Korean media criticizes: South Korea's shipbuilding industry reform plan is nothing new

South Korea's shipbuilding industry reform plan, recently announced by the government, has been criticized by mainstream South Korean media outlets.

On October 31, the South Korean government unveiled a shipbuilding industry reform plan. Its core content is to maintain the existing structure of the three major shipbuilders, but requires a 23% reduction in construction equipment and a 32% reduction in personnel for these three companies by 2018.

South Korean media believe that the government has once again delayed the restructuring of the shipbuilding industry. The Korea JoongAng Daily stated that, in short, this so-called reform plan is nothing new; the three major shipbuilders will adjust their business portfolios under government requirements to improve profitability and productivity, and improve their balance sheets.

The South Korean government reiterated that it has never considered closing Daewoo Shipbuilding & Marine Engineering. Due to the persistent problem of overcapacity, the government's proposals for enhancing the competitiveness of shipbuilders remain unclear and questionable, and this proposal does not involve any specific actions regarding mergers and acquisitions or divestitures.

The South Korean government requires Daewoo Shipbuilding & Marine Engineering to gradually reduce the proportion of its loss-making offshore engineering business; however, this business is still allowed to be retained. Plans to split off the defense business, establish an independent subsidiary, and achieve an initial public offering (IPO) have been abandoned. Instead, the South Korean government suggests delaying as much as possible until the global market recovers.

Daewoo Shipbuilding & Marine Engineering suffered significant losses last year and remained unprofitable in the first half of this year. This year, the South Korean government set an annual order target of $6.2 billion for Daewoo Shipbuilding & Marine Engineering; however, its actual order volume from the beginning of the year to date is only $1.3 billion.

On October 31, the South Korean government pledged not to provide further state aid to Daewoo Shipbuilding & Marine Engineering. However, the JoongAng Daily expressed doubt about this statement. In fact, the Korea Development Bank, the largest shareholder of Daewoo Shipbuilding & Marine Engineering, and the Export-Import Bank of Korea, its largest creditor, are both state-owned banks, and these two banks are already exploring ways to improve Daewoo Shipbuilding & Marine Engineering's balance sheet through debt-to-equity swaps, etc.

The South Korean government's plan clearly states that the Korea Development Bank will promote the privatization of Daewoo Shipbuilding & Marine Engineering; however, the specific privatization arrangements are not mentioned.

Meanwhile, the South Korean government previously commissioned McKinsey & Company, a US consulting firm, to conduct a consulting analysis of the South Korean shipbuilding industry, but the results of McKinsey's report were not reflected in the reform plan announced this time. McKinsey's report predicted that among the three major shipbuilders in South Korea, Daewoo Shipbuilding & Marine Engineering has the lowest chance of survival; in the next five years, Daewoo Shipbuilding & Marine Engineering will operate with a negative 10% operating profit margin; therefore, saving Daewoo Shipbuilding & Marine Engineering is not worthwhile.

McKinsey's report is 36 pages long, while only 5 lines from McKinsey's report are quoted in the South Korean government's shipbuilding industry reform plan. Clarkson Research Services predicts that the average order volume for major vessels of South Korean shipbuilders from 2016 to 2020 will be $23.7 billion, while McKinsey's prediction is $16.3 billion, a huge difference. The South Korean government adopted Clarkson Research Services' prediction.

The JoongAng Daily believes that the South Korean government's plan also reflects realistic factors. The restructuring of Daewoo Shipbuilding & Marine Engineering will inevitably have an impact on the South Korean job market, and South Korean state-owned banks will also be affected, which cannot be ignored. To date, creditors such as the Korea Development Bank and the Export-Import Bank of Korea have provided more than 4.2 trillion won in financial assistance to Daewoo Shipbuilding & Marine Engineering. Last month, Chairman of the Financial Services Commission, Im Jong-yong, stated that if Daewoo Shipbuilding & Marine Engineering goes bankrupt, the Korea Development Bank and the Export-Import Bank of Korea will suffer a huge loss of 13 trillion won (approximately $11.89 billion). Daewoo Shipbuilding & Marine Engineering itself has approximately 12,000 employees, and including subcontractors, the total number exceeds 50,000.

In addition, many industry insiders in South Korea believe that this restructuring plan is shifting the responsibility of handling Daewoo Shipbuilding & Marine Engineering to the next government. In response, relevant personnel from Daewoo Shipbuilding & Marine Engineering stated that Daewoo Shipbuilding & Marine Engineering will absolutely abide by the self-rescue restructuring plan submitted to creditors and the government and will make every effort to restore its competitiveness.