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Universitatea “Alexandru-Ioan Cuza” Iaşi

Facultatea de Geografie şi Geologie

Departamentul de Geografie

Industria constructoare de nave din Coreea de


Sud

Specializarea Student
Geografie, GR11 Mititelu Ionel

Iași

2016

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Figură 1 Coreea de Sud

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Introducere
The Korean shipbuilding industry made a significant contribution to the country’s rapid industrialisation in the
post-World War 2 period, and it is now one of the top global players, leading by value and second only to China
by volume. Korean shipbuilders’ output approximately tripled from 2000 until 2011, when the effects of the
global financial crisis began to be reflected in yard activity, and the Korean industry accounted for 35% of global
vessel completions (in gross tonne terms) in 2013. The industry represents just under 2% of Korean value added
and a sizeable share of exports, around 10% in 2011. It forms an integral part of a wider maritime cluster, with
marine equipment and steel comprising key inputs. Shipbuilding in Korea is dominated by nine major companies,
with the largest (by vessel completions) being Hyundai Heavy Industries, Daewoo Shipbuilding and Marine
Engineering and Samsung Heavy Industries. The vast majority of firms in the industry are privately held (i.e. not
listed on the stock exchange), and some have relatively complex ownership links and affiliates operating in areas
beyond shipbuilding. While a number of smaller firms have closed in recent years, the larger Korean shipbuilders
have been increasing their presence abroad since the mid-2000s, mainly in Asia. The industry produces a wide
variety of shiptypes, but there is a significant share of high-value, large vessels, such as container ships, very
large crude oil tankers, and gas tankers. In addition, offshore vessels and structures, such as anchor handling tug
supply, platform supply vessels and fixed production platforms, are an important part of the industry’s output.
Korea’s average vessel value is twice that of the global average, and Korean shipbuilders have consistently
accounted for more than 30% of the global market in value terms since 2007. Looking ahead, Korea currently
accounts for a third of the global orderbook, with an ongoing focus on large vessels. The prominence of high-
value outputs has been supported by the industry’s R&D spending and skilled workforce. Notably, the major
companies continued to invest in innovation despite the economic crisis, and new R&D facilities (including some
dedicated to naval R&D) are in the pipeline. Skilled workers are also an important input, and shipbuilding appears
to be one of the higher-paying industries in Korea. There are increasing numbers of university-educated R&D
and engineering workers in the shipbuilding workforce, and the industry is strengthening its links to universities
and investing in training to boost staff competencies. Labour productivity was particularly strong from 1998 to
2007; this corresponded to the boom period in the global industry and may have been partly driven by increased
investment by Korean shipbuilders. However, the financial performance of Korean shipbuilding companies has
suffered in the wake of the global economic crisis, and firms appear to be faring worse than their counterparts in
other shipbuilding economies. Operating profits are low and companies have been experiencing liquidity
problems; as a consequence, debt levels have increased substantially and firms’ ability to service debt has become
a major concern for policy makers and financial supervisory bodies. The difficult financial situation has led to an
increase in ownership stakes held by government-related agencies in several large shipbuilding companies. From
a policy perspective, the crisis precipitated a surge in government policy attention to the shipbuilding industry,
with the introduction of a restructuring and competitiveness plan, followed by a plan to develop the offshore plant
industry. The latter has a strong emphasis on increasing local production of engineering, parts and equipment; it
forms part of Korea’s wider efforts to establish a “creative economy” based on technology. However, given its
relatively recent introduction, it is not yet clear how the offshore plan will practically impact on policy. Korea
currently offers R&D support that is focused on developing “nextgeneration” ships and provides funding for key
research organisations; it also supports less-specific “maritime development” R&D that may yield relevant results
for the industry. Ship financing is provided through two state-owned export credit agencies, both of which played
a key role in the restructuring and competitiveness plan through increasing lending and insurance for yards. In
addition, finance arrangements provided for the shipping industry are likely to have an impact on shipbuilders,
via increased demand for vessels. There is also some support for the marine equipment industry, which the
offshore plant development plan appears to reinforce, and support for human resources development. Looking
ahead, the financial difficulties of the industry appear to be the most immediate challenge. The increase in
government exposure to the industry, via ownership and export credit policies, increases the risk to the
government’s finances, should the industry’s performance worsen. The large size of key shipbuilding firms, and
their ownership links, also raises concerns about the employment effects of any possible restructuring and
potential domino effects through the industry and wider economy. Some restructuring and reorientation in the
industry appears necessary, but any government action will need to have an eye to managing the state’s exposure
to risk, as well as endeavouring to maintain a level playing field. The government’s plan in support of the offshore
plant industry envisages a strong push into highvalue, high-technology vessels and marine equipment, and
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supports the industry’s own efforts to build and maintain a strong competitive advantage in this sector. However,
the goals for localisation are ambitious and the government should be cautious not to disadvantage its shipbuilders
by unintentionally raising input costs. Similarly the government’s efforts to support technology development
need to complement those undertaken by industry and avoid crowding out private initiatives. Finally, like other
developed shipbuilding economies, continuing to attract skilled workers to the shipbuilding industry is a
challenge, as society ages and young workers have a wider range of industries to which they can apply their
talents. The industry currently draws on an increasing share of subcontracted workers, but while this strategy aids
flexibility, it may not aid efforts to build worker skills or boost the attractiveness of the industry. In sum, Korea’s
shipbuilding industry has been a success story, but the global economic crisis has dented its finances and it now
faces serious challenges to set itself back on a solid footing. The role of the government in the Korean industry
has changed significantly over the last 50 years, and the government commented that government support is not
now a critical engine for industry success. However, the events of the past 5 or so years have resulted in an
increase in government policy attention to the industry, as in other shipbuilding economies, and have highlighted
questions about optimal ways of dealing with struggling businesses that are relevant for all players in the industry.
1. Introduction to the study In 2012 the OECD’s Council Working Party on Shipbuilding (WP6) introduced a
peer review process, focused on support measures provided by governments to their shipbuilding sectors. Under
this process, economies participating in the WP6 will each undergo an in-depth study of their shipbuilding
industry and related government measures. Non-WP6 economies may also join the process and be the subject of
a WP6 peer review. To date, Japan and Portugal have been the subject of WP6 peer reviews (OECD, 2013a and
OECD, 2013b). The main goal of the peer review process is to strengthen the identification of government
policies, practices and measures affecting the shipbuilding sector and to support discussion of these within the
WP6. The WP6 already compiles an “inventory” of government support measures, which covers a range of
measures and is regularly updated and presented for discussion at WP6 meetings. However, the peer review
process aims to provide a deeper analysis of support measures at the country level, accompanied by contextual
detail of the industry, so as to enable a richer discussion of shipbuilding policy and its impact by the WP6. A key
element of the process is the “peer review” stage, where WP6 participants have the opportunity to actively debate
and discuss drafts of studies, with a view to promoting transparency and experience-sharing within the group.
This third WP6 peer review analyses the Korean shipbuilding industry and related government support policies.
It follows a similar format to that of the Japanese and Portuguese reviews, to aid comparison across WP6
economies.
The report is structured as follows:
 Section 2 provides a brief introduction to the Korean industry, in terms of its contribution to the economy;
 Section 3 looks at the structure of the industry and its facilities;
 Section 4 describes Korean government policies affecting the shipbuilding industry;
 Section 5 analyses the performance of the industry, drawing on a range of data. In the wake of the crisis, it
includes an investigation of the shipbuilding industry performance;
 Section 6 draws together the information and data provided, with a discussion of industry challenges and
responses;
 Section 7 proposes some questions for discussion by the WP6.
This report was prepared by Secretariat staff. The information in the report is drawn from public information
sources, statistical series available to the Secretariat, and the Korean government’s response to the generic peer
review questionnaire, prepared by the Korean Ministry of Trade, Industry and Energy (MOTIE) in collaboration
with the Korea Offshore and Shipbuilding Association (KOSHIPA). The report also benefited from discussions
held in Seoul between the Secretariat and staff from MOTIE and KOSHIPA, and a Secretariat visit to the Hyundai
Heavy Industries (HHI) shipyard in Ulsan, arranged by MOTIE and KOSHIPA. The Secretariat thanks Korea for
its co-operation. 2. An introduction to Korea’s shipbuilding industry Korea’s industrialisation in the post-World
War 2 period has created a sophisticated manufacturing base, of which shipbuilding has been an integral part.
Starting with labour-intensive light manufacturing sectors, Korea gradually moved up the value-added chain
towards more sophisticated products by assimilating technology from overseas and building up its domestic
research and technology (R&D) and scientific capabilities (OECD 2009a, pp. 58-60). In the mid-1970s, Korea
moved into heavy industries such as chemicals and shipbuilding, and established government research institutes,
including one for shipbuilding. Over time, shipbuilding has become one of Korea’s high-technology, innovative
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industries. According to KOSHIPA data provided by the Korean government, as of 2013 there were 80
shipbuilding companies in Korea, nine of which were large and 71 of which were small- and medium-sized
enterprises (SMEs).1 More than 100 shipbuilding SMEs operated in the industry in the early- to mid-2000s, but
their numbers gradually declined, in particular after the financial crisis. The concentration of the industry is a
notable feature of the Korean shipbuilding industry – the number of shipbuilding SMEs in Korea is relatively
small compared to Japan and Portugal. In part, this is a structural feature of the Korean economy more generally,
with chaebol (large C/WP6(2014)10/FINAL 7 business groups owned by a family, with control over subsidiaries
in various industries) and other large business groups accounting for a significant part of GDP compared to SMEs
(OECD 2009a, p. 62; OECD 2014a).

Contribution to output
The contribution of Korean shipbuilders to Korea’s gross domestic product (GDP) has trended upwards since
the late 1980s. Shipbuilding’s share of Korean value added reached just under 2% in 2009 (Figure 1), the latest
year for which data are available from the OECD’s STAN Database (Box 1). This was not far behind the post
and telecommunications sector (2% of value added) or the iron and steel industry (2.1% of value added). As a
cross-country comparison, in 2009 the weight of the shipbuilding industry in the Korean economy was around
ten times greater than that of the Japanese shipbuilding industry in the Japanese economy (see OECD 2013a).
More recent Bank of Korea figures provided by the Korean government suggest that the share of shipbuilding in
the Korean economy may have fallen slightly since 2009. Their data show shipbuilding’s contribution to GDP
was 1.9% in 2010 and 2011, falling to 1.8% in 2012.

Contribution to employment
OECD data on employment in the Korean shipbuilding industry suggest that the industry accounted for around
0.65% of Korea’s total employment in 2006 (Figure 3) – or just over 150 000 people (Figure 4). (In comparison,
in 2008 Japanese shipbuilding employed around 91 000 people, or 0.14% of total Japanese employment. In
Portugal the 2006 figures were 6 000 people and 0.12% of total employment.) After a steep fall from 1984 to
1988, when the share of shipbuilding in employment halved, the sector gradually increased its share of Korean
jobs. The period from 1995 to 2005 saw the sector maintain a relatively steady share of total employment, as the
upward trend in shipbuilding employment numbers tracked the general employment situation.

