Restructuring shipbuilding

Daewoo Shipbuilding & Marine Engineering stunned the market with the revelation of its financial troubles. It reported that it would have to record losses of more than 2 trillion won ($1.7 billion) in its second-quarter balance sheet. The news comes as a surprise since the company had been the only among the top three local shipbuilders to report a profit last year.

The company and its largest stakeholder Korea Development Bank (KDB) are blaming one another for the covert losses. KDB has sent its chief finance officer to supervise the management of the company since it became its largest shareholder in 2000. But the CFO claims he has been kept in the dark. The former CEO is suspected of trying to hide the losses in order to extend his term. Others believe that because it’s hard to calculate the costs of shipbuilding and plant construction, the CFO and management put off responsibility for totalling the losses, but didn’t intentionally cover them up.

Whatever the reason, the accounting fault underscores the problems of a company without an owner. Industry experts say moral hazard can be rampant in companies under prolonged creditors’ management. The chief executives hired by the government, banks and companies are more interested in their own selfish needs than corporate restructuring. There had been rumors that the decision to name the head of Daewoo Shipbuilding came from the presidential office. Moreover, its largest shareholder KDB is known for its bureaucratic and revolving-door policies. The vice president is busy hunting down comfortable positions for after his retirement while the president keeps a low profile, hoping to finish his term without any further disruptions.

It is no surprise that Daewoo Shipbuilding made no strides in restructuring and did not get any better under the control of KDB. Ailing shipbuilders like STX have been surviving solely on assistance from creditor banks. Under such a system, the shipbuilding industry cannot be restructured. The government, which should be spearheading industrial restructuring more broadly, has entrusted the matter entirely to the banks. Two out of three small and mid-sized shipbuilders have shut down or are under either creditors’ or court management. The government must set the direction for restructuring in the shipbuilding industry.

JoongAng Ilbo, July 21, Page 30