[DEBRIEFING] The stunning collapse of Doosan Heavy Industries
Doosan Heavy Industries & Construction, as we know, is in deep financial trouble.
The company, which has staggered through years of growing losses, has finally reached out to the government for help. Its ballooning debt level and lack of new contracts have taken a toll on the Doosan Group, the 15th largest conglomerate in Korea, with even distant affiliates taking hits to their credit ratings.
For the past several years, good news has been hard to come by at Doosan Heavy Industries. Domestic energy policies have turned away from coal and nuclear power — historically, the construction firm’s bread and butter. Similarly, the international company has suffered from a global shift toward renewable energy sources and pivoted away from traditional ones.
Whether and how the government should step in to help the financially distraught plant builder has become an increasingly political debate. And creditors are offering up new suggestions on how to carve up the company’s holdings almost every day, potentially complicating the prospects of life-saving surgery for Doosan Group.
In this debriefing, we aim to strip out the politics and nail down how the company got to where it is today, and what can reasonably be expected moving forward.
1. So a big company is struggling after years of mounting losses. Why should we care?
Changwon, South Gyeongsang-based Doosan Heavy Industries has a workforce of about 6,700 employees. It is Korea’s sole supplier of nuclear reactors and the exclusive construction company for nuclear power plants in the country.
That puts the company in charge of 133,505 gigawatt-hours, or of 23.4 percent of electricity generated for Korea in 2018. If Doosan Heavy Industries fails, nearly a quarter of the electricity on Korea’s grid would be up in the air, with no other domestic companies qualified to step into Doosan Heavy’s role.
The company is also a major builder of coal-fired power plants, from engineering and procurement to construction, both for Korea and a number of other countries. Doosan Heavy Industries built units 7 and 8 at the Hadong power plant, Korea’s first coal-fired plant.
Even though Korea has been focusing on increasing its proportion of renewable energy sources, coal still accounted for 41.9 percent of all power production in the country as of 2018. As with nuclear, if Doosan Heavy Industries fails, Korea could be left without a qualified domestic company to maintain that 238,967 gigawatt-hours of energy.
Korea’s biggest plant builder stands at the brink of insolvency. The company’s debt ratio is in excess of 300 percent, and its share price has nosedived by more than 97.7 percent from its November 2017 peak of 165,238 won ($136.50) to 3,730 won as of Wednesday.
Since February, the world’s leading desalination plant builder has been offering early retirement and paid leave to employees. It has also cried out for help from two state-run creditors, both of which are demanding massive restructuring efforts for the sake of profitability.
Doosan Group relied on Doosan Heavy Industries for about 20 percent of the conglomerate’s revenue and 7 percent of its operating profit in 2019.
Doosan Heavy Industries has been in an accelerating financial free-fall for the past seven years. The aggregate value of its assets at Doosan Group has lost almost 14 percent, from its peak of 33.07 trillion won in 2015 to 28.46 trillion won last year, according to data from the Fair Trade Commission.
Doosan Heavy Industries is 32.3 percent owned by Doosan Corporation, which is the Doosan Group’s holding company. The plant builder owns 36.27 percent of machinery manufacturing affiliate Doosan Infracore, which controls 51.05 percent of Doosan Bobcat, a U.S.-based farm equipment manufacturer. The sub-holding company also owns a 100 percent stake in Doosan Engineering & Construction, which has been posting its own immense losses in recent years.
The dimming outlook for Doosan Heavy Industries has weighed down not only its own credit rating, but also those of other Doosan Group affiliates.
The Korea Investors Service (KIS) cut Doosan Heavy’s credit ratings from BBB+ to BBB last May. The ratings service last month adjusted its credit rating outlook for Doosan Heavy Industries to “negative,” while maintaining its rating at BBB.
In January, the credit rating agency also issued a BBB+ rating for Doosan Corporation, which owns 34.4 percent of Doosan Heavy, citing the weakened credit rating of Doosan Heavy and fiscal pressure for aid to Doosan Heavy’s subsidiaries. The corporation had previously boasted an A- rating.
The KIS in January also lowered its forecast for Doosan Infracore from positive to stable, despite maintaining its rating at BBB.
3. How did this happen? Is the current administration to blame?
That’s what many have argued ever since President Moon Jae-in came to power in 2017. His government wants to boost renewable energy’s share of overall energy production to 20 percent by 2030, and to between 30 and 35 percent by 2040.