Contribution to exports
The shipbuilding industry in Korea makes a significant contribution to Korean exports. Korean exports of vessels
(on a completion date basis) have increased almost constantly in terms of both value and share of total Korean
exports (the latter is displayed in Figure 5). In 1994, vessels exported by Korea totalled USD 4.9 billion,
accounting for 5% of total Korean exports. Supported by a boom of newbuilding contracts before 2008, vessel
exports increased significantly to USD 42 billion in 2009 (11.7% of total exports). In comparison, in 1994
Japanese vessel exports totalled USD 11.7 billion (2.9% of Japanese exports), but by 2009 these had only grown
to USD 22 billion (although spiking to 3.8% of total exports). In the case of China, exports shot from USD 0.5
billion in 1994 to USD 28.4 billion in 2009 (and from 0.5% to 2.4% of total Chinese exports). After 2009, the
share of shipbuilding exports declined to about 9.7% of Korea’s total exports in 2011. This is explained by a
slower growth of shipbuilding exports, when compared to other sectors of the economy; shipbuilding exports in
value grew 27.4% between 2009 and 2011, while total Korean exports increased by 52.7% over the same period.
Contrary to other industries in Korea, shipbuilding exports did not decline during the financial crisis. While
shipbuilding exports grew at an annual rate of 53.8% in 2008 and 3.7% in 2009, total Korean exports grew by
13.6% in 2008 but declined 13.9% in 2009. The impact of the financial crisis on shipbuilding exports may only
be reflected in post-2011 figures because of the nature of shipbuilding activity, where there can be a significant
time difference between a new order and completion/delivery.
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The wider maritime cluster


The shipbuilding industry is part of a sophisticated marine cluster, with upstream and downstream links as well
as connections to other clusters including logistics and electronics. The shipbuilding value chain is composed of
many different activities from design to post-sales, and the high degree of modularity in the industry means that
production can be fragmented across different production units and, indeed, countries, in a global value chain
(OECD, 2013e). One important domestic link is with the steel industry. Korea is the world’s sixth largest producer
of steel, producing 66.1 million metric tonnes (mmt) in 2013 (or approximately 4% of global steel production)
and employing 159 970 people in 2012. Shipbuilding has been a major driver of steel consumption in Korea, and
in 2012 it accounted for 20.8% of the country’s total demand for steel, behind construction (28.1%) and
automobiles (25.1). Total shipments of steel to the shipbuilding sector stood at 5.6 mmt in 2012, and as much as
77.6% of Korean steel plate shipments went for shipbuilding (KOSA, 2013). The marine equipment industry is
another vital part of the shipbuilding supply chain, and also stands as an important industry in Korea in its own
right. Around 80% of Korea’s marine equipment output is produced by members of the Korea Marine Equipment
Association (KOMEA).2 These companies recorded production worth KRW 13.2 trillion in 2011 (approximately
USD 11.9 billion). Around 58% of this was in the engine and machinery segment, while outfittings accounted
for a further 27% and electrics/electronics accounted for 14%. Hulls accounted for most of the remainder.
According to the Korea International Trade Association (KITA), exports of marine equipment amounted to USD
2.4 billion in 2013, corresponding to 6.5% of Korea ship exports of USD 37.14 billion, representing both a
challenge and a potential for a key upstream industry. In particular, the figure reflects not only the weakness of
Korean marine equipment industry but also a vast opportunity to grow sizeably as the world's top 6 shipyards in
terms of new order receipt last year are located in Korea.

Marine equipment
According to the Korea Marine Equipment Association (KOMEA), there are around 1 000 marine equipment
firms in Korea. Korea's combined marine equipment workforce stood at about 63 600 persons in 2012. Engine &
machinery accounted for a large share with 20 674 workers, followed by electric & electronics (18 825), outfitting
(17 014) and hulls (7 040). 177 marine equipment companies were members of KOMEA, accounting for roughly
80% of Korean marine equipment sales as of the end of 2012 (KOMEA, 2013). Table 10 below provides the
segment breakdown of KOMEA's members as of February 2013, as provided by the Korean government.
In 2012, the sales volume of the 190 members of KOMEA reached KRW 12 trillion (USD 10.7 billion), a slight
decline from 2011. KOMEA members accounted for roughly 80% of total Korean marine equipment sales. The
engine & machinery segment accounted for the bulk of sales, recording KRW 6.8 trillion (USD 6.0 billion),
followed by outfitting with KRW 3.0 trillion (USD 2.7 billion), electric & electronics at KRW 1.6 trillion (USD
1.4 billion) and hulls at KRW 602 billion (USD 535 million) (KOMEA, 2013). The exports of KOMEA members
reached USD 2.25 billion in 2012 (Table 11 below gives some statistics for earlier years). China was the largest
export market for Korean marine equipment in 2012 at USD 760.1 million, followed by Japan (USD 272.2
million), the United States (USD 125.3 million), and Singapore (USD 138.1 million) (KOMEA, 2013). Engines
and machinery are the largest category of exports (see Table 12 below). Imports reached USD 1.55 billion in
2011, with a third coming from Japan (KOSHIPA, 2013a).
Some large shipbuilding companies also have dedicated marine equipment departments. In 2012, about 18% of
the workforce employed in large shipbuilding companies focused on the production of marine equipment.12 As
an example, in HHI the engine and machinery and electro-electric systems segments accounted for 11.2% of total
company’s sales. As discussed later (section 6), the extent to which large companies also produce marine
equipment may affect the scope for SMEs to act as equipment suppliers and may pose additional challenges for
SMEs attempting to integrate in the value chain. In line with the strategies of Korea’s major shipbuilders and the
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government (see next section), the marine equipment industry is focusing on the development of eco-friendly and
high-efficiency green ship equipment and offshore plant equipment. For its part, KOMEA signed a Memorandum
of Understanding (MOU) with the Ministry of Trade, Industry & Energy (MOTIE) and Korea's Offshore &
Shipbuilding Association (KOSHIPA), with the objective of supporting sustainable and inclusive growth of the
industry, the national economy and beyond. The tripartite MOU, reflects the new global paradigm for inclusive
and sustainable growth, and features creative connectivity and co-operation in four areas: technical cooperation,
manpower development, reinforcement of marine equipment capacity, fair trade and sharing of co-operation
benefits.

The performance of the Korean shipbuilding industry


This section of the report investigates the performance of the Korean shipbuilding industry, measured by a wide
range of indicators, and compares it to other major shipbuilding countries where possible. It looks particularly at
trends in shipbuilding outputs and market shares in terms of vessel completions, orders and the orderbook. The
section also discusses the export performance and labour productivity trends of the Korean shipbuilding industry.
Finally, it overviews the financial performance of the Korean shipbuilding industry in terms of profitability and
debt indicators. Figure 14 below provides an overview of key Korean production statistics between 1990 and
2013. Annual completions have been gradually increasing since 1990, with a few exceptions in 1993, 2000
(possibly due to the Asian crisis) and more recently in 2012. The consolidation of Korea as a major shipbuilding
country during the last decade is well reflected in new orders and the corresponding fast expansion of the
orderbook during the 2000s. The sharp reduction in orders (and consequently the orderbook) during the aftermath
of the recent financial crisis was just starting to be reflected in 2012 completions. The increase in new orders
during 2013, hints at early signs of recovery for the Korean shipbuilding industry.
The output of the Korean shipbuilding industry has increased considerably since 2000, even though its share of
the global shipbuilding market fell slightly during the same period. Korean completions (cargo and mobile
offshore vessels) hit a record high of around 36 million GT in 2011, an approximate tripling of year 2000 output
levels. However, since 2011 output has gradually declined, to 24.5 million GT in 2013, reflecting a sharp drop in
new contracts after the financial crisis. The Korean share of global shipbuilding completions has oscillated
between 30-40% since 2000, with the drop in the mid-2000s likely due to the significant growth of the Chinese
shipbuilding industry. It is notable that Korean output kept reasonable pace with the expansion of Chinese output,
while Japan’s output was relatively static. Since 2007, the Korean shipbuilding industry has consistently
accounted for more than 30% of global market share, measured by value (Figure 17). Although there was a
decrease in the combined shares of Japan and other countries from 50.4% in 2007 to 33.3% in 2013 mainly due
to the rise of China, Korea did not lose its share and has successfully maintained its share above that of China
(except in 2012). “Other” shipbuilding countries had the same share of the market by value in 2013 as in 2007.
From 2007 to 2013, the average value per vessel built in Korea increased by 55.9%, a larger increase than the
global average of 30.7%. In 2013, Korea’s average vessel value was USD 91.8 million, compared to USD 45.0
million for the global average. Korean average ship prices were also higher than most of its competitors (except
Germany and Italy). The three major shipbuilding economies – China, Japan and Korea – showed similar trends:
the values steadily increased until 2011, when they peaked, and then slightly decreased. Among these economies,
Korea’s increase during this period was the largest, while in Japan the average value in 2013 was lower than in
2007.
In the past 10 years, Korea has increased its market shares in most major cargo shiptypes and now has more than
50% of the global market for LNG tankers, container ships, LPG tankers, crude oil tankers and oil product tankers
(Figure 19). Regarding LNG tankers, Korea accounted for approximately 90% of the global output in 2013.
According to Clarkson’s Offshore Yard Monitor, in 2013, new building contracts and deliveries of Korean yards
in the offshore segment amounted to 32 units and 36 units, respectively.

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New orders and the orderbook


Reflecting the global boom and bust, Korean shipbuilders’ new orders increased gradually until 2007 and
plummeted in 2009, but by 2013 had recovered to about half of their previous peak . Korea’s share of new orders
has fluctuated between 25% and 40% of the global market, marking approximately 33% (16.6 million CGT) in
2013.
Korea had an orderbook of approximately 60 million GT at December 2013, accounting for a third of the global
orderbook (Table 15). Based on Korea’s peak shipbuilding output in 2011 of 36 million GT, this orderbook could
be considered to be equivalent to work for yards for around 20 months. The data in Table 15 suggest that Korea
focuses on building larger vessels than its competitors. The average size of vessels to be built in Korea appears
to be almost twice as large as those built in China and Japan (68 100 GT for Korea, 33 800 GT for China and 31
600 GT for Japan).
Although the Korean shipbuilding industry produces almost every type of ship, it has a particular focus on
container ships and LNG tankers, which account for 55.7% of the Korean total orderbook, measured by CGT. As
discussed earlier, Korea dominates the market segments for a number of different ship types such as LNG tankers,
container ships and LPG tankers. The orderbook statistics at December 2013 suggest that this may continue for
the coming few years .
However, while around 65% of the Korean orderbook consists of container ships, LNG tankers and crude oil
tankers, the composition of the Korean orderbook is still more balanced than that of China, where two shiptypes
(bulk carriers and containership) account for about 68%, as well as that of Japan, where bulk carriers alone
account for 69% of the orderbook .
Korea has already secured orders to be delivered in both 2014 and 2015 to a level equivalent to its 2013 outputs:
about 22.8 million GT in 2014 and 26.2 million GT in 2015 (around 93% and 108% of 2013 completions,
respectively).

Small and medium-sized shipbuilding companies


Due to data limitations, it is currently not possible to extend the analysis above to smaller shipbuilding companies.
However, a number of comments suggest that SMEs face an extremely challenging situation. The Korean
government’s response to the peer review questionnaire noted a number of shipyards have been closed over the
past 10 years. In addition, cancellations in smaller shipyards amounted to 5.1% of total CGT in 2009 and 1.9%
in 2010, compared to 3% and 0.8% respectively for larger shipyards (Lee, 2013). Small firms may also have more
difficulties in meeting the credit rating conditions required to obtain the government Refund Guarantee, which
adds to financial challenges that may lead to a low number of new orders for SMEs. Korean Shipbuilding Industry
and Restructuring and Competitiveness Reinforcement Plan approved in 2009 gives particular emphasis to SMEs
facing temporary cash-flow difficulties due to special reasons, through its Financing Support for Ship Production
assistance package. Additionally, the plan to develop the offshore plant industry, also foresees SMEs with
recovery prospects to be eligible for ship financing such as the Refund Guarantee.

