The one that survives is strong

As I teach “Chinese financial market” and “global energy politics” at a university, I have an ominous premonition of dark clouds gathering over Korea’s shipbuilding industry. There are three adverse factors from the international energy market and China.

First of all, since June 2014, the international oil price plummeted from $110 per barrel to the $50 level. Experts predict the low price trend will continue for two to three years. Consequently, major petrochemical companies such as ExxonMobil, Shell, BP, Total and Eni have cut $200 billion in facility investment in the next two years. They have suspended or postponed drilling and development of most ocean mines. That means the Korean shipbuilding industry’s major contracts in offshore plants are decreasing. Clients will have oil price and cost in mind and will demand design changes to delay the delivery of contracted facilities.

Secondly, Korea has to be conscious of competition with China. In the aftermath of domestic economic slump, China is pursuing comprehensive changes in its growth model. In order to offset the reduction in domestic investment, China is shifting direction to issue low-interest bonds to raise enormous amounts of funding, expand overseas investment and aggressively bid on overseas projects.

China has been making tremendous investments on oil, gas and mines around the world since 2005, and the investment adds up to $400 billion. Under the organized command of the Chinese Communist Party and State Council, energy companies and joint projects that had China’s investment began to give shipbuilding and offshore plant orders to Chinese shipbuilders. The long-term financing terms offered to the contract holders have favorable conditions that Korean companies cannot compete with.

China’s bond issue has quadrupled from $7 trillion in 2007 to $28 trillion in 2014. The balance of debt is 280 percent of GDP, making China the country with biggest debt ratio in the world. Still, China uses the ultra-low interest rate to issue domestic and overseas bonds and provide long-term financing to private enterprises.

In July, the People’s Bank of China - China’s central bank - increased investment in the China Development Bank by $47 billion and the Export-Import Bank of China by $45 billion. It will certainly help Chinese shipbuilders to win contract bids. China is an investor in foreign companies and a financial sponsor while being a buyer at the same time. Taking a lead in various positions, China’s competitive edge will make Korean shipbuilders’ struggle more.

Thirdly, China’s National Development and Reform Commission aggressively supports the internet and manufacturing sectors. Last year, it invested $530 billion in the oil and gas pipeline industry as well as the water resources preservation industry. This year, it selected the “highest level of ocean engineering facility and equipment industry” in addition to industrial robot, clean energy automobile industry and medical industry to provide support. China is closely chasing - or has already caught up with - Korea in the semiconductor, automobile and smartphone areas. China’s concentrated support in the ocean engineering and manufacturing sector is a critical factor to Korea’s shipbuilding and ocean engineering industries. China has already made extensive investments abroad, and its demand and market is incomparably large. Under the Chinese government’s lead, Chinese energy companies will use facilities built by Chinese shipbuilders. Then, Korean companies will be at a great disadvantage in terms of financing and price.

Korea’s three major shipbuilding and ocean engineering companies have suffered a great losses in offshore plants. The cause can be found in the rapidly changing structure of the offshore plant market. In the past, the ratio of shipbuilding and offshore plant was 6 to 4, but it has changed to 3 to 7 since 2011. But countries with abundant resources prioritize their national interests and give offshore plant contracts to local companies. Korean companies failed to understand the localization factor and made unwise decisions. Also, the management neglected the proper allocation of resources and cash flow, resulting in a serious deficit and liquidity crisis.

While the faults of the past need to be strictly clarified, the industry needs to seek ways to survive as well. We cannot let Korea’s shipbuilding and ocean industry die away after being a world leader. The shipbuilding and ocean industry employs 200,000 people and exports $60 billion annually. Learning from the failure, the industry needs to rebuild competitiveness and revive again. The government, state-funded financial agencies and academia need to work with the companies. We cannot give way to China altogether. The shipbuilding and ocean industry is not just any business. It is difficult for Korean companies to stand up against Chinese competitors on their own while they get national support from the government. It is not the strongest that survives. The one that survives is strong.

Translation by the Korea JoongAng Daily staff. JoongAng Ilbo, Oct. 1, Page 29

*The author is an invited professor at KAIST and former CEO of Daewoo Shipbuilding and Marine Engineering.

by Hong In-kie