Hanwha Emphasizes 'Defense Industry', Faces Challenges in Restructuring and Labor Disputes

June 2008 Acquisition Plan Worth 6 Trillion Won
Lower Price Facilitates Business Expansion
Momentum in Decarbonization and Eco-Friendly Technology Development
Attention on Whether to Reduce Merchant Shipping Sector

Workers are busily moving at Daewoo Shipbuilding & Marine Engineering Okpo Shipyard in Aju-dong, Geoje-si, Gyeongnam. [Image source=Yonhap News]

[Asia Economy Reporters Oh Hyung-gil and Choi Seo-yoon] Hanwha Group is making a move to acquire Daewoo Shipbuilding & Marine Engineering (DSME), a deal that previously ended in disappointment. It is expected to create synergy with the group’s ongoing business restructuring centered on defense. DSME, which is welcoming a new owner after 21 years since graduating from workout in 2001, is analyzed to have gained momentum to strengthen its competitiveness in high value-added ships based on record-breaking order achievements. The shipbuilding industry welcomes this sale, saying it has established a fair competitive structure, but remains cautious about changes in the situation as problems caused by excessive competition have not been resolved.

Hanwha Focuses on 'Defense'... Expanding into Special Ships

Hanwha had to give up on acquiring DSME during the global financial crisis in 2008. At that time, Hanwha Group Chairman Kim Seung-yeon convened a management meeting and emphasized, "If there is an executive opposing the acquisition of DSME here, leave the company," showing his strong will to acquire DSME. This is why Hanwha is rolling up its sleeves again to acquire DSME.

DSME applies systems from defense companies such as Hanwha and LIG Nex1 in its special ship business sector. If DSME is acquired by Hanwha, it is evaluated that Hanwha’s next-generation defense technologies can be integrated into special ships such as destroyers, frigates, and submarines, further enhancing technological capabilities.

Hanwha’s affiliates, including Hanwha Corporation, Hanwha Systems, and Hanwha Defense, are engaged in defense businesses. Hanwha Systems also operates a marine research institute dedicated to ship combat systems, marine unmanned systems, and integrated machinery control systems. An industry insider said, "It seems they will focus more on expanding the defense sector, which can generate synergy immediately, rather than merchant ships or offshore plant businesses. However, since the recently contracted merchant ships are scheduled for delivery in 2027 and there are many orders in hand, they cannot reduce the merchant ship business immediately."

Thanks to the acquisition price being lower than in the past, Hanwha has created conditions to invest surplus funds in strengthening shipbuilding and defense business capabilities. Hanwha also pursued the acquisition of DSME in 2008 to enter new businesses with global capabilities. Although it ultimately failed, it is known that about 6.3 trillion won was spent during the acquisition process. The current acquisition price being discussed is in the 2 trillion won range, meaning the entire company will be bought at a much lower price than before.

A business community official said, "Combining Hanwha Group’s core competencies with DSME’s design and production capabilities will enable DSME to turn a profit early and grow into an integrated defense company across land, sea, and air," adding, "It will also gain momentum as a new growth engine in eco-friendly energy businesses."

Ending 21 Years of Ownerless Hardship... Growth Engine in 'High Value-Added Ships'

The shipbuilding industry, which had been in a long slump, has entered a recovery phase since last year by increasing order volumes. As demand for new ships is expected to rise in the future, DSME’s performance improvement is also anticipated.

So far, DSME’s order amount stands at $8.6 billion, fulfilling a significant portion of this year’s order target of $8.9 billion. On the 22nd, DSME secured orders worth 595.9 billion won for two liquefied natural gas (LNG) carriers from an Oceania shipowner, securing work for 30 LNG carriers, six container ships, and one offshore plant. The order backlog is $28.8 billion (as of the end of August), securing about three and a half years of workload.

While orders are being won mainly for LNG carriers, which are considered high value-added ships, the introduction of decarbonized eco-friendly technology is urgent. After Hanwha Group’s acquisition, it is expected that the development of eco-friendly ship technologies will gain momentum based on group support. A business community official said, "Hanwha is likely to accelerate its offshore wind power business by utilizing DSME’s offshore wind vessel manufacturing technology as part of strengthening its green energy business capabilities."

However, specific details on how Hanwha Group will transform DSME’s business structure after acquisition have not yet been finalized. Depending on future directions, such as whether to reduce the merchant ship sector while expanding defense, workforce restructuring is also expected to be inevitable.

Labor-management conflicts are also a concern in this process. Recently, the company and subcontracted workers have been strained due to strikes, and there is a high possibility of differences in positions arising from the acquisition. Although the sale will proceed as a whole rather than a split sale, which the union has opposed, it is anticipated that there will be friction during the post-acquisition integration process.

An industry insider said, "The fundamental problem in the shipbuilding industry was excessive competition due to oversupply, and unless a third company acquires and completely restructures it, that situation will remain," adding, "However, business feasibility and competitiveness can only be judged after the direction is set following the acquisition."