According to the Korea Defense Industry Association, Hyundai Heavy and Daewoo Shipbuilding accounted for 79.5 percent of all sales related to military vessels, indicating the strong presence of both companies in the maritime defense industry. (image: Yonhap)
SEOUL, Feb. 1 (Korea Bizwire) — It is expected that a merger between Hyundai Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. will create massive synergy not only in the South Korean shipbuilding industry, but also in maritime defense.
Both companies are listed as major manufacturers of naval vessels and submarines, in charge of almost all projects commissioned by the South Korean government and the Navy.
Samsung Heavy Industries Co., another major shipbuilding company, does not build military vessels.
According to the Korea Defense Industry Association, Hyundai Heavy and Daewoo Shipbuilding accounted for 79.5 percent of all sales related to military vessels, indicating the strong presence of both companies in the maritime defense industry.
While some argue a merger of the two companies may bring about a monopoly in the maritime defense industry, experts point out that due to the special nature of the defense industry that takes it beyond a market economy, major side effects are unlikely.
“Only Daewoo Shipbuilding and Hyundai Heavy are capable of building submarines and warships, so it will turn into a de facto monopoly if they merge,” said a source from the maritime defense industry.
“The merger wouldn’t mean much, because they have already been taking almost all of the orders.”
The South Korean government also expects that the merger would hardly make an impact on the defense industry, since defense projects are not competition-based.
They are distributed by the government to each of the defense manufacturers based on their area of specialization.
The expectation is that the merger would instead contribute to economies of scale in the maritime defense industry and generate synergistic effects.
Daewoo has more than enough experience in building submarines, which would significantly contribute to bringing Hyundai’s competitiveness in the defense industry to another level.
Daewoo Shipbuilding ranked 85th on the top 100 list of defense manufacturers announced by the Stockholm International Peace Research Institute (SIPRI) last year.
In accordance with relevant legislation, a merger of defense businesses requires approval from the Minister of Trade, Industry and Energy.
Approval may come easily if the merger only involves South Korean firms. However, if a foreign company seeks to take over a South Korean defense manufacturer, then the approval process may become more complex.
For instance, when Kumho Tire Co. was being sold to China’s Qingdao Doublestar Co., Kumho Tire’s defense sector was removed from the deal to prevent Kumho’s tire technology for fighter jets from being turned over.
Daewoo Shipbuilding, however, builds a variety of ships, including military vessels, within the same shipyard, making it difficult to separate its defense sector when being sold to a third company.
Due to such complexities, experts have been arguing that there is only a slim chance that Daewoo Shipbuilding will be sold to a foreign company, which makes Hyundai Heavy the only entity capable of taking over the firm.
H. M. Kang (hmkang@koreabizwire.com)
