Half-baked restructuring

The state-run Korea Development Bank (KDB) announced a fresh 4.2 trillion won ($3.7 billion) rescue package for Daewoo Shipbuilding & Marine Engineering (DSME) to keep the world’s second-largest shipbuilder afloat after massive losses from payment delays, depressed demand and low oil prices. Main shareholder KDB and biggest creditor Export-Import Bank of Korea (Korea EXIM) will lead the new bailout program that includes new stock issuances and a debt-equity swap to make up for the shipbuilder’s losses of up to 6.2 trillion won.

In short, the company is again salvaged by taxpayer money.

DSME’s woes are structural. It is a typical example of how revolving-door practices can ruin a business. State banks have regarded DSME as post-retirement security, a place where they can pocket handsome compensation through executive and advisory titles instead of supervising a company whose managers fake losses into surpluses.

The government is equally to blame. It turned a blind eye to the sinking industry that desperately needed restructuring.

DSME is the biggest in the fleet of sinking shipbuilders, including STX Offshore Shipbuilding and Sungdong Shipbuilding, which are surviving entirely through creditors’ refinancing. State banks like KDB and Korea Exim, as well as Woori Bank, were busier making themselves look good than creating a better business. Korean shipbuilders dominate ship and offshore orders from the world, but their pitiful financial state shows that their ranking has been bought through debt.

The increasing population of zombie companies is jeopardizing the entire industry and economy. According to the Bank of Korea, about 15.2 percent, or 3,295 of total large companies, cannot earn a large enough profit from their operations to pay interest on their loans. As a result, their business entirely hinges on support from public financing. As of December last year, 1,901 small and midsize companies sustain entirely on extensions of guarantees from state entities. The financing policies are wrecking industrial competitiveness, and DSME’s turnaround program should be the starting point to fix the problems in policy.

The goal and direction of restructuring must be clear and pushed ahead with resoluteness and drive. Regardless of their size, companies must be dealt with based on their industrial competitiveness and market conditions. Political influence must be cut off.

If the head of the financial authority and relevant ministers don’t have the strength to make these sorts of decisions, the deputy prime minister for the economy or the president must take the initiative. We must not go down the doomed path of Japan when it lost competitiveness by delaying corporate restructuring in the late 1990s.

JoongAng Ilbo, Oct. 30, Page 34