Financial performance and government exposure


The recent global shipbuilding crisis has clearly had a severe impact on Korean shipbuilding companies’ finances.
Profitability levels are low and debt is mounting to unsustainable levels in some firms. Larger companies have
been surviving thus far, but some shipbuilding companies are now in the hands of (bank) creditors, and others
face concerns about their ability to repay debt and avoid bankruptcy. The difficult financial situation has led to
an increase in government involvement in the shipbuilding industry. To start with, government-related agencies
have emerged with a boosted ownership role in the industry — namely in large shipbuilding companies such as
DSME and STX. Furthermore, recent unconfirmed information from the media suggests that shipbuilding
companies in Korea have fallen under tight supervision from the Financial Supervisory Service (Business Korea,
2014). According to the same source, the regulators have been prompted by companies’ severe financial
difficulties to act and stabilise the financial market. In addition to Hanjin, STX and Sundong Shipbuilding
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(already under supervision), Daesung, Hyundai and SPP have been added to a list of main debtor companies.
Finally, as well as its ownership and oversight role, the government has also become more exposed to risk via
the increased volume of export guarantees granted to the shipbuilding industry, as discussed in Section The
increased level of government involvement and exposure makes it essential to ensure that the government both
maintains a level playing field and manages its risk. The Korean government commented that the increased
ownership role was based on market transactions and would ideally be temporary. In the meantime, as with all
cases of government ownership, it is important to keep an eye to the principles of competitive neutrality that
ensure a level playing field between public and private entities. With regards to support measures such as
guarantee schemes, it is important to understand the risk-sharing arrangements so that the government’s exposure
is transparent and can be managed to avoid unduly large risk to the government’s finances. An interesting issue
is whether the size of Korea’s shipbuilding companies adds to the risks, both for the government but also for the
firms themselves. Complex ownership links between large companies and affiliates can further aggravate and
spread the effects of financial difficulties, which in the case of Korea with its chaebols, is a notable systemic
concern. The size of some shipbuilding companies and the financial links they feature could mean that any severe
financial difficulties could have serious direct consequences in terms of employment as well as indirect costs
related to the robustness of the financial sector. Indeed, the Korean government expressed concerns about the
significant costs in terms of (localised) job losses that could result from failure of a large shipbuilding company.
However, signalling that large shipbuilding companies have a “safety net” may result in moral hazard issues and
disincentivise companies to make needed structural changes. In dealing with the ongoing aftermath of the crisis,
and any further downturns in the industry, the government will need to consider carefully the potential costs and
benefits of public intervention.

SMEs and localisation


The situation of shipbuilding SMEs is particularly challenging, but not without opportunities. These firms have
been experiencing a high number of cancellations and are under severe financial pressure. With a smaller scope
for financial manoeuvre, some SMEs have been forced to close or sell yards. Nevertheless, a number of smaller
companies appear to be productive and efficient. Even though shipbuilding SMEs in Korea account for a small
share of employment and output, ensuring that high-performing SMEs can contribute to value creation in the
shipbuilding industry or the wider maritime cluster could yield valuable employment and diversification benefits.
In the plan for restructuring the shipbuilding industry, the government gives particular attention to SMEs, for
example by providing financial support for productive yards under difficult financial situation for special reasons.
Additionally, the government foresees that SMEs could play a bigger role as suppliers in the value chain of large
shipbuilding companies (e.g. providing marine equipment). This dovetails with the government’s expressed aim
to increase “localisation”, i.e. domestic production of certain maritime equipment, notably in the offshore
industry. The government commented on the important contribution of effective shipbuilding clusters, with a
stable supply of parts and materials (steel plates, engines, auxiliary parts, components) within clusters that have
been formed along the coastline of Korea. The proximity of relevant parts, materials and equipment enterprises,
as well as colleges, has the advantage of facilitating effective co-operation among shipyards, equipment
companies, R&D providers and other stakeholders. However, expanding the activity of shipbuilding and marine
equipment SMEs may be challenging due to the structural set-up of the industry. The high degree of concentration
in the Korean shipbuilding industry may result in difficulties for SMEs to find their market niche and/or to act as
suppliers for larger companies — particularly when large shipbuilding companies also have their own dedicated
departments for marine equipment. And some parts of the shipbuilding and marine equipment industry are clearly
most efficient when operating at scale. This suggests that government efforts to support SMEs should perhaps
focus on reducing any competitive barriers to SME’s activities, guarding realistic expectations about what might
be achieved by government interventions in the Korean market context. Furthermore, efforts to increase domestic
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inputs should not hamper the shipbuilding industry from sourcing from the most cost competitive suppliers. As
in other tradable industries, firms need to weigh up the supply chain risks, exchange rate risks, and cost-quality
trade-offs of various supply options, be they domestic or foreign. Shifting from foreign to domestic supply could
entail transition costs, and it is not clear to what extent eventual technological spillovers might be accrued by
encouraging domestic supply options.

Present day shipbuilding


Currently, South Korea is the world's largest shipbuilding country with a global market share of 41% in Q1 2015.
South Korea leads in the production of large vessels such as cruise liners, super tankers, LNG carriers, drill ships,
and large container ships. In the 3rd quarter of 2011, South Korea won all 18 orders for LNG carriers, 3 out of 5
drill ships and 5 out of 7 large container ships. South Korea's shipyards are highly efficient, with the world's
largest shipyard in Ulsan operated by Hyundai Heavy Industries slipping a newly built, $80 million vessel into
the water every four working days. South Korea's "big three" shipbuilders, Hyundai Heavy Industries, Samsung
Heavy Industries, and Daewoo Shipbuilding & Marine Engineering, dominate global shipbuilding, with STX
Shipbuilding, Hyundai Samho Heavy Industries, Hanjin Heavy Industries, and Sungdong Shipbuilding & Marine
Engineering also ranking among the top ten shipbuilders in the world. In 2007, STX Shipbuilding further
strengthened South Korea's leading position in the industry by acquiring Aker Yards, the largest shipbuilding
group in Europe. (The former Aker Yards was renamed STX Europe in 2008). In the first half of 2011, South
Korean shipbuilders won new orders to build 25 LNGcarriers, out of the total 29 orders placed worldwide during
the period.
Japan had been the dominant ship building country from the 1960s through to the end of 1990s but gradually lost
its competitive advantage to the emerging industry in South Korea which had the advantages of much cheaper
wages, strong government backing and a cheaper currency. South Korean production overtook Japan's in 2003
and Japanese market share has since fallen sharply.
China is an emerging low-cost, high-volume shipbuilder that briefly overtook South Korea during the 2008-2010
global financial crisis as they won new orders on medium and small-sized container ships. However, Chinese
shipbuilders suffered a severe slump recently due to the flagship bulk ship market deteriorating in 2015. Analysts
say that Korea and Japan were able to perform relatively better than China, given the two nations` high-
performance ship technology than the latter.
The market share of European ship builders began to decline in the 1960s as they lost work to the Japanese in the
same way as Japanese builders have lost work to South Koreans more recently; Europe's production is now a
tenth of South Korea's and is primarily military, although cruise liners and some cargo ships are still built in Italy,
Finland, France, Germany and Denmark. The largest shares of the European shipbuilding market belong to
Germany, Italy, Norway, the Netherlands and Spain, which accounted in 2010 for over 70% of total deliveries
by the yards. This activity accounted in 2010 for 1.5% of European GDP. Over the four years from 2007, the
total number of employees in the European shipbuilding industry declined from 150,000 to 115,000. The output
of the United States also underwent a similar change.

Hyundai Heavy Industries Ulsan Shipyard, South Korea


Hyundai Heavy Industries (HHI) is one of the biggest ship construction companies in the world. Its ship
manufacturing facility in Ulsan, a South Korean city located on the south-eastern tip of the Korean Peninsula, is
the largest shipyard in the world.
The shipyard extends across two and a half miles along the coast of Mipo Bay in Ulsan and covers an area of
1,780 acres. Due to its strategic location, the shipyard can be easily accessed from and to the open sea.

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Construction on the Ulsan shipyard commenced in 1972 and it was commissioned in 1974. Meanwhile, HHI also
christened two very-large crude carriers (VLCC), each of 260,000DWT. Construction of the ships as well as the
shipyard was carried out simultaneously.

HHI commenced ship construction at its Ulsan shipyard in 1972 with two VLCCs. A christening ceremony to
mark the completion of the first two VLCCs was held in June 1974. Ten years later, Ulsan shipyard delivered its
first two VLCCs and achieved ten million DWT in aggregate ship production.
The shipyard reached a 20 million DWT production milestone in 1988 and 50 million DWT in 1997. It achieved
an aggregate production mark of 100 million DWT in 2005.
From 1972 to 2013, HHI has delivered 2,981 vessels to 268 ship-owners in 48 countries. Today, it commands
around 16% of the world ship manufacturing market.
In 2011, a total of 82 vessels were built in the shipyard with an aggregate of 10.1 million DWT. HHI surpassed
the 100m gross tonnage (GT) in ship deliveries in 2012. It received an order to construct the world's biggest
containership of 19,000TEU in 2013.
Different types of vessels manufactured in Ulsan shipyard include bulk carriers, container ships, tankers, VLCC,
product carriers, multipurpose cargo ships, ore-bulk-oil carriers, Ropax, pure car carriers, LPG carriers, RO-RO
ships, chemical tankers, offshore rigs / barge and LNG carriers.

Naval ships, special-purpose vessels and HHI's SNSD


Ulsan shipyard also builds naval ships and special-purpose vessels for the Republic of Korean Navy. The shipyard
is equipped with advanced technologies to design and fabricate modern submarines, naval ships and special-
purpose vessels of various hull forms.
This work is overseen by HHI's Special and Naval Shipbuilding Division (SNSD), a government accredited
national defence industrial shipbuilder and engineering consultant for the South Korean Navy. South Korea's first
indigenous frigate, Ulsan-Class, was built in the Ulsan shipyard in 1980.
Shipbuilding facilities at South Korea's Ulsan shipyard
Workshops and facilities within the shipyard are put up in such a way that the maximum efficiency of shipyard
operations can be maintained. Out of the total area of 1,780 acres of the shipyard, the workshops cover
approximately 395 acres.
Ulsan shipyard has ten large-scale dry docks with nine Goliath cranes. This allows HHI to manufacture any type
of ship of any size.
Dry Dock 1, which measures 390m x 80m and is equipped with two Goliath cranes, is used for constructing LNG
carriers. HHI also built the world's first T-shaped dry-dock in 2009 creating additional space for Dock 1
measuring 165m long, 47m wide and 12.7m high. Dry Dock 2 is 12.7m deep and measures 500m in length and
80m in breadth. It is equipped with two jib cranes.
Dry Dock 3, measuring 672m in length and 92m in breadth, is the largest dock of the Ulsan shipyard. It is capable
of undertaking simultaneous construction of a variety of ships and is provided with two Goliath cranes. Vessels
of up to one million DWT in capacity can be constructed at this site.
Dry docks 4 and 5 are comparatively smaller in size and can be used to construct ships of up to 150,000 DWT
and 70,000 DWT respectively.
Dry docks 6 and 7 are specially equipped for the construction of naval ships and special-purpose vessels. Dry
docks 8 and 9 were completed in 1996 and are currently allocated for building VLCCs.
HHI has an H-Dock, again the world's first dry dock for building offshore vessels. The H-dock measures 490m
long, 115m wide and 13.5m high. The deep dock has a capacity of 1m DWT.
Advanced facilities offered by Hyundai Heavy Industries' shipyard
HHI's shipyard is outfitted with cutting-edge facilities and the latest equipment, ranging from fully machine-
driven steel-cutting lines to an eco-friendly painting shop.
Other advanced facilities include a metal works factory, a forge, machine shops, a crankshaft shop and offline
welding robots.
HHI also developed an automatic painting spray head for painting the bottom of ships in September 2014.

