More than two-thirds of the city's 250,000 population either work for Daewoo or Samsung or are family members of those who do.

The same sense of impending loss is growing in Ulsan - a vibrant blue-collar city that is home to the Hyundai Heavy shipyard as well as Hyundai Motor's main plant.

The city used to boast the highest per-capita income in the country for years, but some say it now faces the same fate as the Swedish port of Malmo, once known for its robust shipbuilding industry.

Malmo's iconic 128m-tall Kockums Crane - a symbol of its manufacturing industry - was sold to Hyundai in 2002. The crane was nicknamed the "Tears of Malmo" after residents reportedly cried at the sight of it being shipped to Ulsan.

"Now we are shedding the 'Tears of Ulsan'," said Mr Jun Young Do, the head of the Ulsan city's chamber of commerce.


A version of this article appeared in the print edition of The Straits Times on May 19, 2016, with the headline 'Orders dry up for S. Korean shipbuilders'. Print Edition | Subscribe