Plans by South Korea’s largest shipbuilder, Hyundai Heavy Industries, to merge with its second-biggest rival have drawn praise inside South Korea but criticism abroad.

Proponents say the deal allows state-owned Korea Development Bank (KDB) to exit from its majority stake in DSME.

KDB is a bank and it has been in control of DSME for many years. But KDB has no experience in running a shipyard. A yard should be operated by shipbuilding expertise

Shipbuilding veteran

“KDB is a bank and it has been in control of DSME for many years,” one South Korean shipbuilding veteran says. “But KDB has no experience in running a shipyard. A yard should be operated by shipbuilding expertise."

Best fit for DSME

HHI is said to be the best choice for DSME due to growth trajectory and shipbuilding experience.

The company took less than two decades to overtake the previous market leader, Mitsubishi Heavy Industries of Japan. During the 1990s financial crisis, it acquired Halla Samho shipyard, which is the current Hyundai Samho Heavy Industries. Its joint venture — Hyundai Vinashin Shipyard in Vietnam — is seen as one of the world’s most profitable shipbuilding companies.

HHI’s interest in merging with DSME is seen as the right move within South Korea. But outside of the country, the idea is frowned upon.

“We feel uneasy with this [HHI and DSME merger],” one Japanese shipbuilding source says. “They are trying to merge the country’s two largest shipyards into one and this is frightening as the power would end up in the hands of one company. HHI and DSME are building almost the same type of vessels and there will be too much workload going into one company.”

He says there is already excess capacity in the shipbuilding industry and a merger between HHI and DSME does not help.

“To merge for the continuity of DSME is frightening,” the Japanese source says, adding that China’s plan to consolidate CSSC [China State Shipbuilding Corp] and CSIC [China Shipbuilding Industry Co] will not have the same effect as HHI-DSME.

"The Chinese yards were previously under one group… and we are not expecting much changes to take place when they group together again. They will be more like an association and it is actually easier to talk to one association than two separate ones.”

'No synergy'

But not everyone believes the merger will be a success.

South Korean analyst Moo-hyun Park of Hana Financial Group thinks the merger of HHI and DSME is “unrealistic”, as he estimates the total market share of both yards in terms of LNG carriers and VLCCs to be around 60% globally. That could make it hard to secure competition clearance.

"There will be no synergy effect of the merger bid," he adds. "It will not be helpful to the [South] Korean shipbuilding industry.”

Park adds that combining HHI and DSME into a shipbuilding market titan will put a lot of shipowners on edge.