[Q&A] Lee Dong-geol: "Hyundai Heavy should file a compensation lawsuit... Korea should not be swayed by the EU"

"Decision to Disapprove Joseon Corporate Merger Due to National Selfishness... Deeply Regrettable"

[Image source=Yonhap News]

[Asia Economy Reporters Yu Je-hoon and Bu Ae-ri] Lee Dong-geol, Chairman of KDB Industrial Bank, said on the 27th regarding the European Union (EU) competition authorities' decision to disapprove the corporate merger between Hyundai Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME), "I hope Hyundai Heavy Industries proceeds with a lawsuit for damages and a lawsuit to cancel the disapproval decision to show that Korea is not an entity to be swayed or to follow the EU's decision."

Chairman Lee believes Hyundai Heavy Industries should proceed with litigation to influence the ongoing review of the Korean Air-Asiana Airlines merger. He added, "90% of Korean Air and Asiana Airlines customers are Korean nationals. I wonder if the EU has any reason to oppose it."

In an online press conference held that afternoon, Chairman Lee stated, "(The EU competition authorities' disapproval decision) is thoroughly a decision based on national self-interest and is quite regrettable. It does not appear to be a fair judgment."

Below is a Q&A session between Chairman Lee and the press corps.

▲ What are the countermeasures after the failure of the Hyundai Heavy Industries-DSME corporate merger?

- Please understand that I cannot explain in detail the various reasons and circumstances behind the disapproval of the merger. The EU's decision document has not yet been released, and whether to disclose it involves various other interests. It is difficult to comment until the management consulting for DSME is completed in about one or two months. I will explain in detail at a later opportunity.

▲ How did you assess the corporate merger review when the merger was pursued in 2019?

- Since Hyundai Heavy Industries and DSME are the world's first and second largest shipbuilders, we naturally recognized the importance of the corporate merger review. However, competition authorities generally do not judge solely based on past market shares but also consider the existence of alternative suppliers, market conditions, and the viability of the acquired company. Considering that there are other suppliers besides the two companies in the shipbuilding market and that the ordering parties hold the advantage, we judged that it was sufficiently possible to persuade overseas competition authorities. In fact, China and Singapore gave unconditional approval decisions.

- From that perspective, the EU's recent disapproval decision is very regrettable. Our shipbuilding industry is called the 'Korean League' because the three shipbuilders compete identically like copies. From the perspective of foreign shipping companies, the three companies competing equally drive down ship prices. The same applies to liquefied natural gas (LNG) carriers. Considering the EU's consumers, shipowners, and competition authorities, they might have wanted to maintain the current situation given the low ship prices due to price competition and the high patent fees. It is a decision based purely on national self-interest and does not seem to be a fair judgment.

▲ Was the response to concerns about monopoly due to the merger over the past three years insufficient?

- I think this question comes from a specific region and labor union perspective. Regarding the response to monopoly concerns, KDB has taken proper measures. During the corporate merger review, concerns about monopoly led to discussions about selling or reducing the LNG division. However, the shipbuilding market experiences intermittent bidding, causing significant fluctuations in market share, so monopoly cannot be judged solely by the current situation. Hyundai Heavy Industries carefully assessed this and thoroughly prepared for the review, and KDB also made various efforts, including holding a video conference with the EU Competition Commissioner, considering the important role this transaction plays in our shipbuilding industry.

- Domestically, there were concerns that DSME's partner companies might suffer if the two companies merged, but we had already taken measures to maintain existing transactions with partner companies of both companies. Nevertheless, there were fierce criticisms stemming from incentives hoping the merger would fail. Because of this, Hyundai Heavy Industries, as the main party, and KDB, as the second-largest shareholder, expressed willingness to sign a 'memorandum' if necessary.

▲ What do you think about the criticism that competitiveness and financial conditions deteriorated during the M&A over the past three years?

- I cannot understand the claim that DSME was adversely affected during this period. Considering the company's behavior during the merger pursuit period, I believe it maintained the status quo or better. When I took office, DSME had a quasi-state-owned mentality with many low-price orders exceeding 100% cost rates, but over the past three years, excessive dumping orders have decreased due to KDB's checks. Also, in 2018, DSME had an off-the-record agreement with the labor union to take an extra month's salary, which was disciplined. I think the past three years have been a period of continuously raising awareness between DSME labor and management.

▲ There are concerns about the recovery of public funds.

- On the contrary, by completing the transaction (merger), a large-scale capital increase for Hyundai Heavy Industries and DSME would occur, and the recovery of loans supported by KDB would also improve. We thought the merger was the best way to recover loans, but unfortunately, it failed, so recovery might be difficult for the time being. We will focus on restoring DSME's competitiveness.

▲ How will you respond to overseas competition authorities' corporate merger reviews when pursuing similar M&As?

- Since it has been confirmed that mergers in the shipbuilding industry are impossible, we will not pursue them. However, to prevent the EU from excessively leaning toward national self-interest, I hope Hyundai Heavy Industries proceeds with lawsuits for damages and cancellation of disapproval. We want to express that we will not simply accept their decision.

▲ What is the Plan B after the M&A failure?

- This requires a comprehensive review, so it is difficult to speak specifically. We need to check many changes such as raw material price surges, large operating losses, and rapid domestic conditions changes. We will prepare while reviewing the strengths and weaknesses of DSME based on detailed management consulting results.

- I repeat, the three shipbuilders are identical copies. They compete identically in every aspect. Supply is excessive, and demand is low. We should not be deluded about LNG carriers. Although LNG carriers are booming and everyone thinks they will survive, it is a 'glittering deception.' For each LNG carrier ordered, 5% patent fees are paid to the French company GTT, and after deducting costs, operating profit margins are below 1-2%. Now, with steel prices rising, they are incurring huge losses.

