Daewoo Shipbuilding: Faster Sale Over Getting Full Price... Challenge of Escaping the 'Deficit Swamp'

[Asia Economy Reporter Song Hwajeong] As the government is pushing forward with a plan to sell Daewoo Shipbuilding & Marine Engineering (DSME) to Hanwha Group, attention is focused on whether the search for a new owner of DSME will be finalized after 21 years since its workout graduation. Since Kang Seok-hoon, chairman of the Korea Development Bank (KDB), emphasized a swift sale, the sale process is also expected to proceed quickly.

At the Ministerial Meeting on Strengthening Industrial Competitiveness held on the morning of the 26th, Chairman Kang reportedly reported the agenda on the direction for handling DSME, including the plan to sell DSME to Hanwha Group.

Faster Sale Rather Than Selling at Full Price

Earlier, at a press conference marking his 100th day in office on the 14th, Chairman Kang mentioned regarding the sale of DSME, "A quick sale is necessary for DSME to get out of its current situation," adding, "The way to save DSME is to have a new management entity that can strengthen research and development (R&D) and improve efficiency." This suggested that the sale of DSME would gain momentum.

Recently, with the failure of Hyundai Heavy Industries' acquisition, it has been difficult to find potential buyers willing to acquire DSME. Hanwha Group, which has been focusing on the defense sector, has been considered a viable candidate for acquisition. Considering Hanwha’s experience participating in the 2008 DSME acquisition battle and its strategy to foster the defense industry, Hanwha is seen as the most realistic alternative.

If the sale is completed, controversy over a 'fire sale' is inevitable. The sale price to Hanwha is reported to be in the 2 trillion KRW range, while the public funds invested in DSME have reached 4.2 trillion KRW (2.6 trillion KRW from KDB). In the past, the DSME labor union opposed the sale to Hyundai Heavy Industries, arguing that the price was excessively low.

Chairman Kang has emphasized that speed is more important than price in restructuring companies on the brink of failure. He said, "The principles of KDB’s restructuring have been prioritizing major shareholder responsibility, sharing pain among stakeholders, and sustainable management normalization, but in addition, immediate sale is necessary," adding, "It is better to proceed flexibly and quickly rather than dragging out over the sale price issue." Accordingly, KDB appears to have chosen a quick sale despite the controversy over a fire sale.

Challenge of Escaping the Deficit Quagmire May Lead to Conflict with the Union

Even after acquisition, the normalization of DSME is expected to be an uphill battle. First, escaping the deficit quagmire is unlikely to be easy. DSME recorded a net loss of 667.9 billion KRW in the first half of this year and continues to operate at a deficit. Its debt ratio is approaching 700%. Since last year, ship orders have increased, and DSME has secured an order backlog for more than three years ahead, but delivery will take several years, making it difficult to expect profits in the short term. Ultimately, the deficit state is likely to continue for some time.

Opposition from the labor union is also anticipated. While the company remains in deficit, the DSME subcontractor union went on strike for 51 days starting in June, causing massive losses. During the merger with Korea Shipbuilding & Offshore Engineering, opposition from the union and local communities was also encountered. There is a possibility of workforce restructuring during the post-acquisition integration process, which would inevitably lead to conflicts with the union.