Despite Improved Profitability
The shipbuilding industry is suffering from a sharp drop in remaining orders due to a severe order drought. But there is a positive outlook on the shipbuilding industry that intensive restructuring will lead to a gradual improvement in the profitability of the Korean shipbuilding industry.
According to the shipbuilding industry on September 22, Korea’s three major shipbuilders -- Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME) -- are expected to post relatively good results in the third quarter of this year compared to the second quarter. This is because the shipbuilding industry is expected to enjoy the effects of cost cutting via a reduction in human resources such as the implementation of large-scale voluntary retirements.
Hyundai Heavy Industries applied 260 billion won in one-time severance pays for retirees to its second quarter business results. Samsung Heavy Industries posted 283.7 billion won in operating loss by applying about 200 billion in temporary expenses.
But it is expected that the Korean shipbuilders see their profitability improve as most of such temporary expenses will not be incurred in the third quarter of this year. According to FN Guide, Samsung Heavy Industries is expected to post 45.8 billion won in operating profit even though the company chalked up operating loss in the second quarter of this year. DSME is projected to post 44 billion won in operating income, too. Both companies returned to profit compared to the previous quarter.
Hyundai Heavy Industries which recorded an earnings surprise of 557.2 billion won in operating income in the previous quarter is expected to post hefty operating income of about 350 billion. “Labor cost cuts began to apply in July. It is expected that the effects of cost cutting including a reduction in material cost will take place,” said Jeon Jae-cheon, a researcher at Daeshin Securities.
“The full-scale implementation of each shipbuilder’s self-rescue plan will gradually come into effect,” said a representative of the shipbuilding industry.
An improvement in profitability is not the magic bullet that the Korean shipbuilding industry needs for its problems. This is because the Korean shipbuilders are squeezing profits through stern restructuring and cost cutting at a time when their sales plummeted.
In fact, sales of the three shipbuilders (on a consolidated basis) plunged over the past three years to hit 71 trillion won last year. They dwindled over 12% in one year after hitting 84 trillion won in 2013 and 81 trillion won in 2014. The Korean shipbuilding industry is on the downside. For example, the Korean shipbuilders fall far short of their new order targets which they lowered in consideration of their deteriorating business conditions.