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Blocked Hyundai-Daewoo merger leaves shipbuilders at sea

Europe’s rejection of Hyundai Heavy Industries’ acquisition of Daewoo Shipbuilding Marine & Engineering has scuppered what would have been a major step toward consolidation in an industry where excessive competition weighs heavily on profits.

The European Commission on Thursday vetoed the deal between the world’s second- and fourth-largest shipbuilders, on the grounds that the South Korean companies’ combined market share of at least 60% in large liquefied natural gas carriers would have reduced competition.

Hyundai Heavy issued a statement shortly afterward objecting to the decision, arguing that market share “is not a proper indicator of market power in the shipbuilding industry.” Yet South Korea’s Fair Trade Commission said Friday it would end its own review of the proposal as the company indicates it will withdraw it.

Hyundai Heavy’s effort to regain its top spot has been sent back to square one, but this is not necessarily the good news for rivals that it may appear to be.

Integrating Hyundai Heavy and Daewoo Shipbuilding “should have led to higher ship prices,” said a disappointed executive at a major Japanese shipbuilder. The hope had been that the acquisition would alleviate the cutthroat price competition that has plagued the industry, creating better leverage across the board that would outweigh the disadvantage of creating a larger rival.

As shares of Hyundai Heavy’s holding company closed down 1.6% on Friday, its competitor Samsung Heavy Industries also fell 1.2%. Daewoo Shipbuilding ended the day flat.

The industry is enjoying a period of brisk demand as global supply chain bottlenecks boost purchases of container ships. Shipbuilding orders doubled last year, according to U.K.-based Clarkson Research. Yet this boom is not reflected in builders’ earnings.

Even Hyundai Heavy, a top player, reported 8.31 trillion won ($7 billion) in sales for 2020, and an operating profit of 33 billion won, for a razor-thin margin of 0.4%. The company booked total operating losses of 320 billion won for the first nine months of 2021.

During an industry downturn between 2016 and 2018, shipbuilders took orders at low prices to keep shipyards running, even at the risk of losing money. In 2021, they were hit by surging costs for steel and other materials. The industry has struggled for years with a combination of a market prone to ups and downs and a crowded field of competition that tends to drive prices lower.

Consolidation to address this problem has moved more quickly in China, where the country’s two top shipbuilders, both state-owned enterprises, underwent a government-led merger in 2019. The fact that both serve mainly domestic customers made for a simpler approval process.

South Korean players have been hampered by their focus on foreign demand. Hyundai Heavy and Daewoo’s strength in LNG carriers worked against them here, torpedoing their merger plans.

Source: Nikkei Asia

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