Latest Act in the Crisis of the Enormous Korean Shipbuilders

And now not even their foreign subsidiaries are immune.

By MC01, a frequent commenter on WOLF STREET:

In February 2019, Hyundai Heavy Industries (HHI) was selected by the Korea Development Bank (KDB) as the “sole bidder” for the ailing Daewoo Shipbuilding and Marine Engineering (DSME), in which the State-owned Korea Development Bank holds a 55.7% stake. Samsung Heavy Industries (SHH) had already announced they had no interest in taking over DSME, making this selection process little more than a formality.

In March, HHI finalized the deal worth about 2 trillion won ($1.6 billion) and announced it will split in two entities to fully digest DSME. HHI and DSME workers, supported by the Korean Metal Workers Union, are opposed to this spin-off, fearing it will lead to mass layoffs similar to those experienced by another money-losing mega-shipyard, Hanjin Heavy Industries, back in 2011.

While HHI is threatening workers with hellfire in form of lawsuits and injunctions, the Korean government, through its Korea Development Bank, has already pledged a further 1.5 trillion won  ($1.3 billion) in fresh paid-in capital, plus a further 1 trillion won (over $1 billion) to be provided “if needed.”

This is the latest act in the long-running crisis of the enormous Korean shipbuilding industry, which has been at the receiving end of a colossal bailout starting in 2016. DSME alone received $2.6 billion in public funds in 2017 after being caught in the largest corporate financial scandal to ever rock Korea just one year earlier. Back in 1999, the Daewoo chaebol from which DSME was later spun off, collapsed under the weight of a similar accounting and bribery scandal.

And now not even their foreign subsidiaries are immune.

To take advantage of low labor costs and often very generous financial incentives ranging from tax breaks to loans at favorable conditions, the big Korean shipyards have opened subsidiaries abroad which are just as liable to their carefree attitude towards the most basic financials as the domestic operations.

In 2004, Hanjin Heavy Industries started construction of a huge shipyard in the Zambales Province, Philippines, to take advantage of both local labor costs and the generous financial and fiscal conditions offered to private investors in the Subic Bay Freeport Zone (SBFZ). By 2016 Hanjin was employing over 20,000 locals plus hundreds of foreign nationals (chiefly from Korea and Romania), making it one of the largest private employers in the Philippines.

Hanjin apparently did not merely export their production system but also their cavalier attitude towards budgets: in January 2019, Hanjin Philippines filed for “corporate rehabilitation” (roughly equivalent to bankruptcy protection) following a default on $412 million of loans owed a consortium of five Filipino banks. This was just a slice of the company’s debt. It also owes $900 million to Korean banks, and the fate of that debt remains unclear.

This is by far the largest corporate default in Filipino history, and it has led to a very complicated aftermath, with rumors of a takeover by Chinese and/or Japanese investors, and the Filipino government tempted to nationalize the whole insolvent lot.

Daewoo-Mangalia Heavy Industries (Mangalia for short), a shipyard set up by DSME to take advantage of Romania’s low wages, ready access to the highly lucrative European market, and generous fiscal incentives for foreign investors, accumulated $800 million in losses between 2012 and 2017.

Late in 2017 the Romanian government and the KDB arranged for Mangalia to be sold to the Dutch Damen Shipyards Group for a measly $26 million. Considering the size of the docks (able to accommodate pretty much any merchant ship now in service and over 90% of existing maritime structures) and how modern and productive the whole facility is, Damen made the proverbial bargain.

Facilities as large as the Mangalia shipyard are not merely needed to build new ships, but to repair, overhaul and upgrade existing ones.

For example, in March 2018 the Maersk Honam, a very new and very large Singapore-registered container carrier belonging to the eponymous Danish conglomerate, caught fire in the Arabian Sea while en route from Singapore to Suez. It took the Indian Coast Guard over a month to put out the fire aboard the drifting ship under control (image via SMIT which was involved in the salvage operation):

Maersk made the decision to have the Honam towed to the port of Jebel Ali, Dubai, where the part of the cargo that was still intact was unloaded. After assessing damages, it was decided to reuse the stern section of the Honam in a new ship, to be built by HHI, the same shipyard which had launched the ship just one year earlier.

