Shipbuilders Post Record Losses Due to Incompetence

      July 30, 2015 10:53

      The world's top three shipbuilders -- Hyundai Heavy Industries, Daewoo Shipbuilding and Marine Engineering and Samsung Heavy Industries -- all swung into the red in the second quarter due to massive losses from offshore plant projects.

      Daewoo reflected W3.1 trillion (US$1=W1,160) in accumulated losses in the April to June period, and Samsung W1.5 trillion.

      The top three shipbuilders posted combined operating losses of W4.75 trillion, which marked a record low.

      The losses were attributed to expensive mistakes in constructing offshore oil rigs that stemmed from a lack of experience.

      Offshore plants account for 60 to 70 percent of remaining orders at Daewoo and Samsung, which leaves them wide open to additional losses.

      Lee Suk-jae at JP Morgan said the three shipbuilders jostled for offshore plant orders at unrealistically low prices and ended up "paying a huge price for the lesson."

      Lee added they should use the experience as a stepping stone to honing their skills in the business, which is a crucial part of the global shipbuilding industry.

      Offshore plant orders fetch far higher margins than ships, but construction takes much longer and is more difficult. It typically takes around two years to build an oil tanker that costs around US$100 million, but a floating production, storage and offloading (FPSO) unit costs up to $3 billion and takes at least three years to build.

      Most FPSO projects undergo frequent design changes, which leads to longer construction periods and snowballing costs.

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