EC ruling on South Korean merger

The EU has stopped the merger of two of the world's leading shipyards; a move that's unlikely to stifle the boom in South Korean and Chinese specialist shipbuilding

The European Commission (EC), which enforces European Union (EU) legislation, has moved to prevent the acquisition of Daewoo Shipbuilding & Marine Engineering Co. Ltd (DSME) by Hyundai Heavy Industries Holdings (HHI) — two South Korean shipbuilders amongst the world’s three leading players in the construction of large liquefied natural gas (LNG) carriers.

According to the EC statement, the proposed merger was halted, following an in-depth two-year investigation, because it would have led to “the creation of a dominant position by the merged company, leading to a reduced choice of suppliers and, ultimately, higher prices for European energy consumers”.

DSME says it is considering a challenge to the intervention, while South Korea’s industry ministry says it “regrets” the EU’s position on a deal which, it points out, has already been cleared by China, Singapore and Kazakhstan. DSME has the state-owned Korea Development Bank (KDB) as its majority shareholder while HHI is privately owned. Both companies enjoy diverse industrial output, with a strong emphasis on producing a wide range of commercial vessels, along with marine engines and infrastructure used in the exploration, production and processing of offshore oil and gas.

Competitive supply chain

“Both of these companies are very strong players in the market for the construction of large vessels transporting LNG and only a handful of shipbuilders around the world are able to build these highly sophisticated vessels,” explained Margrethe Vestager, who is in overall charge of the European Union’s competition policy, when the merger’s halt was announced.

“The new entity would have become, by far, the largest player, with a global market share exceeding 60 per cent, and European customers would be left with few alternatives to the merged entity. Neither company submitted any formal remedies to offset the negative effects of the acquisition, so the merger could not be approved.

“Our decision means European carriers will continue to have sufficient options to procure large LNG vessels and this important part of the supply chain will remain competitive.”

Margrethe Vestager, Member of the EC in charge of Competition (Credit: European Union)

Far East success

Over the past five years, the worldwide market for the construction of large LNG carriers has reached a total of $45 billion, with EU customers accounting for almost half of all orders.

During 2021, South Korea's three major shipbuilders — DSME, Samsung Heavy Industries Co. and Korea Shipbuilding & Offshore Engineering Co. (KSOE) — received their largest number of orders in the last eight years, to a combined value of $46 billion and representing around one quarter of all the new orders for ships placed worldwide, according to data by market researcher Clarkson Research Service.

It's a success that means South Korea is now only second to China in terms of shipbuilding orders received — thanks mainly to a steady rise in demand for its expertise in building eco-friendly ships which can cost up to 20 per cent more than conventional vessels to build.

Booming stock markets

The desire by HHI and DSME to join forces is typical of a current trend around the world that is seeing increased merger and acquisition (M&A) activity, fuelled by low borrowing costs and booming stock markets. Global M&A volumes reached a record $5.8 trillion for the first time ever, during 2021, comfortably eclipsing the previous record of $4.5 trillion set in 2007, according to data published by financial markets specialist, Dealogic.

Shipbuilding on the banks of the River Huangpu in Shanghai, China (Credit: Shutterstock)

Chinese streamlining

South Korea’s biggest maritime rival, China, has also started to sharpen its own commercial shipping focus with some bold recent streamlining and merger activity.

In October, the state-run China State Shipbuilding Corporation (CSSC) allowed its subsidiary Tianjin Xingang Shipbuilding Heavy Industry to go bankrupt with debts of around $2 billion.

The yard, which employs 1,700 workers, will terminate its contracts by the end of 2023, with any remaining production taken over by another state-owned group, Dalian Shipbuilding Industry, which is developing a carbon-neutral vessel that will run on ammonia.

CSSC has also begun a merger with the country’s second-largest shipbuilder — China Shipbuilding Industry — and is moving fast to improve coordination and innovation within the new group. Plans include transporting its headquarters from Beijing to Shanghai and the construction of a new cutting-edge 18 billion yuan ($3 billion) shipyard which will replace much of the harbour city’s older dockland facilities.

Shanghai itself is also on a clear upward maritime trajectory having just extended its lead as the world’s largest container port with state media reporting that the historic metropolis handled just over 47m containers during 2021 — an eight per cent increase over 2020.

It means Shanghai has now been the world’s largest container port for the past 12 years.

Dennis O’Neill is a freelance journalist specialising in maritime.