The Dubai Drydocks cut the Honam in two: the 125-meter long bow section is currently being disposed of, while the 228-meter long stern section was loaded aboard the COSCO heavy lift ship Xin Guang Hua and shipped to the HHI shipyards in Geoje. This photo shows the stern part of the Honam piggybacking on the Xin Guang Hua (image via COSCO):

Maersk expects the “new” ship to be operative in 2020. The Honam cost $137 million to build and is a very new, clean and efficient design, so the estimated $30 million to rebuild her sounds reasonable.

Maersk has declared the Honam “general average,” meaning owners of the surviving cargo will have to pay a share of the cost for vessel damage, tow, cleanup, legal fees etc. Exact calculations are likely to take years and are already leading to costly and nasty litigation.

Cargo owners whose insurance didn’t cover general average or who relied on Maersk to provide minimal compulsory insurance will receive bills ranging from hundreds of thousands to millions of dollars.

Fires aboard commercial vessels have become common over the last few years, with incidents such as the sinking of the vehicle carrier MV Grande America earlier this year making the news. According to specialized transport and logistic insurer TT Club, 66% of such accidents can be attributed to “poor practices in the overall packing process,” which include anything from poor cargo handling to illegal mislabeling of dangerous goods.

Insurance companies are pressuring shippers to put this situation under control because it costs them enormous sums of money every year, especially as declared cargo values continue to soar and more efficient space utilization aboard container ships and vehicle carriers makes the eventuality of a fire particularly devastating.

In 2013 the large container carrier MSC Flaminia suffered a fire en route from Charleston to Antwerp which cost a crew member his life and insurers over $250 million. The cause of the fire was determined to be mislabeled cargo, in the specific unsafely packaged and undeclared calcium hypochlorite.

The sinking of the MOL Comfort container carrier in 2013, following a devastating fire, has cost insurance companies a crushing $400 million. The enormity of the damages prompted the most affected insurance company, Tokyo Marine Nichido, to sue the ship builder, Mitsubishi Heavy Industries, for ¥60 billion (over $55 million), claiming a flaw in the ship design caused the disaster. By MC01, a frequent commenter on WOLF STREET

Aircraft engine maker Rolls-Royce struggles with its debacle for the Boeing 787 Dreamliner. And China is learning it the hard way. Read… The Engines of Large Airliners and the Costly Challenges Manufacturers Face

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  33 comments for “Latest Act in the Crisis of the Enormous Korean Shipbuilders

  1. Iamafan says:

    Apparently most of the $412 million owed to local Philippine banks had NO collateral. Unbelievable. This is worst than our subprime housing crisis. At least that one had a lousy house and lot.

  2. Dave Mac says:

    With all the media talk of an impending recession, shipbuilding is perhaps not the best place to be invested.

    However, short sellers will be delighted.

  3. Paulo says:

    regarding: “Cargo owners whose insurance didn’t cover general average or who relied on Maersk to provide minimal compulsory insurance will receive bills ranging from hundreds of thousands to millions of dollars.”

    I don’t understand this situation. Why on earth would the buyers of transport services be on the hook for the cost of the shipping line problems? Imagine a plane crash, and then charging the passenger estates for restitution. Imagine a bridge collapse, then charging the vehicles on the bridge for a portion of replacement costs.

    I’m sure there is a historical process or evolution/explanation for this “insurance” situation. If anyone knows it…..If not, I’ll do a search and see what I can find out. I would imagine it goes back to Colonial days of exploitation, so the “Kings” ships/owners/captains/crew would not be on the hook for sinkings and/or seizures

    • MC01 says:

      General average is an admiralty/maritime law principle that goes back a very long time: the first known instance was embodied in the so-called Lex Rhodia, the maritime code of the Isle of Rhodes which was adopted around 800BCE and which became one of the basis for all future admiralty laws.
      Admiralty law and the Law of the Sea have been united in the UN Convention on the Law of the Sea, which was adopted worldwide in 1994 (albeit with some exceptions).

      General average is in some ways a relic of the past and is only used sparingly these days (if I remember correctly including the Maersk Honam it has been invoked only three times over the past decade) but like the Romans would have said “dura lex sed lex”, “it may be a bad/tough law but it’s still law”.
      Many cargo owners have already filed a complaint with the ITLOS tribunal in Hamburg because they feel Maersk is just trying to save pennies on their skins. As said litigation is likely to be lengthy and costly.