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With a strong technology base, South Korea has always strived to develop and build its own military ships,
submarines and fast boats. The development and modernisation of South Korean defence capability got a kick-
start during the 1970s with the formulation of the eight-year National Defense Plan, aimed at making the country
selfreliant in defence capability.
Over th e past four decades, South Korea has demonstrated incredible growth and global integration to become a
hightech industrialised economy. In the 1960s, GDP per capita was comparable with levels in the poorer countries
of Africa and Asia. In 2004, South Korea joined the trillion-dollar club of world economies and is currently the
world’s 12th largest economy. Korea’s export focused economy was hit hard by the 2008 global economic
downturn, but quickly rebounded in subsequent years, reaching 6.3 per cent growth in 2010. The US-South Korea
Free Trade Agreement was ratified by both governments in 2011 and went into effect in March 2012. On the
longterm basis, South Korea has been able to transform itself from one of the world’s poorest nations into one of
the world’s richest nations. Its GDP (purchasing power parity) is $1.64 trillion (2012 est.) and is 13th in the world.
Its amazing economic growth in a short period has been dubbed “the Miracle on the Han River“. Its main
industries are electronics, telecommunications, automobile production, chemicals, steel and shipbuilding.
Shipbuilding Industry
In 2003, South Korea became the world’s leading shipbuilders by going ahead of Japan in shipbuilding volume,
order backlogs and new orders, mainly for merchant ships including oil tankers. China has also developed its
shipbuilding industry, outpacing Japan and giving tough competition to South Korea. According to one report, it
became the leading shipbuilder in 2011 when it accounted for 48.2 per cent of a total of 28.11 million
compensated gross tonnes (CGTs) worth of deals globally placed, compared with a 31.2 per cent in 2010. South
Korea’s shipbuilding sector continues to be the industry leader.
Military Shipbuilding Capability
With a strong technology base, South Korea has always strived to develop and build its own military ships,
submarines and fast boats. The development and modernisation of South Korean defence capability got a kick-
start during the 1970s with the formulation of the Eightyear National Defense Plan, aimed at making the country
self-reliant in defence capability by using its domestic technology and industrial resources. The result was the
building of Ulsan-class frigates and the Pohang-class corvettes which are considered as the mainstay of ROKN’s
fleet in coastal operations. Since then South Korea has not looked back and has indigenously constructed a
majority of its naval vessels. There are many shipbuilding companies involved in the building of naval vessels of
various types and sizes including auxiliaries, the salient details of which are as follows:
Hyundai Heavy Industries Co. Ltd (HHI)
Hyundai Shipyard is located on the southeastern tip of the Korean peninsula, thus it has easy access to the open
sea. Coupled with this its mild weather and dry climate with little precipitation throughout the year, provide an
ideal geographic environment for shipbuilding. Along with its location and spirit of enterprise, HHI has
positioned itself as one of the world’s leading shipbuilders since commencement of its shipyard operations in
1973. It has build a variety of modern, sophisticated naval and auxiliary service vessels since 1975, when Korea’s
Ministry of National Defense nominated it as the designer and builder of the first indigenous Korean frigate Ulsan
Class. HHI’s Special and Naval Shipbuilding Division (SNSD) was entrusted with this special task, having
specialised manpower and streamlined modern facilities. As a licensed National Defense Industrial Shipbuilding
Company and engineering consultant, HHI’s SNSD has the advanced technology to design and build modern,
reliable naval ships and auxiliary service vessels of various proven and advanced hull forms. HHI has expertise
in building a large variety of naval requirements, ranging from submarines, destroyers, frigates, corvettes, inshore
patrol vessels, fast attack craft to high and medium speed marine diesel engines. The noteworthy achievements
are HDD-10000 aegis destroyer, HDD-5000 stealth destroyer, 1800-tonne class AIP submarine, HDF-2000H
frigate, HDC-1200 corvette and offshore/inshore patrol vessels, HDP-600 patrol vessel, HDS-500 fast attack craft
and various types of logistic support ships.
Daewoo Shipbuilding & Marine Engineering Co. Ltd
Daewoo Shipbuilding & Marine Engineering (DSME) has made a remarkable impact on the global market since
its foundation in 1973. DSME has expertise in building submarines, destroyers, frigates, corvettes, offshore patrol
vessels (OPVs), salvage and rescue vessels, fast patrol boats and submarine rescue ships. The noteworthy
examples are DWKSS-I/II submarines, DW10000D/5500D destroyer, DW 1200C corvette, DW 1800 patrol
vessel, DW4000R submarine rescue ship, etc.

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Hanjin Heavy Industries & Construction Co. Ltd (HHIC)


Beginning in 1972, HHIC has built highspeed patrol boats, frigates, corvettes, landing ship tanks, oceanographic
vessels, salvage ships, midget submarines, multipurpose logistic supply ships and hovercrafts and also exported
them. The noteworthy examples are the 19,000-tonne assault landing ship, fast frigate class, patrol corvette class,
patrol killer guided missile, various types of OPVs, etc.
Kangnam Corporation (KNC)
KNC has been at the top of the leading Korean glass-reinforced plastic (GRP) hull shipbuilders since
commencement of its shipyard operations in 1968. It has built all types of GRP hull naval ships and special-
purpose vessels and has successfully built and delivered minesweeping hunters (MSHs), minehunting crafts
(MHCs), and various high-speed patrol boats to the Korean Navy. The noteworthy examples are minesweeping
and hunting craft (KMSH)1, KMHC 1,500 tonne class patrol Craft1, etc.
STX Offshore & Shipbuilding Co. Ltd
Based on its experience of having built more than 700 ships in the past 40 years, STX Offshore & Shipbuilding
ranks number one among the world’s major shipyards and has significantly contributed to making South Korea
the leader in the world’s shipbuilding industry. The construction of the Dalian Shipyard in China will be added
to its existing facilities in Jinhae and Busan. STX took a leap forward to become the world’s largest shipbuilding
company through its acquisition of STX Europe (formerly Aker Yards). STX Offshore & Shipbuilding acquired
authorisation to become a member of the national defence industry in September 2007. STX Offshore &
Shipbuilding plans to expand its territory in the national defence industry by constructing various kinds of ships,
such as battleships, offshore patrol vessels and special-purpose ships. The noteworthy examples are guided
missile patrol boat killer1, OPV1, training ship1, etc.
STX Engine Co. Ltd
Diesal Engines: STX engine’s military diesel engine was designed with focus on small size, lightness and high
power output. Through technology cooperation with MTU of Germany, STX Engine is producing engines for
tanks, destroyers and coast guard ships.
Communication-Equipment Technology: STX engine possesses essential proprietary technologies related to
underwater acoustic, radar, tactical communication and battle system.
Sebang Hi-Tech
Sebang Hi-Tech Co. Ltd, which was established in 1952, is the sole defence manufacturer in South Korea
specialising in the provision of propulsion energy sources for underwater military vehicles and weapon systems.
Some examples are the 209 class submarine battery K45PS13K and K30PS15. BA738 battery is used for light-
weight torpedoes.
DACC CO. LTD
The company’s area of expertise is composite launching tube to contain a guided anti-ship missile.
Indian Perspective
It has been reported that India has decided to award a $1.2 billion contract to Kangnam Corporation for eight
mine-countermeasure (MCM) vessels. The tender was first issued in 2008 but has taken five years to fructify.
According to the deal, the first two minesweepers will be constructed at Pusan, South Korea, and the remaining
six will be built at the Goa Shipyard through transfer of technology. The Indian Navy wanted to modernise its
MCM fleet for more than a decade as it currently operates 12 ageing Pondicherry and Karwa-class minesweepers.
Their projected requirement is for 24 MCM ships.
Indian shipbuilding also has a lot to emulate from South Korea for developing their indigenous shipbuilding
industry and becoming a world leader in a very short time.
La Corée du Sud fait partie des nations leader mondiale de l’économie maritime. Elle a su se spécialiser dans le
domaine de la construction maritime depuis une vingtaine d’années. Cela explique l’investissement des «
chaebols » comme Samsung ou Hyundai dans un secteur qui est sujet à une concurrence de plus en plus rude avec
les autres pays de l’Asie de l’Est.
Un pan industriel coréen qui s’est imposé comme leader mondial.
La géographie de la péninsule coréenne lui impose une nécessaire ouverture sur la mer. Ne disposant que de peu
de ressources naturelles, le commerce extérieur relève d'une importance vitale. Le secteur naval, et en particulier
la construction navale, est un des piliers de cette économie. Ce territoire se positionne sur tous les pans de
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l’activité maritime : ports, transport et construction. La quatrième économie d’Asie est devenue le leader mondial
de la construction de navire en 1998 du fait de prix bradés par rapport à l’augmentation du carnet de commandes.
Elle possède cinq des principaux constructeurs dont le leader mondial : Hyundai Heavy Industries. A titre
d’exemple, Daewoo a construit le porte conteneur Jules Verne de la CMA-CGM, armateur français, inauguré en
grande pompe à Marseille par le président François Hollande en juin 2013. Les treize constructeurs coréens se
concentrent tous au sud du pays, au plus proche de l’activité maritime.
Le rapport de l’année 2014 de la conférence des Nations unies sur le commerce et le développementmontre que
93% des navires sont construits par la Chine, la Corée du Sud et le Japon. La Chine construit essentiellement des
navires de transport de vrac, la Corée réalisant essentiellement des navires à plus forte valeur technologique
ajoutée comme des portes conteneurs géants, des tankers, ainsi que des navires offshore : navires de forage,
plateformes.
Prenant son essor dans les années 80 et 90, la Corée a rattrapé son retard sur son voisin nippon, en atteignant son
niveau de livraison. A partir de 2006, suite à l’augmentation des commandes mondiales, les chantiers coréens
dépassent les japonais. Mais c’est aussi à partir de ce moment là que l’on a vu le développement des chantiers
navals chinois. L’accroissement des commandes à pousser les armateurs à rechercher les chantiers les plus
compétitifs.
Une concurrence exacerbée dans un secteur en mutation
C’est dans ce contexte qu’est mise à mal cette domination sectorielle. De nouveaux acteurs sont apparus et
rivalisent de plus en plus la primauté coréenne. Face à une concurrence régionale, la Corée du Sud se place face
au Japon et plus récemment face à la Chine. Les conséquences de la crise de 2008 dans le secteur maritime ont
particulièrement touché ce secteur hyper-mondialisé et changé la position des acteurs. Le leader mondial,
Hyundai Heavy Industries, a connu une perte record de profit entre janvier et juin 2013. Le renvoi de 81 de ses
260 dirigeants en octobre 2014 a constitué un geste fort et est une illustration du malaise de l’entreprise. Entre
janvier et septembre 2014, les constructeurs chinois ont remporté 45% des commandes mondiales en volume
contre 20,7% pour les Coréens, selon l'agence londonienne Clarkson. Cependant, les pouvoirs coréens ont
multipliés les plans d’aide en soutien au secteur alors en crise.
La Chine a du développer des chantiers navals afin de soutenir son commerce international et notamment
l’exportation du « made in China ».Les Coréens ont subi les contrecoups des annulations de navires, alors que
l’activité chinoise a pu profiter d’un faible coût de production.
Le Japon a su également tirer son épingle du jeu. Par une politique monétaire de baisse du yen fin 2012, les
chantiers nippons ont vu leurs commandes bondir de 75,9 % en 2013. Face à un won très fort, ils ont réussi à
capter des commandes, en délocalisant également la construction vers des pays asiatiques encore moins cher que
la Chine, comme les Philippines.
Ainsi, la réorientation des chantiers navals coréens passent par la construction de bâtiments à hautes valeurs
ajoutées. Les coréens gardent une longueur d’avance sur ces segments: les méthaniers, ou encore les plateformes
de forage en haute mer dont la demande ne cesse d’augmenter. Ces types de navires nécessitent un savoir faire
technologique qui permettent aux chantiers coréens de décrocher de lucratifs contrats. A contrario,
l’interventionnisme étatique chinois en matière de commerce extérieure a poussé à une multiplication très rapide
des chantiers navals. Les constructeurs de petite et moyenne taille risquent la disparition à long terme dans un
contexte maritime de surcapacité et de forte baisse des ordres d’achat. Cependant, l’environnement mondial
dégradé joue contre la Corée. Avec un ralentissement économique global, une monnaie, le won, qui reste très
élevé par rapport à son concurrent chinois, le secteur naval du pays au matin calme doit se réorganiser.
Face à la Chine, la réorientation des chantiers coréens se porte vers la construction de bâtiments à hautes valeurs.
Une embellie apparait pour les chantiers coréens qui ont pris conscience de cette nécessité. Dernier exemple en
date : la livraison du plus grand porte conteneur du monde le 20 novembre. Cependant, par une spécialisation sur
certains types de construction navale, la Corée pourrait alors constituer une menace pour les parts de marché
européennes qui étaient jusqu’alors préservées. Ainsi la crise de 2008 a fait apparaître une nouvelle répartition
des acteurs les plus puissants, les entreprises, mais surtout les pays.

