Combination of Defense Units
The creation of a national defense company based on business consolidation is emerging as a hot issue in South Korea amid the restructuring of its shipbuilding industry. The Korea Aerospace Industries (KAI) was established in 1999 through a similar process, that is, an integration of aerospace business units of different enterprises led by the South Korean government.
At present, Daewoo Shipbuilding & Marine Engineering and Hyundai Heavy Industries are engaged in the production of large naval vessels and submarines and STX Offshore & Shipbuilding and Hanjin Heavy Industries are producing smaller naval vessels. The likelihood of the combination is on the rise as Daewoo Shipbuilding & Marine Engineering’s restructuring plan has been known to include the spinoff of its defense segment.
Military experts point out that South Korea’s naval vessel and submarine production still has a far way to go in terms of size. “The entire market is less than one trillion won and M&A should have been carried out long ago in the interest of its global competitiveness and survival in the global arena,” one of them advised, adding, “These days, nuclear submarines are creating a new trend and the government needs to make a continuous investment in order not to lag behind the trend, and business integration can be an effective way of improving the efficiency of the investment.”
Up to now, Daewoo Shipbuilding & Marine Engineering has signed 38 submarine supply contracts in South Korea and five abroad, including nine for type 209 and three for 1,400-ton. Its surface vessel contract track record consists of 34 units in South Korea and nine abroad, including three KDX-I destroyers, six patrol frigates and five combat support ships. Hyundai Heavy Industries has built 73 warships, including two Aegis ships, three KDX-II destroyers and five submarines, and some of them have been exported to New Zealand, Bangladesh, Venezuela, etc.
There are also some experts who are opposed to the integration. According to them, the integration is likely to have a negative effect on competitiveness and the presence of the multiple companies is more effective in terms of growth based on competition. They prefer pairing between large and small companies to comprehensive consolidation, examples including Daewoo Shipbuilding & Marine Engineering being combined with STX Offshore & Shipbuilding and Hyundai Heavy Industries being merged with Hanjin Heavy Industries.
They also point out that the consolidation is not easy at all in that the corporations’ facilities are scattered across the country. Those on the opposite side, however, say that this can be solved with reference to the example of Japan. In July last year, Mitsubishi integrated its naval vessel business into its facilities in Nagasaki. “Once an integrated company is established, it is expected to be able to record at least two trillion won (US$1.7 billion) in annual sales in the domestic market alone although there are still many hurdles to the destination,” one of them mentioned.