    • Iamafan says:

      Revisit the shipping conundrum with the Haijan ships here. Many shippers got the good stuck.

    • Wolf Richter says:


      “Why on earth would the buyers of transport services be on the hook for the cost of the shipping line problems?”

      Great question. And I have an anecdotal answer for you.

      When we moved from New York City to Europe nearly two decades ago for a three-year stint, we had all our stuff shipped by container via a US moving company. But the container didn’t arrive, and didn’t arrive, and no one knew where it was. For weeks, we were sitting in our apartment with nothing in it. Turns out, eventually, that the container had got “lost.” When they “found” it again many weeks later in some port area in Antwerp, they charged us “demurrage” for storage that exceeded the cost of shipping the container. This involved several parties, including the US moving company and the container carrier.

      The deal was this: they would not release the container unless we first paid the demurrage charges. It was pure extortion.

      Until then, I didn’t even know what “demurrage” was. We got our lawyer in Europe involved (big law firm we used for our business), and through them, we got the amount of the demurrage charges cut down to about half the amount, with the legal fees eating up the other half.

      For most innocent bystanders, international container shipping is its own beast with some very surprising twists and turns.

      • Iamafan says:

        Wolf, something happened in New Jersey in 2016 when Hanjin declared bankruptcy:

        Many shippers got screwed. Containers were stuck and shippers had dark moments not knowing what will happen to their goods.

      • gary says:

        This kind of fraud seems to be rampant in the entire transport/storage industry.

        Be careful with moving companies, self-storage facility contracts, etc.!!

      • wkevinw says:

        I guess this is what international freight forwarders earn their money for- avoiding this.

      • Olivier says:

        That does not surprise me. With all those professional services companies: be they architects, builders, accountants, movers, shippers, doctors etc, you must rate yourself as lucky if when they harm you they don’t send also you a bill for the harm.

        There are professions like that: cosseted by arcane and frequently archaic laws and regulations, and then there is the rest of us.

      • Paulo says:

        Wow. Thanks MC and WR for the explanation. My friends just sold their place and are moving back home to Australia. I hope their shipping container makes it.

        I had no idea…perils of the sea and all that it entails!

      • d says:

        used to ship a lot FCL.

        We found it was safer to ship Freight collect. From a straw-man to a straw-man.

        Then if there were any of those odd issues which will arise from time to time, it is simply cheaper and easier on many occasions, to simply walk away.

        As the legal fees alone in even a small dispute can be greater than the value of the good’s.

        When the fright has not been paid, there is no insurance, and the shipping company is about to get stuck with the goods and all the bills shipping companies can become very cooperative and realistic.We had 4 FCL containers stolen from the wharf with forged documents.

        Nobody was really interested until the freight company realised the boxes were Freight collect, and that Freight and customs duties had not been paid. Suddenly Everybody was very interested. They got them and the goods back. The goods sat in police and customs storage for 7 months whilst the issues were worked through. 10K in legal fees, but no Demurrage as they were in police storage, not harbourboard, @ $360.00 day.

        HTF did they get away, with charging you even partial Demurrage, on a cargo, THEY LOST????????

    • 2banana says:

      Gee, what could wrong with this “law?”


      “Maersk has declared the Honam “general average,” meaning owners of the surviving cargo will have to pay a share of the cost for vessel damage, tow, cleanup, legal fees etc.”

      • d says:


        Its very old well precedented and international.

        This will be nasty, very expensive, and run round in the courts for years. Probably ending at one of the Major insurers or HHI’S doorstep depending on why the fire started.

        The guys with the big problem are the uninsured who cant walk away or turn their consignees into straw-men/stones. This will put some of them into bankruptcy.

    • UHaul says:

      Yep, this is how it is, I had a container shipped to ASIA last year, I shall go over the actual costs, just in case anybody here wants to do such a foolish thing.

      1.) First of all I was told “No problem”, just buy a container, and load it, and ship it off, but its not all that easy. But yes, you can BUY insurance, but it’s basically to cover your ‘shipment’ goods, and the liability certainly isn’t covering millions. Very common for someone to pack say ‘oxygen cylinders’ and then say they leak at sea, sure your supposed to declare combustibles, but who would know. I know in my shipment I had some c02 cylinders and they were never detected, so they could have had easily been a gas that makes steel burn.

      So what does it cost?

      2.) What they say, and what is reality.

