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Hyundai Heavy, DSME merger falls through on EU veto

South Korea to draw up measures to shore up Daewoo Shipbuilding, including finding a new owner

By Jan 14, 2022 (Gmt+09:00)

Hyundai Heavy, DSME merger falls through on EU veto

The European Commission on Thursday vetoed the combination of the world’s two largest shipbuilders Hyundai Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. (DSME), frustrating South Korea's efforts to restructure the country's shipbuilding industry dragged down by price competition.

The commission said their proposed merger would create a "dominant position and reduce competition in the construction of large liquefied gas (LNG) carriers," and the two Korean shipbuilders failed to formally offer remedies to address such concerns.

The commission's decision, which Hyundai Heavy said was "unreasonable and regretful," would bring to naught South Korea's three-year efforts to sell loss-making Daewoo Shipbuilding to its bigger rival and achieve economies of scale through their merger. 

But the government played down the impact of the failed merger between the two Korean shipbuilders and hinted that it would look for a new owner of Daewoo Shipbuilding, as part of measures it will draw up in the near future to shore up Daewoo Shipbuilding.

"The shipbuilding industry conditions have improved compared to 2019 and the impact (of the EU's veto) on the country's shipbuilding sector will be limited," said a joint statement issued by the finance ministry, the commerce ministry and the regulatory Financial Supervisory Commission.

In March 2019, Hyundai Heavy agreed to acquire a 55.7% stake in the troubled smaller rival from the state-run Korea Development Bank (KDB) for 2 trillion won, alongside a pledge to inject 1.5 trillion won into Daewoo. 

The takeover agreement was welcomed as a move to ease excessive competition among the country's Big Three shipbuilders -- Hyundai, Daewoo and Samsung -- and to better cope with low-cost competitors from China.

In response to the commission's rejection of the acquisition, Hyundai Heavy said in a statement that it will come up with comprehensive countermeasures, including filing a complaint about the decision with the European Union's court.

An LNG carrier built by Daewoo Shipbuilding
An LNG carrier built by Daewoo Shipbuilding


EU concerns centered on LNG carriers used to transport LNG between Europe and other parts of the world, including the Middle East and North Africa. European shipping companies are major customers of Hyundai and Daewoo.

“Large LNG vessels are an essential element in the supply chain of liquefied natural gas and enable the transport of this source of energy around the globe,” Margrethe Vestager, the commission’s executive vice-president in charge of competition policy, said in a statement on Thursday.

"Given that no remedies were submitted, the merger would have led to fewer suppliers and higher prices for large vessels transporting LNG. This is why we prohibited the merger,” he said.

South Korea’s three major shipbuilders, including third-ranked Samsung Heavy Industries Co., have swept global orders for LNG carriers, more profitable than oil tankers and container ships.

In particular, both Hyundai and Daewoo took 60.3% of the global new orders for LNG carriers last year, securing orders for 47 new vessels out of the total of 78 LNG ships. In the segment of very large container ships, both companies make up a combined 80%.

CALL FOR SELLING PART OF LNG TERMINALS 

The proposed Hyundai-Daewoo tie-up needed to be cleared by six countries, where their major clients are based, under the terms of the deal agreed with KDB. It has already received the green light from Singapore, Kazakhstan and China, but was pending approval from the EU, South Korea and Japan.

As a condition for their merger, EU antitrust regulators last year called for selling part of the LNG carrier business of either Hyundai or Daewoo to lower their combined market share to below 50% in the LNG ship market.  

But the world's largest shipbuilder rejected the demand. Instead, it offered to transfer LNG-related technologies to competitors, which appeared to fall short of the commission's requirements to allay monopoly concerns.  

The EU's executive arm said that large LNG shipbuilders enjoy high entry barriers because they are extremely complex to build. It noted that demand for large LNG carriers was not affected by the pandemic and the sector has a very positive outlook for future demand.

"South Korean shipbuilders are further expanding their foothold in the segment of eco-friendly ships as even container ships and tankers are now installed with dual-fuel engines to reduce carbon emissions," said a shipbuilding industry source.

"Ahead of the adoption of stricter carbon neutrality measures for the shipbuilding industry from next year, European shipbuilders would be afraid of the emergence of a superlarge shipyard." 

COMPETITION BETWEEN DOMESTIC SHIPYARDS

Back in 2015, South Korean shipyards were pushed to the brink of bankruptcy in the face of competition from low-priced Chinese shipbuilders and massive losses from their offshore plant business.

Debt-ridden Daewoo Shipbuilding in 2015 was taken over by creditor banks led by KDB, while Hyundai Heavy Industries Group in 2016 underwent a drastic overhaul of businesses to stay afloat.  

Now that their merger plan fell through, the country's Big Three shipbuilders will likely repeat cut-throat competition not only for conventional vessels, but also in the segment of next-generation ships such as autonomous sailing vessels and eco-friendly carriers powered by ammonia and hydrogen.

Shares in Hyundai Heavy were 2.37% higher at 108,000 won around midday, with investors shrugging off the EU's veto of the merger which had been widely expected. Daewoo Shipbuilding declined 1.78% to 24,800 won.

Write to Jung-Hwan Hwang and Kyung-Min Kang at jung@hankyung.com

Yeonhee Kim edited this article
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