- Industrial restructuring is necessary, but since the merger failed, we have no choice but to consider what to do realistically. Theoretically, one option is for the three shipbuilders to reduce their production capacity by one-third each, effectively shrinking the overall scale to avoid excessive competition. However, this would likely face resistance to workforce restructuring and is almost impossible.

- Another option is for the three companies to devise specialization strategies on their own. Otherwise, they will perish together. About two years ago, I met the global sales head of a Japanese bank and asked, "The three major Japanese financial groups have different global strategies; do they coordinate?" He replied, "They do not coordinate but do communicate." He probably used that expression due to concerns about collusion. We need such wisdom too.

- Policy authorities may dislike this idea, but how about not issuing Refund Guarantees (RG) for orders with cost rates exceeding 90%? Both construction and shipbuilding industries tend to incur losses when cost rates exceed 90%. Loss-making orders lead to national wealth outflow. Since the three-shipbuilder system will face difficulties for a considerable time without industrial restructuring, it would be good if they voluntarily restructure. If that is difficult, measures like restricting RG issuance might be necessary.

▲ What about the possibility of DSME's overseas sale?

- Overseas sale is practically impossible. DSME builds special ships like warships and possesses unique domestic technology, so overseas sale is impossible. We must find buyers domestically. I will explain detailed plans after consulting is completed in March. For now, creditor financial support has been extended, so operations this year will not be affected. We can sustain with current funds for one to two years, but the situation after that is problematic.

- Regarding the sale method, we plan to proceed with new share issuance to improve financial structure through new money inflow rather than selling existing shares. Considering DSME's potential insolvency and its scale, few companies in Korea can acquire existing shares and invest new funds. If investment is attracted through new share issuance, KDB, as the second-largest shareholder, can also help a sound owner.

▲ How much public funds have been injected into DSME so far? Is additional support possible?

- No public funds have been injected so far. All funds have been provided by KDB itself. The total amount invested so far is about 4.2 trillion KRW, with KDB bearing 2.6 trillion KRW. Also, there will be no additional funding unless management normalization is possible.

▲ What is your position on Edison Motors' signing of the main contract to acquire SsangYong Motor? You requested verification by a third party; what are the future plans including this?

- Agreeing to the rehabilitation plan and the feasibility of the business plan are entirely different matters. I requested third-party verification, and I believe it must be done. However, so far, I have not heard any details about third-party verification from Edison Motors.

▲ What are the key considerations for KDB regarding SsangYong Motor's rehabilitation plan?

- We will focus on how the acquisition price will be used to repay SsangYong Motor's debts.

▲ How is HMM's management situation? Are there plans to sell shares?

- HMM's situation has been resolved with considerable achievements. It is now under the sole management of the Korea Ocean Business Corporation. The remaining issue is the shares held by KDB. Currently, combined shares of Korea Ocean Business Corporation and KDB reach 70%, making sale impossible. The task is to reduce shares to a level that facilitates finding a buyer. Depending on market conditions, shares exceeding what is necessary for smooth M&A should be sold gradually. For example, if combined shares are 70%, about 30-35% should be sold stepwise, leaving only 30-40% to enable sale.

▲ Will the disapproval of the Hyundai Heavy Industries-DSME merger affect the Korean Air-Asiana Airlines merger?

- There is a clear difference. In the case of Korean Air-Asiana Airlines, 90% of customers are Korean nationals. I wonder if the EU has any reason to oppose it. To show that Korea is not an entity to be unilaterally swayed or to follow the EU's decision, I hope Hyundai Heavy Industries files lawsuits for damages and cancellation of disapproval regarding the M&A and engages in a strong legal battle with the EU.

- The aviation market has received massive public funds worldwide after COVID-19. They have provided support 10 to 20 times ours. If the EU intends to oppose the Korean Air-Asiana Airlines merger, they should also recover public funds invested in their domestic airlines and let them all go bankrupt. They maintain their airlines with tens of trillions of won but oppose our case.

- The Fair Trade Commission is expected to announce the review results soon. Once the final decision is made, Korean Air will respond actively, but I hope the Fair Trade Commission, Ministry of Foreign Affairs, and the entire government will help. There is no example of a government sitting idly by during overseas corporate mergers like Korea. For example, when the EU tried to regulate big tech, US competition authorities intervened and even defended big tech. I once again request active help from our competition authorities.

▲ Presidential candidate Yoon Seok-yeol of the People Power Party pledged to relocate KDB's headquarters to Busan. What is your view?

- I brought a book called 'Victory of Cities' today. I read it about two years ago. It discusses why cities are important and how to regenerate them. About two years ago, in 2019, I said, "Relocating KDB is regression, not progress," and "It goes against financial development." Looking back on the past five years, I believe it is better for KDB to oversee nationwide balanced development from Seoul, the financial and economic capital.

- The continued discussion about KDB's relocation seems to stem from a lack of understanding of industry and finance. People who do not know how industries or companies operate think bringing only the bank is enough, and those who do not understand finance think relocating KDB will boost finance. Many seem unaware of what KDB does. KDB is not an institution that simply distributes huge fiscal funds; it considers how to efficiently support funds it procures.

- Especially regional politicians make such claims, but the horse must be before the carriage. If you put the carriage before the horse, will it be pulled? Moving KDB will cause more harm than good. It is a case of losing the forest for the trees. The perception that 'small benefits are mine (region), but large costs are yours (nation)' is not a desirable attitude for running a country. Looking at the Busan, Ulsan, and Gyeongnam regions, they think rapid restructuring and new growth are key to urban regeneration and regional development, but they keep pumping money into old companies. As a result, there are no achievements, high costs, and inefficiency.