No pity for DSMEIn reality, there are no “what ifs” in history. But I am tempted to contemplate alternate historical view of the shipbuilding industry, which is now in such bad shape that the whole thing will have to be restructured. What if Hanwha Group had taken over Daewoo Shipbuilding & Marine Engineering (DSME)?
The conglomerate signed a memorandum of understanding with Korea Development Bank (KDB) to buy the bank’s controlling stake in one of the world’s biggest shipyards for 6.3 trillion won ($5.5 billion) in November 2008. The deal was called off two months later after Hanwha struggled to come up with the funds amid a global liquidity squeeze from the meltdown following Lehman Brothers’ bankruptcy. The state bank refused to renegotiate terms with Hanwha and did not return the deposit of 300 billion won. Many now say that Hanwha got off cheaply considering what it could have been saddled with if it ended up buying the shipbuilder. DSME last year incurred a loss of 5.5 trillion won. But then again, the company may not be in such a parlous state if it was under Hanwha.
Few corporate bailouts have succeeded. That’s because a business run on easy money lacks discipline. DSME has been bailed out with public funds three times. In 1989, state banks KDB and Export-Import Bank of Korea handed out a package of special loans and debt rollover worth 470 billion won to the company, which was called Daewoo Heavy Industries at the time. In current value, the bailout amounted to billions of dollars. The government came to its rescue again in 2000 with KDB and other creditor banks agreeing to convert debt worth 1.17 trillion won into equity to prevent it from defaulting on its loans. Since then, the company became a subsidiary of KDB. Last year, the state bank had to provide another 4.2 trillion won to the multibillion-dollar-loss-making shipbuilder.
Why would a son want to work hard when he has a rich father who tops up his bank account every time he runs out of money? The shipbuilder beat its competitors through cheap bids for ship orders. It had the biggest backlog among the three major shipbuilders. With its dockyard full of work, business appeared to be flourishing. But the balance sheet told a different story that was never destined to have a happy ending.
How could the world’s second largest shipbuilder keep up a money-losing business for so long?
An ownership structure in which nobody had any real responsibility encouraged reckless business behaviors. KDB sent a group of supervisors to DSME in July 2005 but the company was already in a wreck. KDB is being blamed for negligence. Even the Board of Audit and Inspection is probing who is responsible for ruining a company that ran on taxpayers’ money.
The government watchdog won’t be able to unearth all the shady practices that went on in the company. It is said that bribes were rampant to secure generously-paying positions of outside directors, auditors and advisers at the shipbuilder. Bureaucrats and politicians would hardly have missed out on the chance to cash in on DSME when they even consider Kookmin Bank, KT, and Posco as treasure troves to plunder — even though the government no longer has a stake in those companies.
If Hanwha owned DSME, it would not have run business recklessly. Korea’s two other major shipbuilders — Hyundai Heavy Industries and Samsung Heavy Industries — are not as damaged as DSME even though they faced the same challenges from a prolonged global slump and setback in the offshore oil rigging business. Their debt-to-capital ratios are 220 percent and 309 percent, respectively, quite moderate when compared with DSME’s ratio of over 4,000 percent. Neither have ever received a public bailout.
Pity should no longer be wasted on DSME. Another multi-billion-dollar bailout would resuscitate the company. But we have learned from the past that such a lifeline of government aid will do little for the company’s future. The government and politicians aren’t likely to cease exploiting the company. Either way, it is doubtful that Korean shipbuilders will remain on top of global rankings. Korea Inc. has been elbowed out by China in petrochemicals and steelmaking and is being threatened in semiconductors, smartphone and automobiles.
Restructuring will be demoralizing. Fathers will be without jobs, shops will go out of business and dockyards will become junkyards. Nevertheless, it must be done with haste and resolution. The focus should shift to future competitiveness. How can Korea’s shipbuilding stay ahead in competitiveness? The answer is already laid out in the market.
JoongAng Ilbo, May 3, Page B8
*The author is the industry news editor of the JoongAng Ilbo.