A half-baked planI began to question where this country is headed as I watched the scandal over Choi Soon-sil spill over. The government unveiled its outline to restructure the shipbuilding industry amidst the turmoil. The keystone was to fill the pipeline to the domestic dockyards with public procurements for merchant and naval vessels worth 11 trillion won ($9.63 billion) to keep them busy until global demand recovers, hopefully by 2020. The three major players — Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME) — will stay intact, but would have to downsize by shedding 23 percent of their docks and 32 percent of their workforces by 2018.
I had expected a more drastic and farsighted vision after watching the government’s resolute action against Hanjin Shipping. But despite all the strong talk, the so-called government outline did not much differ from the self-rescue plans each shipbuilder presented to their creditors in June, and failed to deliver an industry-wide strategy to rebuild the country’s edge in shipbuilding. We have lost faith in the government’s will and ability to retool the country’s industrial strengths in the fast-changing era to generate growth in the future.
The shipping and shipbuilding industries enjoyed renaissance years from the 1990s to the mid-2000s, helping fuel growth in the Korean economy.
Korea became the world’s powerhouse in shipbuilding, and Korean corporate names once held seven places in the top 10. Their fall from grace hit the country hard. The mainstream exporters now generate a deficit of more than 8 trillion won a year. Owing to its heavy presence in the economy — in terms of the scale and workforce — the government embarked on the project of restructuring in an industry-wide context. The accurate diagnosis and prescription of weaknesses and strengths was pivotal in redesigning the future of the industry.
The Korean shipbuilding industry hinges on two primary operations of manufacturing vessels and offshore drilling facilities. The two areas should be diagnosed separately.
First of all, Korea commanded such a supremacy in shipbuilding because it maintained the top design and manufacturing capacity thanks to a surge in cargo demand from the staggering expansion of the Chinese economy. But the maritime lines faced a slump from a glut in container capacity in the wake of the 2007 financial crisis and the slowdown in global trade that followed.
The question now is, when will the overcapacity would be eased? So far, the outlook is rather dim. The world’s biggest liner, Maersk Sealand, decided to stop placing orders for new vessels and instead purchase secondhand megaships with capacities of over 10,000 TEU around the time Hanjin Shipping filed for court receivership in early September. Another major CMA of France, the third largest in the world, decided to cut mid-sized liners of 5,000 to 6,000 TEU capacity from its fleet, all pointing to the still burdensome container capacity.
From the freight transportation market conditions, it is unlikely sea trade will pick up anytime soon or that demand for vessels will rise. The cycle of ship-owners selling off old fleets and placing orders for new ones has lengthened.
Second, the deep-sea oil rigging facility market hinges on demand for crude oil and the prospects for replacement fuel. Offshore plants were once considered as a new cash cow for shipbuilders during a time when oil demand was at its peak. Oil at the time hovered at $100 and oil companies all rushed to deep sea exploration. But the global financial crisis slowed the economy and dampened oil demand.
Then Americans commercialized ways to extract natural gas from shale formations, a cheap means by which to replace costly oil fuel. Oil companies no longer have to go deep into the sea for costly exploration. Currently identified shale gas reserves are said to be enough to power the world for more than 60 years. Shale gas gains greater price competitiveness if oil prices hit over $60 a barrel. Traditional oil producers are taking pains to keep the price from going above $60. From current market conditions, demand for deep-sea oil won’t likely recovery any time soon.
Third, it’s true Korea has remained a powerhouse in shipbuilding, but the industry has kept up its rank by keeping their fees cheap. This dumping practice has left a dent on the balance sheets of local dockyards.
The McKinsey & Company study, at the request of the government, limited itself to the financial statements of the three majors. Its report, therefore, cannot be sufficient in mapping out a plan to strengthen the overall competitiveness of the shipbuilding industry. The report irked DSME because it purely focused on the balance sheet.
Still, the government has not even considered the report in its outline, raising questions as to whether the economic team has any will to strengthen the country’s industrial competitiveness. The government does not have any will to implement a stringent plan to strengthen its fundamentals for future growth. If it cannot ensure future growth, it should have at least taken care of the debt. The government has left too much to be desired in its restructuring campaign.
Translation by the Korea JoongAng Daily staff.
JoongAng Ilbo, Nov. 4, Page 29
*The author is a professor of maritime law at Korea Maritime and Ocean University.