      Well they said about $3k for a new container ( only new containers can be shipped ), and about $150 for pickup/delivery, and $600 for boat to asia, and then $100 unload the pickup to destination.

      3.) What did it really cost?
      $3,500 for container, has it needed to be certified that it was new. $150 to drop-off, and $2500 to pick-up and take to boat, they said ‘no problem’ for pick-up, but in reality 99% of all containers are dropped off empty, and not picked up loaded, so I had to find a ‘recovery’ service that would come pickup the container and load on a truck-trailer.
      Boat $3000, e.g. about $2500 MORE than they said it would cost “the quote”, again MAERSK, it seems that they can change the rules anytime they wish, and at the destination, your container is NOT-Released until all MONEY is paid. Note this the ‘quote’ you get is absolutely meaningless.

      Import fee’s were about $3,000, I think I was told it would cost $100, biggest problem was SOC ( self owned container ), nobody wants to be a broker for an SOC, 99% of all containers are done as a lease, the problem of course is they charge you $100/day from drop-off to return, in my case it took 6 months to get the container off the property in USA, and to the property in ASIA, had I been using a leased/service container, my charges would have been $20,000 USD or more.

      So when all said and done, I think I paid about $15k USD to transport $1,000 USD worth of junk, mostly craft-beer stuff I wanted and some hand-tools and ladders. Had I every known that shipping a container would cost more than $10k, I would have just left the junk in the USA for the guy who bought the property.

      Yes, if there is a fire, and especially IF they can prove that YOUR container caused the fire, or loss of ship, then you could be subject to a +$100 million bill, but don’t worry as they will not release your container until you have paid up all the fines.

      One more note, it took 4 months to get the container off my USA property, there were 3 outfits that came out to pickup, and all billed, but didn’t pick-up, all did the same thing “Nobody told us this was a loaded container can’t do this”, funny thing is that in all cases I had said “loaded container”, so the worst part of containers is the people who haul them in USA, I talked to one trucker that had a side-lift, charged $350 to come pickup, and he told me that 90% of his pickups were DECLINED and he still got 100% payment, talking about a racket. Another TOW outfit came out, and on arrival their excuse for decline ( but still have to pay ) was “We don’t haul containers”,

      Lastly the container biz was in a free-fall from last year, a large reason my cost quote jumped from $600 to $3,000 was that MAERSK just raises the price, as the ships sail on a schedule, and even by last year containers shipment had dropped off the cliff.

      • d says:

        You obviously dealt with some bad shipping agents.

        I never owned a container, only ever paid the shipping cost of the leased container, inclusive of lease period.I shipped hundreds of them around Asia-pacific.

        You only pay a daily hire rate if you keep the box over a minimum number of days after it is released from customs.

  4. Willy2 says:

    – That’s what you get when you’re backed by the government. Then calculations of profit & loss don’t matter (too much) anymore. Romania, South Korea, Japan, Philippines and the biggest of them all …………… China (I am sure the list is much longer).
    – I know that the officials in the previous south korean government actually demanded that (some of) the chaebols gave them money. And in return the chaebols got all kind of favours.

  5. Iamafan says:

    I believe we are seeing a sample of peak debt. The government can print all the money they want but still they can’t outlaw unprofitable companies.

    What will happen when more and more companies become zombies? Profitability and Cash Flow still matter

  6. Mary White says:


  7. David Hall says:

    Lithium batteries have caused numerous fires. Am not sure it is safe to ship them.

    • MC01 says:

      There’s a growing body of legislature regarding the shipment of Li-Ion (UN 3480) and Li-Metal (UN 3090) batteries and equipment containing them.

      Generally speaking the most common causes of fire in Li-Ion batteries in cargo holds are too high of a charge at the factory (IATA limits charge of batteries to be shipped to 30% of rated capacity) and failure to follow guidelines for packaging. For example Li-Ion over 100Wh are limited to 35kg per package and must be prepared in accordance to IATA Packing Instruction 965.
      Of course the unthinkable may happen, and will happen, but assuming to be smarter than the lads who came up with the safety instructions has sent a whole lot of people to the hsopital if not to the morgue.

  8. nick kelly says:

    Good bit MC.
    Quite the salvage job and pic on the fire resto.

    Container ship building (distinct from engine, electronics) is constantly in search of cheap labor and I’m a bit puzzled SK is still in it this big.

