Gov’t takes on failing shippers and shipbuilders

The government said it will not force any mergers in the troubled shipbuilding and shipping industries.

But it has decided to require tougher “self-rescue” plans from the industrial giants, including Korea’s three largest local shipbuilders - Daewoo Shipbuilding & Marine Engineering (DSME), Hyundai Heavy Industries (HHI) and Samsung Heavy Industries (SHI) - and shipping companies Hyundai Merchant Marine (HMM) and Hanjin Shipping.

According to a government plan unveiled Tuesday after a third round of meetings by a consultative body on industrial restructuring, it has no plan to force shutdowns or mergers among the three shipbuilders.

The announcement was made a day after Hanjin Shipping asked its creditors to approve a self-rescue of the company by management on Monday.

“[Such forced measures] are impossible and not desirable,” Financial Services Commission Chairman Yim Jong-yong said at a press conference held after the meeting.

The government will require greater efforts from the three shipbuilders compared to their earlier plans.

DSME will have to submit plans including layoffs of an additional 2,300 workers by 2019 and other cost-cutting. The government will ask the main creditors of HHI and SHI to come up with turnaround measures.

The two shipbuilders have been making internal efforts to carry out restructuring without creditors’ intervention.

This is the first track of the government’s plan for an overhaul of industries that were pillars of the Korean economy. The government is providing guidelines to help the restructuring process for industries that are sensitive to economic cycles, like shipbuilding and shipping, which signifies a deep intervention in overhauling the private sector.

The government gave a deadline to HMM to finalize negotiations on rental fees of vessels with foreign companies by mid-May.

“If the shipper fails to adjust its fees, its creditors will have no choice but to apply for court receivership,” Yim said. “Discussing a merger of the two shipping companies [HHM and Hanjin] is not appropriate.”

Hanjin Shipping is sitting on 6.6 trillion won ($5.8 billion) in debt. HMM has 2.67 trillion won. Their operating profits plunged as global rental fees dropped more than 80 percent over the past two years.

The three shipbuilders won just three new orders in the first three months of this year because global demand for new ship vessels fell due to low oil prices. DSME posted a 3.5 trillion won loss last year.

“Orders for the nation’s shipbuilders will run out within a year or two,” said Paik Jeom-kee, a professor of shipbuilding engineering at Pusan National University. “If they fail to come up with a solution to overcome the demand shortfall, improved first-quarter results will be hard to maintain.”

The second track of the government plan is to help normalize troubled companies based on creditors’ risk assessments, while the third is to overhaul industries suffering from oversupply of capacity.

The government will induce voluntary mergers and acquisitions and reduction of facilities in the steelmaking and petrochemical industries.

As for the deteriorating financial health of the main creditors of the struggling companies - Korea Development Bank and the Export-Import Bank of Korea - the government decided to help finance the institutions.

Experts said the government plan is weak on substance.

“Today’s measures are limited to the companies that are in emergency mode now,” said Kim Sang-jo, an economics professor at Hansung University. “The government needs to devise a contingency plan for companies considered risky in the near term.”

“The government has no concrete direction for industrial restructuring,” said Sung Tae-yoon, an economics professor at Yonsei University. “It should come up with a road map before the presidential election season.”

The shipbuilding and shipping industries showed lukewarm responses to the government’s announcement.

“There is no measure to make fundamental changes,” an insider at a shipbuilder said. “Using taxpayer money will not root out old practices of overheated competition.”

The heads of HHI’s five shipbuilding-related affiliates portrayed a dim outlook for the shipbuilding industry in an emergency joint statement on Tuesday and asked for the support of their employees to cut operating costs.

“There aren’t even any inquiries about new orders, and empty docks are becoming a reality,” HHI CEOs Choi Kil-seon and Kwon Oh-gap, Hyundai Mipo Dockyard CEO Kang Hwan-goo, Hyundai Samho Heavy Industries CEO Yoon Moon-kyun, HYMS CEO Kim Ju-hoan and Hyundai Engineering & Technology CEO Lee Hong-gi said in the statement.

The companies will encourage workers to cut labor costs. Extra shifts for weekends and holidays will be abolished.

HHI reported a 325.2 billion won operating profit for the first quarter just before the statement was released. That was a turnaround after 9 quarters of losses. But it conceded that the profit was largely due to external factors.

“We feel grateful about the profit, but exchange rates and slashed materials costs played key roles in lifting operating profit, rather than internal capabilities” the heads reported. “Companies’ reserves and cash from sales of non-core assets also bolstered the profit.”

BY SONG SU-HYUN, KIM JEE-HEE [song.suhyun@joongang.co.kr]