A crisis of rivalry

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A crisis of rivalry

To foreign industry analysts, the astronomical losses incurred by the country’s top three shipyards must be baffling. Hyundai Heavy Industries reported an operating loss of 3.25 trillion won ($2.82 billion) last year. Samsung Heavy Industries is expected to suffer an operating loss of more than 1 trillion won in the second quarter. Investors and industry watchers were stunned and even felt betrayed when Daewoo Shipbuilding & Marine Engineering, which was the only shipbuilder to report a profit last year, disclosed that it would have to book an accumulated loss of more than 2 trillion won in the second quarter. Calls are getting louder for an industry-wide restructuring including closures of some dockyards and a deep reexamination of the money-losing offshore platform business.

But industry insiders maintain that the three top shipbuilders still have promising futures ahead of them. This mainly goes for the top three. Some even consider the losses inevitable to achieve a new level of competitiveness. They claim that the three leading shipbuilders have stable positions in the global shipbuilding market and should not be equated with smaller companies in the local shipbuilding industry.

In building massive container vessels and in fuel efficiency technology, the three shipbuilders are way ahead of their Chinese and Japanese rivals. They are also unrivalled in making deepwater oil drilling platforms. More than 70 percent of global offshore platform orders go to Korean companies. In terms of the order backlog, deepwater plants account for more than half the revenue of the three shipbuilders thanks to the reputations they hold in the industry. STX had to withdraw because it could not catch up with their skills and technology in the field.

Offshore platforms are the primary reason for their colossal losses. Experts point to a lack in designing skills and excessive competition, which led to low-priced orders. Designing is less of a problem since it can be handled with outsourced expertise. The biggest problem is in hyper-competition. Why local players compete amongst themselves and have to bring down prices to cause such hemorrhages of red ink is a mystery to outsiders.

Korean builders are accustomed to the tradition of bidding at the lowest price - instead of reasonable bids - to win an order. What they don’t realize is that they are committing the tragedy of the commons, bringing down the whole group as a result. They have come to take for granted that bargain prices are inevitable to win orders even at the expense of generating losses for themselves and their peers. There is also another uncomfortable truth in the playing field for the three local contenders. It is the longstanding rivalry between the country’s two largest family-owned chaebol, Samsung and Hyundai.

Industry watchers say the two would do anything to triumph over the other. Their press statements usually highlight the fact that they have beaten their rival. For instance, a colossal order from Norway for a floating production, storage and offloading unit and the Gorgan natural gas project from Australia caused major losses for the local industry because deliveries have been delayed due to strict maritime regulations of the host countries and frequent demands for design changes from the owners. If the builders had included provisions for penalties for delivery interruptions and risk sharing, they would not be looking at their yawning deficits today. They were foolish not to draw up contracts in their favor especially since the clients had no one else to turn to.

Experts advise companies to ban price competition so that they can win orders based on more lucrative conditions. Market conditions are the worst they’ve ever been. Global ship orders only amounted to one third of the amount from the previous year as of May. Local players must exercise wisdom in order to come up with a win-win solution and spend more resources on building competitiveness rather than pursuing ruinous rivalries.

JoongAng Ilbo, July 22, Page 30

*The author is an editorial writer of the JoongAng Ilbo.

by Yang Sunny

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