    I would have expected it to migrate to China or India by now, as it migrated from Europe and UK to Asia.

    Ship trivia: the bow is the hard part cuz of the curves. When the Korean yards were still learning, one outfit had the bow built in Holland, with a temporary flat stern plate. Then they towed it to Korea where the rest was built.

    • MC01 says:

      The Wisdom Marine Group of Taiwan (one of those “very large companies most people will never hear about”) operates a fleet of 130 dry dulk carriers and has a further 13 under construction. Each and every one of these ships has been built, or is being built, in Japan, chiefly by Imabari Shipbuilding and Kawasaki Heavy Industries.
      Imabari is by far the largest shipbuilder in Japan and one of the largest in the world by cargo-carrying capacity (what really matters nowaday) and manufactures each and every one of their ships in Japan.
      However being a private company (wholly owned or almost completely so by the Higaki family) financial data are hard to come by.

      Japan is full of companies that manufacture goods that “should be” manufactured in China, Malaysia or Vietnam but aren’t. I often work with these companies and I cannot but keep on wondering how they can pull it off, but they do.

  9. Andrew says:

    I counted over a dozen container ships sitting in Vancouver’s harbour a few months ago, and they sat there for weeks. Were they waiting for a load to return to Asia/Europe, or had they ran out of money for fuel home?

    I worry these ships will become “ghost vessels,” and we’ll have to tow them to a Bangaladeshi scrap yard.

    • MC01 says:

      British Columbia is actually one of the places favorite by shipowners to “idle” their ships in the Northern Pacific.
      “Idling” is generally done because rates have sunk to a point when operating the ship just doesn’t make economic sense. There are several different kinds of “idling”, ranging from long-term storage (the ship will need several weeks to return to service) to “hot storage” (the ship can be put back in service in a few days). It’s up to the shipowner to do the math and decide how long the ship will be moored.
      Obviously ships operating on scheduled services are not idled but may be moored for a few days according to their schedule.

      The Shanghai Containerized Freight Index (SCFI), an index tracking the cost of shipping containers from the port of Shanghai to several major ports around the world (Rotterdam, Singapore, Oakland etc) is very cyclical in nature. It usually peaks in or around week 40 of the year and starts coming down around week 5. That’s when container ships are usually idled for a few weeks, helping to push rates up again.
      But this is an unusual year: the SCFI has so far refused to rebound above 800 and is now below 770. Some may say it’s a “recession indicator flashing red” but I personally believe it’s just a symptom of massive glut and excessively optimistic growth projections over the past decade leading to huge orders, leading in turn to overcapacity chasing orders.

  10. Paul says:

    “Late in 2017 the Romanian government and the KDB arranged for Mangalia to be sold to the Dutch Damen Shipyards Group for a measly $26 million. Considering the size of the docks (able to accommodate pretty much any merchant ship now in service and over 90% of existing maritime structures) and how modern and productive the whole facility is, Damen made the proverbial bargain.”

    No mention of where all the debt went.

    That could change the picture dramatically.

    Iconic companies like Jeep and Remington, to name a couple that come to mind, have changed hands for pennies because their liabilities went with them.

    • MC01 says:

      I’ll give you a hint. A certain character whose name starts with “tax” and ends with “payer” will be “on the hook”. ;-)

  11. Mike says:

    Around 15 to 20 of the largest of these ships, emit as much pollution as the entire worlds car fleet. And they do this because unregulated US globalist corporations decided to outsource US jobs in order to save a few dollars…..

  12. Javert Chip says:


    Extraordinary claims require extraordinary evidence:

    You claim 15-20 of these ships pollute as much as the world’s 1 billion (1,000,000,000) cars…and it’s all the fault of the United States.

    Got a link to support both those extraordinary claims?

  13. Anon says:

    Some things need to be improved if human society is planning on growing much larger.

    — Skin-in-the-game has to increase. eg Decentralized ownership. Slaves don’t care and like a good circus. Managers care about their bonuses and incentive pay.
    — Courts have to convict and punish individuals using a recognizable set-of-rules. eg The number of princesses-of-wails needs to be lowered.

    I’ve read that the court system of Hong Kong was instrumental in making HK an economic hub.

    Obvious that current management recognizes the two tenets listed above. Right now both tenets are being given lip service by management. If I really owned my job I could sell it on Ebay.

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