Hyundai Heavy Industries’ presence in defense markets is largely centered on the production of naval warships via its Korea Shipbuilding & Offshore Engineering (KSOE) unit. Here the company is seeking to expand its position through the acquisition of rival shipyard Daewoo Shipbuilding & Marine Engineering. First announced in 2019, the acquisition is beginning to look problematic as delays of its consummation continue to mount.
The $2 billion acquisition would make HHI’s title as the world’s largest shipbuilder unassailable, and it is just this position that has regulators worried. According to reports, the HHI/Daewoo merger would create the world’s largest shipbuilder with a 21 percent market share. As a result, the deal is moving forward slowly as HHI tries to appease international regulators.
The company is hoping it can convince regulators to approve the deal due to the competitive threat from the merged China Shipbuilding Industry Corp (CSIC) and China State Shipbuilding Corp Ltd. HHI applied for international approval of the deal in five countries – China, Singapore, Kazakhstan, Japan, and South Korea – plus the European Union (EU). As of June 2021, three of the countries – China, Kazakhstan, and Singapore – had given approval.
The EU is especially concerned about the deal, as it could give HHI a monopoly on liquefied natural gas (LNG) and liquefied petrochemical gas (LPG) carriers. The heavy scrutiny by the EU coupled with the COVID-19 pandemic is the key reason the deal has been delayed. Currently, the transaction could close by the end of 2021.
However, completion is not assured. Not only must the deal pass muster with the EU, but it still faces regulators at home in South Korea and in Japan. A further fly in the ointment is news that shipbuilding is entering an upswing in 2021. A report in The Maritime Executive stated that Korean shipbuilders have already achieved nearly three-quarters of their 2021 targets in the first six months of the year. With a resurgence in the market underway, the need to consolidate DSME may not be as acute.
Regardless of the outcome, not much will change in regard to HHI’s naval shipbuilding operations. In its home market of South Korea, the unstable behavior of its northern neighbor continues to fuel defense procurement and modernization efforts.
As a result, the ROK Navy has ramped up production of its new Incheon (aka FFX) class frigates. HHI has been tapped to build the first three vessels of this class, with Daewoo building two of the second batch. At present, the construction schedule appears to have reverted to the original plan to build 20 of these ships in groups of six, eight, and six ships, respectively. Competition for these orders among Korea’s shipyards is expected to be fierce, but HHI has an advantage – especially if the Daewoo deal is consummated – thanks to its experience with these ships.
These warships have also garnered their first export order, with a two-ship sale to the Philippines. Following years of negotiation, Manila placed an order for two frigates in 2016. According to Forecast International’s Warships Forecast, this is an important milestone for the Korean program, since it establishes the Incheon class as a viable candidate on the international market. The first of the two Rizal class ships were delivered in early 2020. The rapid construction time of these ships is notable and could be a solid selling point for future exports. Other export opportunities certainly exist within the Pacific Rim area and probably outside it as well, making the future appear bright for the Incheon class.
With the accelerated need for new warships high on South Korea’s priority list, HHI can likely look forward to a steady revenue stream for its warship operations for years to come.
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