Bribery Scandal, Terrible Earnings

DSME shipyard.
DSME shipyard.

 

Fined the highest for employee corruption last year, the outlook of Daewoo Shipbuilding and Marine Engineering (DSME) continues to be bleak, for this year’s profit is doomed to be less than expected.

Last October, prosecutors arrested and indicted 11 former and current executives and staff of DSME for malpractice and embezzlement. One executive asked for a golden “key of fortune” (a kind of expensive lucky charm) for his son, and “Kim Yuna’s necklace” for his daughter from a subcontractor in exchange for advantages in becoming a supplier. Another executive caused financial losses to the company by raising the unit price for parts that subcontractors supply. The total amount of losses was 3.4 billion won (US$3.3 million).

At the same time, the Fair Trade Commission (FTC) fined the DSME the largest amount on record for violating subcontractor law.

Ko Jae-ho, CEO of Daewoo Shipbuilding and Marine Engineering.​The FTC caught DSME in the act of unfair cuts in payment to 89 subcontractors and ordered 26.7 billion won (US$26.2 million) in fines to be paid to the National Treasury. It also demanded that the DSME pay contractors 43.6 billion won (US$42.9 million) of underpaid amounts immediately. From 2008 to 2009, DSME had cut the payment by 6 to 7 percent yearly to eight subcontractors that were in charge of assembling ship blocks.

DSME appealed the FTC’s verdict. A PR official of DSME said, “We are counter-suing the FTC for unfairly punishing a proper way of encouraging the competition and a fair decision on the subcontractor payment.”

To make things worse, DSME’s performance is expected to plummet further. It already performed poorly in the first quarter, and security companies are predicting that this year’s performance will not meet expectations.

A source from Daishin Securities said, “DSME’s operating profit is expected to be better than last year’s, but still lower than what it expects,” and lowered its target share price. Also, considering that the profitability of merchant ships and marine plants are lower than expected, it decreased the estimated earnings for 2014 from 701 billion won (US$689.1 million) to 522 billion won (US$513.2 million).

Daishin Securities concluded that the profit from marine production facilities which DSME acquired in 2011 is lower than expected, and said, “Overall, earnings will increase until 2016, but it will be a slow process.”

Tongyang Securities said, “The first quarter results didn’t meet the forecast and market consensus,” and picked the increase in deficit from the company’s Mangalia shipyard, a delay in pipeline construction, and weak profits in shipbuilding as faults.

Hi Investment & Securities also analyzed, “Lower-than-expected profitability is inevitable.” It said that the profitability in shipbuilding went down, but small-scale ship construction increased from last year. In fact, the amount of orders as of the end of May 2014 was US$1.9 billion (1.92 trillion won), only 13.10 percent of the entire year’s projected order of US$14.5 billion (14.75 trillion won). In 2007, DSME recorded US$21.5 billion (21.87 trillion won) in orders.

A source at DSME explained, “We admit the market for marine plant facilities was pretty bad for the first half of the year,” and “It’s too early to jump to conclusions because there are still quite a number of projects we are expecting to acquire later this year.”

A series of poor performance points finger the current CEO Ko Jae-ho as lacking leadership. As an image makeover move, DSME received resignation notes from 60 executives and staff, but only ten were accepted.

On this issue, the industry and the financial sector criticized DSME for this sly move. “Knowing that it will be hard to avoid the blame, DSME did something that they never meant to follow up on.” They also said, “It’s an act of killing the mood for cooperation and aid between large companies and SMEs,” on DSME not cooperating with the FTC’s verdict.

Sales are still increasing due to past orders, but operating profits are falling sharply, undermining overall profits. Before CEO Ko took over in 2011, operating profits were 1.09 trillion won (US$1.07 billion). In just one year, operating profits went down to 486.3 billion won (US$478.0 million), and fell further to 440.9 billion won (US$ 433.4 million) in 2013.

In March 2012, CEO Ko received much attention from both inside and outside of the company for becaming the first CEO of DSME through internal promotion, not through tedious parachute appointments. This issue had been spotlighted by former CEO Nam Sang-tae’s statement to the Korea Development Bank (KDB Bank), “If a CEO is elected from within the company, I will retire.”

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