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South Korean Shipyard Hyundai Heavy Industries


A short overview of the South Korean shipyard Hyundai Heavy Industries (HHI) is presented, with particular
emphasis on R&D activities of the company. The paper is based on available technical data [1, 2] and author’s
personal impressions obtained during the technical visit to the shipyard. In September 2011 the author attended
the 2nd Annual MarineTech Summit in Busan, South Korea, where he presented the paper “Investigation of
Linear Springing of Large Container Ships” (authors: I. Senjanović, Š. Malenica, N. Vladimir). In addition to the
attendance of the conference, within the scientifi c cooperation between the HHI and Faculty of Mechanical
Engineering and Naval Architecture (FAMENA), Zagreb [2], the author’s technical visit to the HHI was arranged.
The world’s largest shipyard Hyundai Heavy Industries is located in Ulsan, in the south-east of South Korea.
Together with the world’s largest assembly plant operated by Hyundai Motor and the world’s largest oil refi nery
owned by SK Energy it forms the heart of the Ulsan Industrial District. The Hyundai’s shipyard stretches over
four kilometres along the coast of Mipo Bay in Ulsan. HHI was established in 1947 by Chung Ju-yung, as a
construction company. Despite the fact that Hyundai’s shipyard was still in the planning stages and the company
had no experience, capital and shipbuilding technology, in the early 1970s it received orders for two 260000
DWT crude oil tankers from Greek shipowner George Livanos. In March 1972, ground was broken on an empty
stretch of beach in Ulsan to construct what would become the world’s largest shipyard. The ships and the shipyard
were built simultaneously and this was a historical fi rst step for Hyundai Heavy Industries. The HHI separated
from the Hyundai Group in the early 2002, and in its current independent establishment Hyundai Samho Heavy
Industries and Hyundai Mipo Dockyards are included. Since the above mentioned beginning, the HHI has
diversifi ed its business activities from shipbuilding into other heavy industrial fi elds and it has developed into
an integrated company with seven divisions: Shipbuilding, Offshore & Engineering, Industrial Plant &
Engineering, Engine & Machinery, Electro Electric Systems, Green Energy and Construction Equipment, and
has about 25000 employees in total. The Shipbuilding Division currently leads the shipbuilding industry with a
15% share of the global market, and it is capable to build all types of ships. It has nine large-scale dry docks with
seven huge “Goliath Cranes”. Since the 1970s this division has garnered many awards and set many records
within the shipbuilding industry. The Shipbuilding Division reached the milestone of 20 million DWT in 1988,
30 million DWT in 1991, 40 million DWT in 1994, 50 million DWT in 1997, and 100 million DWT in 2005.
Hyundai Heavy has delivered about 1600 ships to more than 250 ship-owners in about 50 countries. Main
products of this division are the following: VLCCs, tankers, product carriers, chemical tankers, (ultra large)
container ships, bulk carriers, OBO carriers, Ro-Pax ships, Ro-Ro ships, high-speed ferries, car carriers, LNG
carriers, LPG carriers, submarines, destroyers, frigates etc. The founding of the Offshore & Engineering Division
began in 1991. It was strongly motivated by the Saudi Arabian order for 89 jackets and deck structures for the
Open Sea Tanker Terminal for the Jubail Industrial Harbour Projects. Since then this division has completed
about 150 projects, 3 million tons of offshore facilities and 5100 kilometres of subsea pipelines. The main
products of the Offshore & Engineering Division are fl oating units, fi xed platforms, pipelines & subsea facilities
and offshore installations. The Engine & Machinery Division is the diesel engine builder with approximately
35% global market share and it plays an important role in the shipbuilding industry. This division reached the
production milestone of 100 million bhp in low-speed engines in 2010. It received more than 5800 unit orders
for Korea’s fi rst independently designed in-house diesel and gas engine, the Hyundai HiMSEN, which represents
a remarkable growth in the medium-speed engine market. Industrial pumps and robot systems are strategic items
in the division’s plan for long-term growth. Other division’s key products are 2-stroke marine engines, 4-stroke
marine engines, crankshafts, propellers, marine propulsion shafts, power plants, packaged power stations, cargo
oil pumps and side thrusters. The role of the R&D Division of the company is related to creating new products
by focusing on the development of market-driven technologies. The division consists of six institutes as presented
in the table, and includes two overseas research centres in China and Hungary. HMRI currently possesses capital
facilities and support equipment for hydrodynamic research on ships and offshore structures. HMRI joined the
International Towing Tank Conference (ITTC) in 1986. The other aspects of research covered by the Institute
include offshore engineering, structural research, noise & vibration reduction, model manufacturing as well as
measuring. HPDRI is a newly organized institute with a special mission to improve product development
technologies. The main tasks are to enhance the performance and reliability of existing products and to develop
next generation models and new products. Products include engines, construction equipment, fl uid machinery,
and wind turbines. HIRI played a vital role in developing production technologies such as welding, casting,
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forging, protective coatings, and automatic manufacturing facilities. HIRI has also developed engineering
technologies for energy and environmental control systems used in oil & gas processing plants, power generation
plants, IGCC plants, desalination plants, engine emission protection systems, ballast water treatment systems etc.
With a strong emphasis on mechanical and electrical engineering, HEMRI is engaged in a variety of R&D
activities addressing fundamental, applied & theoretical, and practical technology. Activities of the TDI are
related to creation of corporate cultural environment, through visual communication design, industrial design,
and brand identity design. Recently established TMI is in charge of planning mid to long-term R&D strategy,
creating and exploring new businesses, securing and dealing with intellectual property, building global R&D
network, knowledge management, etc. Although it is impossible to predict the future of the shipyard in the
doubtful conditions which will probably continue to be present in the fi eld of global sea transportation and
exploitation, one can say that the position not only of the HHI but of the whole Korean shipbuilding industry will
be surely kept in the near future. Due to different economic, technical and technological as well as social reasons
it is not possible to compare Croatian and Korean shipbuilding industry directly, but in the author’s opinion, the
close link between research and industry, as in case of the HHI, should be one of the baselines in the future of
Croatian shipyards. Further on, the just-in-time production strategy which is present in the HHI reminds that the
whole production system besides research institutions and ultimately shipyards also includes engine factories,
equipment manu facturers, other joint industries etc. Finally, it should be mentioned that the author’s visit to the
HHI was supported by the EU FP7 Project TULCS (Tools for Ultra Large Container Ships) [3]. The author
expresses his gratitude to ByungKi Choi, PhD, Principal Research Engineer, Maritime Research Institute/R&D
Division, as well as to Professor Emeritus Ivo Senjanović, University of Zagreb, FA MENA for making possible
his technical visit to the shipyard. Also, the author is grateful to Croatian naval architects Mr. Jurica Bašić, Mr.
Ivan Guina and Mr. Ivica Pamuković, who work as inspectors in Korean shipyards, for the time spent together
while exploring the beauties of Busan.

Hyundai Heavy Industries reportedly exiting offshore plant construction


In a huge change of direction for the world’s largest shipbuilder, local media in South Korea is reporting under
pressure Hyundai Heavy Industries (HHI) has decided to ditch offshore plant construction.
“Stick to your knitting,” the current darling of the tanker trades, Paddy Rodgers, ceo of Euronav, regularly
reminds his peers. Going back to basics is something HHI also looks keen to do too.
HHI, which has just been forced to enter restructuring largely on the back of an ill-timed massive expansion into
the offshore construction business, is now downsizing its offshore plant department with a view to exiting the
sector all together, multiple Korean media outlets are reporting. However, HHI has today claimed, in a release,
that it does not intend to entirely exit the sector.
HHI, along with other leading Korean yards, Samsung Heavy Industries and Daewoo Shipbuilding & Marine
Engineering (DSME) have all been badly burny from the falling oil price and all have entered restructuring.

La construction navale
VUE D'ENSEMBLE
En 2001, le Japon était le plus important constructeur naval au monde avec 33% de parts de marché en
nouvelles commandes, la Corée arrivait en deuxième place avec 30% et la Chine comptabilisait 11%. L'UE est
passée de 24% en 1998 à 13%. En 2002, la Corée occupait environ 45% du marché mondial après avoir triplé
sa capacité de construction navale dans les années 1990. Le plus grand groupe européen de construction navale
est le groupe norvégien Aker Yards, numéro 4 mondial avec plus de 10 chantiers navals. L'industrie en Europe
couvre le segment de la technologie de pointe de la production mondiale (porte-conteneurs évolués, ferries et
ro-ro; bateaux-citernes multi-usage et navette, plate-forme offshore et installations FPSO, transporteurs de gaz
et de produits chimiques, bateau de pêche de haute qualité et construction de petits bateaux spécialisés).