According to government data, renewable energy accounted for 6.2 percent of all energy produced in Korea in 2018. That is up 0.6 percentage points from when he took office.
Most significantly for Doosan Heavy, Moon has advocated a phasing-out of nuclear power in Korea. Although Doosan Heavy Industries has stopped short of directly blaming the Moon administration’s policy changes for its problems, there’s no denying that the company has lost significant revenue from a number of nuclear power plant projects coming to a halt.
The Moon administration has scrapped earlier plans for six new power plant projects in the country since coming to power. Doosan Heavy said it lost around 10 trillion won in possible contracts domestically.
From the cancellation of three nuclear power plant projects, the builder claims to have lost potential contracts worth between 7 and 8 trillion won, and another 2 to 3 trillion won after plans for three coal plants were shifted to liquefied natural gas.
Opposition party politicians have seized on those numbers to fiercely attack the Moon administration, accusing it of single-handedly bringing down Doosan Heavy Industries and endangering Korea’s electricity supply.
4. But is it really the government’s fault? Couldn’t Doosan Heavy Industries have focused on more overseas projects?
Doosan Heavy Industries had been losing money well before Moon came to power, as its main business, building and maintaining coal-fired power plants, was losing popularity across the world.
Its nuclear power plant division only accounts for around 15 percent of the company’s entire business, while coal plants make up around 70 percent.
Operating profits for Doosan Heavy Industries have steadily fallen, most recently reaching 87.7 billion won from a record-high 477.4 billion won in 2012.
Meanwhile the company has reported net losses every year since 2014, with the exception of a 15.8 billion won net profit in 2017.
Much of the decline in profits can be blamed on a lack of foreign contract volume, which has historically accounted for around 70 percent of Doosan Heavy Industries’ total sales. Since many countries have for decades begun shifting toward renewable energy sources, the demand for new coal plants has declined over the last decade.
In recent years, the new contract volume for coal power plant construction fell from 76 gigawatts in 2013 to 23 gigawatts in 2018, according to the International Energy Agency. Experts have also noted that low oil prices have reduced the demand for new power plant contracts in the Middle East, which accounts for much of the global market demand.
The Korean government has pushed back against critics’ arguments that Doosan Heavy’s failings owe largely to Moon’s nuclear phase-out policies.
The Ministry of Trade, Industry and Energy argued in a statement last month that funding from the state-owned Korea Hydro & Nuclear Power to Doosan Heavy Industries for supplying core machinery parts rose from 587.7 billion won in 2017 to 892.2 billion won in 2019.
5. So is it only Doosan Heavy Industries that has been losing money? What have its competitors done to survive?
Everyone in the thermal power plant business has taken a hit from the passage of international climate pacts aiming to shrink the greenhouse gas footprint of energy production. Worldwide, new electricity sources have skewed increasingly toward renewable energy sources like wind and solar power.
The global plant-building market as a whole has struggled for the past several years, with companies announcing layoffs and restructuring plans.
In 2017, Munich-based conglomerate Siemens announced it will cut around 6,900 jobs, mainly in its power and gas division, to respond to the rapid growth of renewables. A year later, General Electric cut some 24,000 employees at its troubled power plant business.
A Doosan Heavy spokesperson said that the company lost some of its credibility in the global market and suffered in exports as it continued to lose money and because of unfavorable domestic policies.
The spokesperson also said the company has been working non-stop to develop new growth areas, including components for power plants that run on liquefied natural gas.
6. Why is this becoming an issue now? Weren’t there bad forecasts for the company before this year?
Doosan Heavy Industries was actually warned multiple times in the past by multiple entities.
Most recently, the Cleveland-based Institute for Energy Economics and Financial Analysis (Ieefa) issued a warning on the sustainability of Doosan Heavy Industries in a report in September 2019, saying the power equipment company has been accumulating too many losses from its heavy focus on coal and nuclear projects, for which the demand has been in “terminal decline.”
“The company’s financial health has remained inextricably linked to a high-risk pipeline of domestic and developing market fossil fuel projects,” said Ieefa Asia Energy Finance Studies director Melissa Brown. “For Doosan Heavy, problems in the marketplace and pressure on the balance sheet are intertwined.”
