[News Focus] Will Seoul push for consolidation of warship makers?

A number of options are being considered for restructuring the Korean shipbuilding industry, which suffers from overcapacity, with the government stepping up its active intervention.

The latest option being discussed is the consolidation of military ship makers, a local business daily said Monday, quoting a high-ranking government official close to the matter.

The official said the idea came amid talks over the sale of Daewoo Shipbuilding and Marine Engineering, in which state-run companies, including the Korea Development Bank, hold about 50 percent stake.

DSME is the unequaled front-runner in the warship-making business in Korea, ahead of its rivals in terms of size and with a portfolio of products ranging from submarines to warships. The faltering shipbuilder garnered record-high sales of 1 trillion won ($871 million) in special shipbuilding business last year.

Besides DSME, there are three other smaller players in this sector, including Hyundai Heavy Industries, Hanjin Heavy Industries & Shipbuilding and STX Offshore & Shipbuilding.

The government thinks the whole process of auctioning off DSME will be easier after the shipbuilder sheds its military-related business, which is tightly regulated as it is related to the country’s security.

If the proposal is followed through, industry watchers said Samsung Heavy Industries could emerge as a candidate to take over DSME as it is not keen on adding military-related business to its portfolio. The shipbuilding affiliate of Samsung Group sold its two military arms to Hanwha in 2014, citing the lack of synergy effects with its core businesses such as tech and finance.

Another factor influencing the talks of consolidating the military shipbuilding business is the growth potential of the industry itself whose market size reaches about 2 trillion won.

“This is one of the few sectors where Korea has a competitive edge in engineering -- a critical condition in manufacturing for future growth,” Lee Kang-rok, a stock analyst of Kyobo Securities said.

The government allegedly has started studying the economic impact of consolidating this sector, benchmarking the merger of three aerospace makers -- Samsung, Hyundai and Daewoo -- in 1999. The new single aircraft maker Korea Aerospace Industries has advanced into a globally competitive aircraft manufacturer over the past 15 years.

“The government’s strong will is most important to push ahead with restructuring of the military shipbuilding sector,” Lee said.

Despite the possible advantages of consolidation, industry insiders said it would be a daunting and difficult task, considering the characteristics of the shipbuilding industry.

“The shipbuilding business has many differences from sectors in other areas, including facility operations. For instance, it is difficult to sell a portion of the shipyard by the type of ships,” an official from the nation’s top three shipbuilding firms said.

By Seo Jee-yeon 
(jyseo@heralcorp.com)