Spinning Off
Daewoo Shipbuilding & Marine Engineering (DSME), a troubled South Korean shipyard, started the final touches of its self-rescue plans. The plans include large-scale workforce reduction, wage cuts, non-core asset sales as well as spin-off of its defense unit. The company plans to separate its lucrative defense business, including special vessel, put it in its subsidiary and list it.
DSME had a final negotiation with its largest shareholder Korea Development Bank (KDB) on May 20 with its self-restructuring plans, such as workforce reduction, wage cuts and facility reduction by 30 percent.
The company also included its plan to incorporate its defense division, which turned over some 1 trillion won (US$839.28 million) last year, as a subsidiary. Winning the order of the patrol combat corvette (PCC) Anyang from South Korea’s Navy in 1981, DSME has pushed into the defense market in earnest and recognized as having the best technology in the vessel and submarine sector. Currently, the company has established the full lineup of vessels ranging from submarine, rescue ship and combat support ship to aegis battle ship. In particular, it is the only domestic defense company specializing in special vessels which has won submarine contracts from other countries. DSME is the world’s fifth submarine exporter, following the U.K., France, Russia and Germany.
The performance of the defense unit is also putting up a good show. The company had a turnover of 1.2 trillion won (US$1.01 billion) last year, boosted by three submarine orders received from Indonesia in 2011. It posted 300 billion won (US$251.78 million) in sales in 2013, while recording 400 billion won (US$335.71 million) in 2014. The operating margin is about 5 to 6 percent. The order backlog is now standing at 20 vessels, or nearly 5 trillion won (US$4.2 billion). DSME believes that the corporate financial structure will improve when it separates its lucrative business into a subsidiary and list it. A spokesperson from DSME said, “We have never considered the sale. It also has a problem with sharing the site with other businesses. It is physically impossible to separate the space.”
The company will slash its workforce and wages. It officially planned to cut 3,000 jobs over the next three years but is now considering the additional reduction due to mounting pressure on the high intensity self-restructuring plan from creditors. DSME President Chung Sung-rip has insisted that there is a serious problem of labor oversupply in the industry and the workforce should be stayed at the level of 2009. The company thinks that the optimal number of workers is around 10,000. The number of DSME workers at the end of last year stood at 13,200. Considering the fact, it aims to cut 3,000 jobs. However, DSME has been advancing the time to reduce its labor due to pressure on additional restructuring plans. In this case, the company will fire some 4,000 workers in the next three years, according to some industry sources. Accordingly, the number of regular workers at the nation’s “big 3” shipbuilders will be slashed by 8,500 within three years, including Hyundai Heavy Industries with 3,000 layoffs and Samsung Heavy Industries with 1,500 layoffs.
DSME is also likely to reduce the wages of office workers. The company already announced to its workers that it would lower the wages of office and administrative workers by 10 percent, additionally reduce it by 3 to 10 percent according to staff levels, offer unpaid leave for one month to all employees and abolish monetary incentive systems.
It is inevitable for the company to reduce its facilities. This is because the industry will face empty docks from the second half of next year due to the rapid decrease in orders. DSME will also shut down its docks in order from the lowest operation rates. One out of four floating docks in the Geoje shipyard is highly likely to be closed down.