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La situation économique mondiale a engendré une réduction brutale de la demande; en 2001, seul le segment
des transporteurs de gaz naturel liquéfié (GNL) a connu une augmentation dans le volume absolu de
commandes. Toutefois, il ne s'agit que d'un créneau du marché qui ne représente que 8% des commandes
mondiales en tonnes brutes compensées. Les chantiers coréens ont exécuté 79% des nouvelles commandes de
transporteurs GNL en 2001, sans détenir de brevet sur les technologies clés requises. Daewoo Shipbuilding,
numéro 2 mondial, est le premier constructeur de transporteurs GNL avec la moitié des commandes de
tonnage GNL en 2000. Avec les semi-conducteurs et l'acier, la construction navale a été le principal moteur
de la croissance économique coréenne en 2001.
Dans les années 1990, les chantiers navals sud-coréens ont triplé leur capacité de construction navale tout en
ignorant les niveaux de demande pour parvenir à prendre la tête du marché mondial, ce qui a été fait en 1999.
Ceci a conduit à une surcapacité et à des prix destructeurs pour le marché international de la construction
navale. Même la crise économique et financière en Corée du Sud qui a débuté en 1997 n'a pas permis de
modifier le cours des choses bien que le pays ait reçu un soutien financier international considérable à
condition d'introduire les principes d'économie de marché libre. Les chantiers navals qui étaient lourdement
endettés et avaient été déclarés en faillite n'ont pas été fermés mais libérés de leurs dettes par l'État sans
restriction des capacités. La dévaluation de la monnaie sud-coréenne a octroyé aux chantiers un avantage
concurrentiel supplémentaire. Selon un rapport de la Commission européenne, en 1999, les prix des chantiers
coréens ont été abaissés jusqu'à 40% en dessous des coûts de production. Et depuis que l'UE poursuit une
politique de réduction des aides d'État accordées aux sociétés de construction navale européennes, les prix
plus bas des sociétés asiatiques ont conféré aux chantiers navals coréens des parts de marchés considérables.
Grâce à un record historique du niveau de commande en 2000, les prix se sont quelque peu redressés mais la
chute significative des commandes en 2001 a de nouveau mené à une réduction des prix (les commandes
totales en tonnes brutes compensées étaient de 20% inférieures en 2001 qu'en 2000). Tandis que le
ralentissement de l'économie mondiale en 2001 a principalement touché les segments du vrac liquide et des
conteneurs, les événements du 11 septembre ont eu un impact important sur l'industrie de croisière, qui a vu
trois faillites et une sérieuse chute des réservations. Ce manque de commandes deviendra probablement une
grande menace pour les constructeurs navals européens vu le malaise croissant concernant la situation après
2003 lorsque toutes les commandes précédentes auront été achevées.
Jusqu'en mai 2001, la Commission a essayé d'entamer des négociations avec la Corée du Sud dans le but de
stabiliser le marché mondial de la construction navale par le biais d'instruments de marché. L'enquête sur les
subsides menée dans le cadre du Règlement communautaire sur les barrières commerciales (TBR) a montré
que des subsides considérables avaient été octroyés aux chantiers navals coréens par le biais de programmes
intérieurs et d'exportation, ce qui va à l'encontre de l'accord de l'OMC sur les subsides de 1994. Ces efforts
ont eu lieu au niveau bilatéral et à l'OCDE. Cependant, aucun progrès n'a été réalisé du fait que le
gouvernement coréen a prétendu qu'il n'avait aucune influence sur les chantiers navals ou sur les institutions
qui les soutiennent et il a ajouté être persuadé que cette industrie respectait les principes de libre marché.
Après les vaines négociations entre la Corée et l'UE, la Commission a lancé un rapport conformément au
TBR en mai 2001. Il a montré que l'aide de l'État coréen aux chantiers s'élevait à 2,6 millions d'euros à
Daewoo et 1,7 million à Sambo. En octobre 2000, le comité des associations de constructeurs navals de
l'Union européenne (CESA) a déposé plainte dans le cadre du TBR afin d'éliminer certaines pratiques
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commerciales causées par les subventions octroyées à la construction navale commerciale en Corée qui ont
nui aux ventes européennes de navires commerciaux. Le rapport a découvert des subventions sous forme de
garanties de paiement à l'avance et des prêts fournis par la Banque d'import-export de Corée (KEXIM) qui ne
respectent pas les réglementations de l'OMC, des remises de dettes et des réductions de taux d'intérêts par les
banques gouvernementales et sous contrôle gouvernemental et des concessions fiscales spéciales.
Au cours du litige commercial avec l'UE, la Corée du Sud a dévoilé le 17 juin 2002 un ambitieux programme
visant à étendre la domination du pays dans cette industrie en ignorant la pression étrangère visant à réduire
la capacité. Le programme, suggéré lors d'une réunion entre représentants du gouvernement et constructeurs
navals, prévoyait 170 millions de dollars pour développer une nouvelle technologie ces dix prochaines
années. Lors de cette réunion, les constructeurs navals coréens ont décidé d'augmenter leur part du marché
mondial de 30% en 2001 à 40% en 2010. Il a été suggéré que les navires de haute qualité et à forte marge
devraient s'élever à 35% de la production totale en 2010 contre 13% en 2001. De plus, ils ont promis de

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renforcer les exportations d'équipement de construction navale en passant de 370 millions de dollars en 2001
à 2 milliards en 2010. En 2001, les exportations de bateau s'élevaient à 6,4% des exportations totales
coréennes. Le programme souligne les préoccupations concernant les constructeurs navals japonais qui se
sont associés pour rivaliser avec les Coréens par le biais de fusion et de partenariats stratégiques. Toutefois,
les constructeurs navals coréens reçoivent suffisamment de commandes de construction pour être occupés
jusque fin 2003. En mai 2002, le premier constructeur naval mondial, Hyundai Heavy Industries, a obtenu
des commandes pour un total de 400 millions de dollars de quatre firmes navales pour construire 12
pétroliers. À l'époque, Hyundai avait reçu commande pour 22 bateaux valant quelque 800 millions de dollars,
ce qui a porté son retard à 110 navires, de quoi occuper ses chantiers pour les 30 mois à venir.
Afin de continuer à augmenter les ventes en UE, les constructeurs navals coréens ont tenu des négociations
avec plusieurs sociétés néerlandaises, étant donné qu'elles ont la réputation d'être très fortes dans des
domaines comme la navigation, l'équipement haute technologie et la consultance. De plus, les Pays-Bas ont
le port de Rotterdam, qui est devenu l'un des plus fréquentés du monde. En 2001, les Pays-Bas étaient le
deuxième investisseur en Corée après les États-Unis. Les constructeurs navals coréens s'intéressent aussi à la
République tchèque comme point d'entrée dans le marché de l'UE. Le pays est idéal pour les investissements
juste avant son entrée dans l'UE du fait du grand nombre d'avantages pour les investisseurs étrangers, dont la
main-d'œuvre bon marché, les vacances fiscales de 10 ans, les primes à la création d'emploi et l'importation
de machinerie exemptée de taxe. En outre, la haute qualité de la production d'acier du pays est reconnue à
travers le monde.
En ce qui concerne les pays candidats, la Commission a mené une étude en 2000, qui stipulait que les
chantiers d'Europe de l'Est avaient besoin d'aide en liquide pour survivre à l'entrée dans l'UE et supporter la
concurrence. Selon le rapport, la Bulgarie a besoin d'aide financière extérieure à l'UE à cause de la faiblesse
du système bancaire national. Le principal problème de ce pays est que son plus grand chantier naval, Varna,
a été placé sous administration judiciaire en 1999 et aucune solution n'a encore été trouvée. Néanmoins, le
faible coût de la main-d'œuvre permet à l'industrie d'espérer à nouveau pour l'avenir. Le secteur slovaque
connaît les mêmes problèmes et souffre en outre de manière significative du conflit au Kosovo. Des signes
positifs sont visibles en Lituanie et en Lettonie, les quatre chantiers lituaniens s'étendant au-delà de leurs
clients traditionnels d'Europe de l'Est à la Scandinavie et l'Europe occidentale. Le troisième constructeur
naval européen, Polish Stocznia, a été déclaré en faillite en 2002, ses dettes atteignant 448 millions de
dollars. Toutefois, la société devrait rouvrir avec moins de travailleurs et avec l'aide du gouvernement
polonais puisque l'industrie doit être assainie avant l'entrée dans l'UE. Elle emploie environ 7 500 personnes
et ses commandes se sont chiffrées à 1,2 milliard de dollars en 2001.
L'UNION EUROPÉENNE
En ce qui concerne la République de Corée et l'UE, la Commission prétend que l'industrie de construction
navale coréenne enfreint l'accord de l'OMC sur les subsides de 1994. En 1994 également, le règlement du
Conseil 3286/94 a été adopté (Règlement communautaire sur les barrières commerciales). Ce règlement a
créé des procédures européennes dans le domaine de la politique commerciale commune afin d'assurer
l'exercice des droits de l'UE conformément aux règles commerciales internationales, particulièrement celles
établies sous l'égide de l'OMC. Le 24 octobre 2000, le Comité des associations de constructeurs navals de
l'Union européenne (CESA) a déposé une plainte officielle en vertu du Règlement communautaire sur les
barrières commerciales (TBR).
En vue d'une résolution rapide, l'UE et la Corée ont tenu les 18 et 19 juillet 2000 un premier cycle de
consultations sur la construction navale à Séoul, le procès-verbal a été adopté par la CE et la Corée visant à
promouvoir les conditions justes et concurrentielles et à stabiliser le marché. En conséquence, le
gouvernement coréen s'était engagé à n'entreprendre aucune intervention directe et indirecte pour empêcher
les chantiers navals coréens en perte et pour appliquer les principes financiers et comptables
internationalement reconnus, assurant ainsi que les prix fixés par les chantiers navals coréens reflètent les
conditions du marché. L'UE a cessé d'octroyer une aide au fonctionnement sous forme de subventions aux
constructeurs navals européens le 31 décembre 2000, car la Commission était convaincue que l'aide d'État
était un principe de distorsion et n'aidait pas forcément l'industrie à améliorer sa compétitivité.
Étant donné la résolution non négociée entre l'UE et la Corée, l'UE a proposé le 25 juillet 2001 d'adopter un
règlement du Conseil imposant un mécanisme de défense provisoire en octroyant des subventions aux
constructeurs navals européens afin qu'ils retrouvent leur compétitivité. C'était l'un des éléments de la
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stratégie en deux parties de la Commission, proposer un mécanisme de défense provisoire et débuter les
procédures de règlement de litige. Le Commissaire en charge de la concurrence, Mario Monti, a déclaré que
la proposition ne visait pas du tout à réintroduire l'aide opérationnelle aux constructeurs navals, qui s'est
terminée le 31 décembre 2000, mais simplement à raviver la compétitivité de l'industrie européenne. La
proposition a été adoptée le 27 juin 2002, l'UE visant premièrement à résoudre le litige à l'amiable, après
quoi elle lancerait immédiatement les procédures pour un panel contre la Corée à l'OMC et activerait le
mécanisme de défense provisoire pour la construction navale européenne, même si la Finlande, la Suède, le
Danemark et le Royaume-Uni avaient exprimé leurs réserves à cet égard. La France a décidé de soutenir la
proposition de la Commission lors de la réunion du Conseil des ministres européens de l'industrie le 6 juin
2002 à Luxembourg, permettant la majorité qualifiée nécessaire au Conseil. Un an plus tôt, la Commission a
également proposé de réintroduire provisoirement les subventions pour les constructeurs navals européens,
mais un désaccord entre les 15 a bloqué ce projet. Cette fois, le Commissaire en charge de la concurrence
Mario Monti a déclaré que le projet de compromis réduirait la somme des subventions des 14% initialement
proposés et qu'il limiterait aussi leur durée et leur champ d'application. La Commission entamera bientôt une
série de négociations avec les autorités coréennes afin d'essayer de restaurer des pratiques commerciales
normales. La proposition de mécanisme de défense a été limitée aux segments de marché dans lesquels la
Commission et le Conseil ont considéré que les pratiques commerciales coréennes avaient considérablement
nui à l'industrie européenne, à savoir les bateaux conteneurs et les tankers de produits et produits chimiques.
Pour ces segments, le mécanisme, s'il est imposé, autorisera un plafond maximum de 6% de la valeur du
contrat, mais ne devra pas engendrer de distorsion de concurrence au sein de l'UE. L'aide ne devra être
autorisée que s'il est clair que la somme de l'aide constitue le minimum nécessaire pour rester compétitif dans
l'UE.
Les principales dispositions du mécanisme de défense provisoire sont les suivantes:
 l'aide maximum de 6% de la valeur du contrat;
 le champ d'application du mécanisme couvre les bateaux conteneurs, les tankers de produits et de
produits chimiques, les transporteurs de gaz naturel liquéfié (GNL);
 l'autorisation de l'aide dans les deux premiers segments après que la Commission annonce dans le
Journal officiel qu'elle a lancé la procédure de l'OMC contre la Corée (qui dépend de l'évaluation par
la Commission de l'issue négative des négociations bilatérales avec la Corée);
 l'entrée en vigueur de l'aide aux transporteurs GNL sur la base d'une nouvelle enquête de la
Commission conformément au règlement communautaire sur les barrières commerciales (TBR),
confirmant que les chantiers communautaires construisant ce type de vaisseau souffrent
matériellement et subissent un grave préjudice causé directement par les pratiques coréennes
inéquitables;
 le règlement expire le 31 mars 2004, pour tenir compte du temps nécessaire pour qu'un panel de
l'OMC rédige des conclusions, par exemple 18 mois depuis la fin du mois de septembre 2002.
Vu l'échec des négociations entre l'UE et les autorités sud-coréennes en septembre 2002, la Commission a
déclaré dans sa communication sur l'industrie mondiale de la construction navale (6 e rapport) de novembre
2002 qu'elle lancerait à nouveau une action de l'OMC contre la Corée par le biais de la procédure de
règlement des litiges.