“Doosan Heavy appears to have misread the direction of power markets over the past three years, and like many national champions in the power sector, the company has lost much of its domestic and global growth potential,” the energy institute’s report stated.
Likewise, the company’s credit ratings have been falling, and if nothing else, that should have offered a clear warning sign to the company, the government and investors.
7. What are the creditors suggesting?
As the Korea Development Bank and the Export-Import Bank of Korea have agreed to provide a total of 1 trillion won in loans to Doosan Heavy Industries, the two state-run creditors essentially want the company to restructure and separate profit-making affiliates from under its arms.
They remain concerned that the financial risks from Doosan Heavy Industries’ plant-building business could extend even to its profitable affiliates.Under the loan agreement, Doosan Group’s shares in Doosan Solus, an electronics parts supplier, Doosan Fuel Cell and Doosan Mecatec, a chemical process equipment manufacturer, would be held as collateral under the plan. Doosan Tower, which is located in Jung District in central Seoul, would also be put up as collateral.
One idea that has been widely reported across media outlets as a realistic solution was splitting off Doosan Heavy Industries’ ownership of Doosan Infracore, which partly owns Doosan Bobcat, into a separate firm and letting Doosan Corporation, the holding company of Doosan Group, acquire the stake later.
The rest of Doosan Heavy Industries would be left with its main business and a 100 percent stake in Doosan Engineering & Construction, which has been posting immense losses in recent years. Some analysts have suggested the possibility of Doosan Engineering & Construction being out on the market for sale, but specific details have yet to be finalized.
8. Is Doosan Heavy Industries able to keep moving forward?
Doosan Heavy isn’t yet waving the white flag and waiting for creditors to come to the rescue.
The company last month asked its employees to go on leave with reduced pay and offered voluntary retirement to employees aged 45 and older. The plan applied to a total of 2,600 employees, or 39 percent of the total workforce.
Doosan Heavy Industries was also increasing its research-and-development investments in other business areas.
In September, Doosan Heavy Industries completed a test model of its first ever large-sized gas turbine, developed entirely in-house. It was the outcome of a government-sponsored project that kicked off in 2013.
If successfully tested in the coming months, the gas turbine would make Korea the fifth country in the world to develop its own gas turbine, the company said. The development would allow it to target the global market for natural gas energy production.
The company hopes to reach more than 3 trillion won in sales of gas turbines annually, and occupy 7 percent of the global gas turbine market by 2026.
According to IHS Cambridge Energy Research Associates, the global gas power production market is expected to grow from 1,757 gigawatts in 2018 to 1,976 gigawatts in 2023 and reach 2,189 gigawatts by 2028.
New York-based consulting firm McKinsey & Company believes liquefied natural gas demand will grow at 3.6 percent per year from 2018 to 2035.
9. Would policy changes help Doosan Heavy Industries?
At this point, any policy changes re-emphasizing nuclear or coal-fired power plant production would help the company avoid losses from mounting even further, but that’s highly unlikely.
Korea pledged in 2009 to reduce its greenhouse gas emissions by 30 percent, from the previous year’s emission levels by 2020. Under the Paris Agreement in 2015, Korea agreed to cut those emissions by 37 percent by 2030. Although those pacts were not legally binding, it is unlikely that Korea would reverse its current policies to re-embrace coal power.
But things could change under a new administration. Moon’s government is the first to embark on policies aimed at curtailing traditional energy sources in favor of renewables.
Just last week, the United Future Party Chairman Hwang Kyo-ahn, the main leader of the opposition party, last week accused the Moon administration of ruining the Korean economy, and vowed to increase support for nuclear power production.
“If you go to Changwon, South Gyeongsang, right now, Doosan Heavy Industries and some 300 partnering companies have shut their doors because they are out of work,” Hwang said.
While many are divided over the causes for Doosan Heavy Industries’ stunning collapse, it may be too late for Doosan Heavy Industries to restore its prior standing. Warnings were ignored, and alarms were muted for months.
At this point, it will take more than just a policy shift and a couple years of positive growth for the company to begin posting net profits again. The spin-off proposals of Doosan Heavy Industries offer a starting point, but how the conglomerate is ultimately divvied up is worth paying attention to, especially given the company’s deep ties to Korea’s energy production.
BY KO JUN-TAE [email@example.com]