[Exclusive] Hanwha Engine Considers Re-entering Medium-Speed Engine Business After 10 Years... Challenging HD Hyundai's Market Dominance

Group-Level Portfolio Restructuring... Strengthening Defense and Shipbuilding Synergy
Rumors of STX Engine Acquisition... Favorable Timing for Both Buying and Selling
Supply Chain Diversification and Improved Competition

It has been confirmed that Hanwha Group is actively considering re-entering the medium-speed engine business through its affiliate Hanwha Engine. The background behind the group's attempt to re-enter a market it exited more than a decade ago is seen as a combination of Hanwha Group's strategy to expand its defense industry portfolio and a desire to counterbalance the market dynamics, which have recently shifted in favor of HD Hyundai.

According to industry sources on April 25, Hanwha Engine is currently reviewing various options for re-entering the medium-speed engine market. The company is expected to leverage the licenses and technologies related to medium-speed engines it secured during its previous incarnation as HSD Engine to restart the business, and then expand its scale through a range of methods, including mergers and acquisitions (M&A).

Medium-speed engines are primarily used as auxiliary engines (generator engines) that supply power on ships, or as main engines for small and medium-sized vessels such as warships, offshore drilling ships, and passenger ships. Hanwha Engine is reportedly planning to focus on generator engines in the initial phase of re-entry, and, in the mid- to long-term, to expand its business structure to include engines for warships and retrofit (performance improvement) engines for existing vessels. A Hanwha Engine official stated, "The decision to resume the business has not been finalized yet," adding, "We are reviewing several options."

Group-Level Portfolio Restructuring... Strengthening Defense and Shipbuilding Synergy

This move aligns with Hanwha Group's ongoing efforts to restructure its portfolio around the defense sector. In 2023, Hanwha Group acquired Daewoo Shipbuilding & Marine Engineering (now Hanwha Ocean), thereby strengthening synergies between shipbuilding and defense at the group level. Recently, Hanwha Ocean has begun making a full-scale entry into the U.S. warship market, and the group is also pursuing the acquisition of the Australian shipbuilder Austal, further enhancing its defense shipbuilding capabilities. If Hanwha Engine regains medium-speed engine production, the group will be able to vertically integrate the engines required for warship construction, significantly bolstering its defense capabilities.

Currently, the medium-speed engine market is effectively dominated by HD Hyundai Heavy Industries. HD Hyundai Heavy Industries maintains its leadership with a global market share of about 35% in medium-speed engines, thanks to its proprietary HiMSEN engine. In particular, it holds a 72% market share in the segment of medium-speed engines using methanol, an eco-friendly fuel, ranking first in the world. Hanwha's re-entry into the medium-speed engine market could directly challenge HD Hyundai's strong market dominance.

However, the approaches of the two companies are markedly different. HD Hyundai has achieved vertical integration across shipbuilding, engine manufacturing, and equipment, leveraging technological prowess and cost competitiveness. In contrast, Hanwha is taking a strategy-integrated portfolio approach linked to defense, connecting engine manufacturing, warship construction, and weapons systems within a single group. This structure could provide a strong advantage in government and overseas procurement markets, especially in U.S. government defense procurement (G2G) projects. Ultimately, Hanwha's return to the medium-speed engine business is expected to be a key piece in its blueprint to become a "global defense group based on shipbuilding," rather than simply an expansion of its shipbuilding machinery division.

Rumors of STX Engine Acquisition... Favorable Timing for Both Buying and Selling

Recent rumors about Hanwha Group's possible acquisition of STX Engine are also related to this context. STX Engine possesses technology for both land and marine engines, as well as electronic equipment, covering both civilian and military applications. As a major player in the domestic medium-speed engine sector, its sale could significantly reshape the market landscape. For Hanwha Group, STX Engine is seen as a realistic target for quickly securing related production infrastructure and technical personnel.

The fact that STX Engine's major shareholder, UAMCO, has been steadily selling its stake is also interpreted as a preliminary step towards the company's sale. UAMCO disposed of 5.43% of its shares through a block deal this year alone. Its stake, which stood at 84% in 2023, dropped to 60.64% (common shares basis) this year. An investment banking (IB) industry source commented, "Given the nature of defense and shipbuilding as national key industries, only HD Hyundai Heavy Industries Group and Hanwha Group are realistically positioned to acquire STX Engine. Among them, Hanwha, which needs to strengthen its medium-speed engine business, is likely to be more proactive. UAMCO, which holds a significant stake, may also be motivated to sell before the price becomes too high, which could make a sale more difficult."

Positive Industry Response... Supply Chain Diversification and Improved Competition

The industry response has also been positive. The domestic medium-speed engine market is currently a de facto monopoly under HD Hyundai, raising concerns about supply chain concentration risks. If Hanwha returns to this market, it is expected to diversify the supply chain and improve competitive dynamics. An industry insider said, "Hanwha could once again serve as a counterbalance in the domestic engine market, which is currently dominated by HD Hyundai affiliates. This appears to be not just a simple business expansion, but a strategic choice for the entire group."

Previously, Hanwha Engine, in its former life as HSD Engine, had experience in the medium-speed engine business. At that time, HSD Engine entered the ship medium-speed engine market in 2007 to reduce its dependence on low-speed engines and diversify its business structure. However, as the global financial crisis led to a sharp decline in orders for ship engines, the business contracted rapidly. New orders for medium-speed engines, which stood at 140.2 billion won in 2011, plummeted to the 20 billion won range in 2012. After entering restructuring in 2016 and selling its medium-speed engine plant, the company ultimately exited the business. Since then, Hanwha Engine has continued to focus on low-speed engines.