Korea is still home to the world’s top four shipbuilders, but for the first time
ever a Chinese company has snatched fifth place
The world shipbuilding market, once dominated by five major South Korean companies, has seen some
major changes in the space of a little over a decade.
As the South Korean builders struggle with financial troubles and declining orders, China has kept up its hot
pursuit and broken into the world’s top five for the first time. While the South Korean companies had
previously traded the top five spots among themselves, this marks the first time [in more than 10 years] that
they have lost one of them to a foreign competitor.
Clarkson Research, a British service analyzing shipbuilding and shipping information, announced on Dec.
29 that Daewoo Shipbuilding & Marine Engineering ranked first for total orders as of late November with
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8.244 million compensated gross tons (CGT). Total orders reflect the amount of work commissioned from
a shipbuilder, providing an indicator of its industry standing.
Coming in second and third were Samsung Heavy Industries and Hyundai Heavy Industries with 5.032
million CGT and 5.002 million CGT, respectively, while Hyundai Samho Heavy Industries took fourth place
with 3.924 million CGT.
In fifth place was the Chinese company Shanghai Waigaoqiao Shipbuilding (SWS) with 3.030 million CGT.
This marks the first time ever that a Chinese shipbuilder has broken into the top five. Last month’s fifth-
ranked company, Hyundai Mipo Dockyard, slipped to sixth with 2.846 million CGT.
“It’s the first time in over ten years that another country has made it into the top five,” said a Samsung Heavy
Industries source.
“While there could be some changes in total orders due to things like delivery delays, Chinese shipbuilders
get a lot of support from their government,” the source added. “This could spell the end for South Korea’s
dominance.”
South Korea accounted for eight of the top 10 shipbuilders in the world as recently as 2008. Several smaller
ones, including Sungdong Shipbuilding, have since been pushed out amid rapid growth by Chinese and
Japanese competitors. While the same companies held down the top five positions, the next five spots have
changed hands repeatedly. Chinese and Japanese companies also held down the seven through ten spots for
total orders as of late November: Jiangsu New Yangzi and Hudong-Zhonghua from China, and Imabari SB
Marugame and Imabari SB from Japan.
The problem for the South Korean companies now is that recent staff cuts and belt-tightening have left them
with little in the way of new orders, leaving them vulnerable to further inroads by Chinese and Japanese
competitors next year.
“Unless the shipping industry situation improves and there are improvements in the kind of high value-added
ship orders that domestic companies specialize in, you could see the Chinese companies that specialize in
bulk carriers increasing their total orders and continuing to creep up,” said a source with Daewoo
Shipbuilding & Marine Engineering.
“The big three (Daewoo, Samsung, and Hyundai) will find a way to make it through, but the middle [smaller-
sized but competitive shipbuilders] has dropped out,” the source fretted.
Weathering the Storm: Korea’s Shipbuilding Industry by Greg Scarlatoiu (gs@keia.org) Surrounded on three
sides by water, Korea is an oceanic nation that depends on the import of 95 percent of its energy sources and
the export of its manufactured goods via maritime routes. Maritime transport is Korea’s lifeline, and between
the 16th century iron-clad “turtle ships” that propelled their creator, Admiral Yi Sun-sin, and his legendary
naval exploits to near-mythical status and the early 21st century next-generation super container ships
spanning several football fields in length, the Korean shipbuilding industry has been a success story. As the
“Miracle on the Han River” was taking place, it seemed perfectly sensible for Korea to make shipbuilding a
strategic industry in the 1970s, as shipbuilding required the employment of large numbers of workers by
both ship yards and the supporting industries, including steel producers and engine manufacturers, and it
generated foreign currency.
After World War II, Japan had centered the reconstruction of its industry on shipbuilding, and China is
currently in the process of building on the Japanese and Korean experience, developing the industry with the
support of substantial investment by the state. In developed nations, the removal of subsidies for shipbuilders
has often resulted in the industry’s decline, with the United Kingdom as the best known example of that
trend. Due to its strategic value for developing economies in particular, overinvestment and large subsidies
in the shipbuilding industry in developing nations have often resulted in over-capacity, and low profit
margins. Once an economy reaches a certain level of development, higher labor costs tend to result in
significant loss of competitiveness and the industry’s decline, as the European experience indicates.
Nevertheless, due partly to auspicious circumstances, the South Korean shipbuilding industry managed to
maintain its competitive edge, despite higher labor costs. After ship prices hit bottom in 2002, three factors
created the conditions for a boom in the shipping industry: First, the International Maritime Organization
called for a phasing out of single-hull tankers by 2010, thus creating demand for double-hull ships, less likely
to spill cargo, especially oil, in a collision, ultimately destined to become the industry standard. Second,
China’s accelerated economic growth resulted in increased demand for super-cargo ships able to hold up to
10,000 containers on their decks. Third, high demand for oil and high energy prices resulted in increased
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demand for new oil tankers and offshore production facilities, and also for the increased use of liquid natural
gas (LNG), thus spurring demand for LNG carriers. Korean shipyards were
able to deliver super-container ships, LNG carriers, and offshore oil production facilities, and in 2004 Korea
surpassed Japan as the world’s largest shipbuilding nation. Before the current turmoil, Korea became home
to seven of the world’s top ten ship yards, Korean yards accounted for over two thirds of worldwide orders
for LNG carriers, almost 65 percent of mega container ships, and over 40 percent of very large tankers.
Korean dry docks had a backlog of orders of up to three years, and Hyundai Heavy Industries, Daewoo
Shipbuilding and Marine Engineering, and Samsung Heavy Industries became the dominant players in the
market for mega-container ships, giant tankers, and the latest LNG carriers. The Korean shipbuilders’
capacity to recruit enough young ship design engineers was better than Japan’s, thus allowing Korea to stay
in the lead in the industry.
The efficient ship-manufacturing process employed in Korea ensured that shipbuilders stayed ahead of
another challenger, China, engaged especially in the construction of bulk carriers and small tankers. Korean
shipbuilders assemble key segments of the vessel into modular blocks, including piping and interior
facilities, before transporting them to a dry dock for assembly, thus significantly improving productivity.
According to data recently released by Bloomberg, quoting Clarkson Plc, the top shipbroker, Korean
shipyards had backlogs of $212.4 billion in late October 2008, or 38 percent of the $556.7 billion worth of
worldwide global orders. Despite the current global turmoil and owing in large part to outstanding contracts,
signed before the global crisis, between January and October 2008, Korean exports of ships increased by 56
percent to $34.2 billion. Korean shipbuilders, in particular Hyundai and Samsung, are expected to deliver
ships worth $53 billion in 2009. It may seem that Korean shipbuilders have little to worry over the short run,
but, over the long run, after years of unprecedented growth, the South Korean shipbuilding industry will
have to brace itself to weather the storm ahead.
The current global economic slump has resulted in a dramatic drop in new shipbuilding orders. Hyundai,
Daewoo, and Samsung, the world’s three biggest shipbuilders, are likely to sail through the sharp slump in
global shipping orders. However, small and medium sized shipbuilders are in a more precarious position,
and the Korea Federation of Banks recently held a meeting with representatives of troubled shipyards to
address the government’s approach to providing a solution to the liquidity problem companies are facing. A
fast-track program intends to provide liquidity to smaller exporters affected by exchange rate-inflicted losses.
While this program may rescue some firms, the restructuring of firms beyond immediate rescue may also be
needed. If Korea’s shipbuilders weather the storm, and the world gets beyond the current crisis, destiny may
once again smile upon Korea’s ship yards. As the world searches for alternative sources of energy, liquified
petroleum gas (LPG ) consumption as a bridge between the energy of the present and that of the future may
once again spike, resulting in increased demand for LNG carriers, and Korean shipbuilders could no doubt
capitalize on that development. As the United States pays increased attention to a New Energy for America
plan under a new administration, the value of shipping may be rediscovered. Shipping requires no investment
in infrastructure such as highways or rails, and fuel costs per ton transported via ship are relatively low.
Nevertheless, foreign shipbuilders including Korean firms may have to wait before having a chance to
become involved in reviving the U.S. merchant fleet, which represented about one third of the world’s
merchant fleet 60 years ago, but now is down to only 2 percent of the world’s total. The main obstacle to
that involvement, possibly also one of the greatest obstacles in the way of the revival of the U.S. merchant
fleet, is represented by the Merchant Marine Acts of the 1920s and 1930s. Meant to protect the U.S.
shipbuilding industry, those acts decree that only ships built in the United States, operated by U.S. crews,
owned by U.S. companies, and flying the American flag can load or unload at two or more consecutive
American ports. As long as the acts are still in force, it will be impossible for Korean shipbuilders to play a
role in American coastal shipping.

SOUTH KOREAN SHIPYARDS: OPPORTUNITY OR THREAT?


