Hyundai Heavy Industries Group’s acquisition of Daewoo Shipbuilding & Marine Engineering Co. will threaten the existence of many subcontractors and could ultimately destroy the ecosystem of the Korean shipbuilding industry, panelists at a policy forum asserted on Aug. 13.
The forum was organized by Reps. Chae Yi-bae of the center-right Bareunmirae Party and Kim Jong-hoon of the progressive Minjung Party.
Ahn Jae-won, head of the Korean Metal Workers' Union Research Institute, said, “The Korea Development Bank emphasizes the need to reorganize the Korean shipbuilding industry to a ‘big two” system. Technically speaking, however, the acquisition will result in a ‘super big one’ system.” He further said that the newly created firm will focus on reducing its capacity rather than developing new technologies as competition will disappear as a result of the merger.
In particular, he said, “It can be difficult for shipyards other than the four subsidiaries of Hyundai Heavy Industries Group to survive. The super big one system will eventually demolish the industry’s ecosystem.”
The total number of Daewoo Shipbuilding’s subcontractors stood at 598 as of 2015. If Hyundai Heavy Industries Group purchases Daewoo Shipbuilding and controls its plants in Ulsan, Mokpo and Geoje regions, it will assume control of most of the South Korean shipbuilding industry. In short, the group will be able to secure control of performance payments and wages of subcontractors and suppliers.
Jeong Mi-kyung, head of a research institute on German politics and economy, asserted that the Hyundai Heavy’s acquisition of Daewoo Shipbuilding is actually a “restructuring” of the shipbuilding industry. She cited a report produced by global management consulting firm McKinsey & Company at the request of the government in June 2016.
According to the report, Daewoo Shipbuilding is expected to post an operating margin of minus 10 percent over the next five years and suffer a cash shortage of 3.30 trillion won (US$2.72 billion) in 2020. It also said the domestic shipbuilding industry size would shrink by 55 percent compared to the past five years. Jeong noted that this means that the super big company created through the merger will lead to a situation where “one plus one equals less than 1.5.”
Meanwhile, Chae said, “There is growing concern that the marriage of the two dockyards could create counterproductive effects such as the decline of the shipbuilding equipment and material sectors, destruction of jobs at subcontractors, and the stunting of Daewoo Shipbuilding’s industrial growth potential.” Kim who jointly sponsored the debate also said, “In fact, the outcome of the combination of Hyundai Heavy and Daewoo Shipbuilding is very unclear, so there should be a lot of studies and discussions on it.”