When Hyundai shipyards received their first supertanker order ever from a Greek shipowner some 20 years
earlier, no one could imagine that 20 years later Hyundai would become the largest shipyard on earth. When

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Hyundai's workers realized that the two sections of their first supertanker wouldn't fit into each other and the
Greek shipowner refused to accept the vessel even after the problem was corrected, everyone was sure that
South Korea's ambitions to become a shipbuilding power would soon deflate. Twenty years later, South
Korea has achieved its goal and now its only concern is how to become the indisputable leader.Although it
sounds bizarre, South Korea had no considerable exposure to shipbuilding prior to the early 1970's. Contrary
to Japan, South Korea's main rival with experience of over 400 years, South Korea had not been exposed to
extensive shipbuilding activities until Park Chung Hee, a general who became president of the country after
a coup, decided that South Korea needed to become a shipbuilding leader.For the past 30 years, the South
Korean economy has been growing at an average sustained rate of 8% per year, meaning that the size of the
country's economy doubled every nine years. Surrounded by the general economic growth, the shipbuilding
sector experienced an exceptional expansion. In the early stages of the country's economic expansion, the
South Korean government recognized that the labor and time-intensive business of shipbuilding provided a
growth opportunity. In addition, national fleet build-up was recognized as an issue of strategic importance
as trade with other countries was growing at a fast pace. The government encouraged shipping companies
to undertake the task of expanding the national fleet by heavily subsidizing newbuilding construction. Loans
from the Korean Development Bank covered up to 90% of the total construction costs in addition to
particularly favorable repayment terms. In practice, up to 70% of the construction costs were covered by
local governments using the Korean Development Bank as a conduit. In return, the shipping companies
agreed to deploy their vessels, for a fixed period, in national and international routes selected by the
government. The government was obliged to cover any losses incurred by the shipping companies due to
their operations in the routes under consideration.

As a result, the national-flag fleet increased from 800,000 gross tons in 1970 to 4,000,000 gross tons in 1980
- an average annual growth of 17%. The growth continued well into the 1980's, although internationally
weak market conditions somewhat constrained the growth rate in the second half of the decade. In 1985, the
national-flag fleet was 6,500,000 gross tons and, in 1990, it was 7,000,000 gross tons. In addition to the
domestic fleet, the South Korean government subsidized the construction of vessels sold to foreign buyers.
Indicative of this is that $270 million in government-guaranteed loans were requested in 1989 by the
shipyards toward the construction of vessels for native companies vs. $264 million that were requested for
the construction of vessels for foreign companies.
This substantial fleet buildup was carried out by the national shipyards which received governmental
subsidies in addition to those received by the shipping companies, and expanded their capacity at a rate
previously demonstrated only by the Japanese in the 1960's. In 1989 alone, $712 million was allocated by
the government for shipyard restructuring and investment loans. Therefore, it is of no surprise that, while
South Korea's shipbuilding capacity, in cgt (1) terms, was only 0.4 m cgt in 1975, it had moved to a position
second only to Japan in 1993, with a capacity of 2.2 m cgt if you consider the EU-12 nations on an individual
basis. This translates to an increase of 5.5x (see Table 1). The tremendous increase in capacity resulted in a
corresponding increase in output. From 1982 to 1993, output, in grt(2) terms, increased threefold to 4,363 m
grt (see Table 2). Subsequently, South Korea's market share increased to 22% of the world's total,
establishing it as the indisputable second power in shipbuilding behind Japan.
1993 was a milestone year for the South Korean shipyards. For the first time in history, South Korean
shipyards, taking advantage of the won's depreciation and the simultaneous yen appreciation against the US
dollar, booked more new orders than their Japanese rivals (see Table 3). In 1994, the Japanese shipyards
counterattacked with price reductions and regained the top ranking. In the first nine months of 1995, South
Koreans have once again received more new orders than the Japanese. With three months remaining for the
year end, the competition between the two has reached new highs and it is of great interest to see if South
Korea will gain the top ranking for a second time. Surprisingly enough, the South Korean shipyards, in their
effort to gain the top position, are assisted by Japanese shipping companies which placed orders with South
Korean shipyards for the first time in 1995. The fact that these companies were driven by the dramatic

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appreciation the Japanese yen realized in the beginning of the year does not diminish the importance of the
actual fact. However, with the Japanese yen now depreciating against the US dollar, $1=Y105 vs. $1=Y85
in the first half of the year, the cost advantage of the South Korean shipyards vs. their Japanese counterparts
is diminishing.
South Korean shipyards were successful in capturing one-fourth of the world's orderbook mainly by
undercutting all competition, and low labor cost was one of the foundations on which the South Korean
shipyards built their expansion. However, the industrial unrest that followed 1987's democracy restoration
in South Korea greatly affected the shipbuilding industry. In the first six months of 1989, all shipyards were
virtually closed, and when the disputes between the workers and the shipyards' management were settled,
the workers were receiving wages 25% higher than before. Currently, the labor costs are estimated to increase
at a 10-15% annual rate. In addition, continual labor disputes keep distracting the operations of some
shipyards, e.g. Hyundai, almost every year. In 1994 alone, Hyundai had an estimated loss of $470 million
due to the strike that took place in the summer of that year. What's even more important is that the labor
problems have directly affected the shipyards' ability to deliver on time, thus adversely affecting customers'
confidence.
Against all odds and despite declining newbuilding prices that have resulted in an even further profit margin
deterioration, South Korean shipyards are set to increase capacity, aiming to gain market share at the expense
of profitability. It seems that their first and foremost objective is to knock Japan off the leadership position
of the shipbuilding industry at any expense. Starting in 1995, South Korean shipyards have, once again,
started adding capacity that, by the end of the decade, should amount to 9m grt from the 6.5 m grt it is today.
All major shipyards have expansion plans. Hyundai's output potential will increase by 6 VLCCs per year
after its two new docks are completed. Samsung has already completed the construction of a third dock
capable of producing 4 VLCCs per year. The width of this dock allows the alternative use of constructing
two medium-sized vessels in parallel. Halla Engineering has finished with the construction of its new yard
in Samho where two docks with a total capacity of 1m dwt were built. Hanjin has extended its No 3 dock by
30m so that it will be capable of building the new generation containerships there. Dae Dong has built a new
yard for vessels up to 100,000 dwt. Daewoo is the only major shipyard that has no capacity expansion plans.
However, its management plans to increase the potential output by increasing its productivity by up to 15%.
South Korea's plans for additional expansion have drawn criticism from all around the world. However, the
South Korean government, which signed the OECD agreement that puts an end to subsidies at the end of the
year, never accepted any discussion on capacity limitations. After all these years of direct subsidization, it is
very intriguing to watch how the South Korean shipyards will manage to survive after the end of the
governmental subsidies, especially if the newbuilding prices remain at the current depressed levels.
Furthermore, South Korean shipyards face the additional danger of a major won appreciation. During the
period between 1987-1989, when the won appreciated from 823won/US$ to 671won/US$, all major
shipyards' profit margins dipped below zero. Currently, the won is trading at 765won/US$ and further
appreciation would cause additional problems. It is estimated that at a level of approximately 700won/US$,
South Korean shipyards' profit margins would become negative and price increases would be necessary to
maintain profitability.

The Similarities Between the Decline of Commercial Shipbuilding Industry and


the Future of the Aviation Industry
The views and opinions expressed in this article are those of the author and do not necessarily reflect the
official policy or position of The Eno Center for Transportation.
A new report by Aaron Klein, a former Treasury official, draws parallels between the demise of the U.S.
commercial shipbuilding industry and a threat to the future of the aviation industry. The paper, published in
July 2015 and entitled, “Decline in U.S. Shipbuilding Industry: A Cautionary Tale of Foreign Subsidies
Destroying U.S. Jobs,” examines the systematic elimination of the U.S. domestic shipbuilding industry as a
result of subsidized foreign competition and compares this to the massive government-subsidies provided to

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industry/
the Gulf airline carriers today. This historical perspective on the American commercial shipbuilding industry
provides clues as to the impact of foreign subsidies on American companies, workers, and the economy.
Klein divides the report into two sections. First, he establishes the parallels between what transpired in the
shipbuilding industry in the 1970s and 1980s and what is happening in the aviation industry today. Second,
Klein examines the detrimental effects on jobs, workers, companies and communities. He extends this
analysis to conclusions on the potential negative impact of Gulf carrier subsidies on today’s domestic
passenger aviation industry.
The Decline of American Shipbuilding and What It Means for Aviation Today
The United States had a long and storied commercial shipbuilding industry. After the Second World War,
American shipbuilding was at its peak and a worldwide leader. In 1975, The U.S. was building more than
70 commercial ships. However, the United States shipbuilding industry began to rapidly decline when the
Japanese and South Korean governments began to subsidize their domestic shipbuilding companies.
During the 1970s and 1980s, South Korea provided capital incentives, trade incentives and tax holidays to
commercial shipbuilding companies, while Japan provided large subsidies in the form of easy finance and
loan deferments. Unable to compete with the massive subsidies Japanese and Korean companies received
from their government, U.S. shipbuilding declined rapidly: in 1975 U.S. companies built 77 ships; in 1990,
only three commercial ships were built in the United States.
In 2005, the World Trade Organization (WTO) ruled that South Korean shipbuilders were benefiting from
illegal export credits, but it was too late for the U.S. shipbuilding industry. Today, the U.S. ranks nineteenth
in the world for commercial shipbuilding, accounting only one-third of one-percent of new commercial
shipbuilding.
The result of these trends is clear: when the playing field was no longer level, the bottom dropped out of the
U.S. shipbuilding industry. Today, South Korea has 37 percent of global ship construction, Japan has 27
percent, and China has 21 percent. In other words, South Korea is producing more than 100 times the amount
of ships as the United States.
Just as South Korea and Japan did for their shipbuilding industries, Qatar and the United Arab Emirates
(UAE) have provided over $42 billion in subsidies and unfair benefits to their state-owned airlines, Qatar
Airways, Etihad Airways and Emirates.
These subsidies coincided with the three Gulf carriers’ rapid expansion in the international marketplace,
including the United States. However, recent studies have proven that as the Gulf carriers continue to rapidly
expand, they are not creating meaningful demand in the markets they enter. Instead, thanks to the virtually
unlimited funding from their governments, they are able to distort the market and divert passengers from
U.S. airlines.
Klein explains that many parallels can be made between the aviation and shipbuilding industries. Both are
transportation businesses with significant economies of scale. Each industry serves a vital role in the nation’s
economy with major effects across its own supply chain. And most importantly, both create middle class
jobs.
The end of a level playing field in aviation, with U.S. companies facing direct competition from subsidized
foreign carriers, is remarkably similar to what happened to U.S. shipbuilders in the 1980s. If the Gulf carriers
are indeed successful in shifting passenger traffic from U.S. airlines, the American aviation industry will
suffer. Using the shipbuilding industry’s devastation as a guide, the extent of that suffering, in terms of jobs
lost, the effects on workers and on communities, will run deep and wide.
Consequences for Jobs, Workers and Communities
The decline in the nation’s shipbuilding industry decimated a once thriving industry. In 1980 there were
approximately 180,000 jobs in private shipyards. That number has fallen by over 40 percent, with only
105,500 jobs still existing in private sector shipbuilding today. And considering the lost potential for growth
the U.S. shipbuilding industry, which was estimated to reach 250,000 jobs in 2010 had the playing field
remained level, the loss is even more remarkable.
The Department of Transportation estimates that every direct shipbuilding job is supported by or creates
three other jobs – the engineers designing the ship, the steel workers producing what will become the ship’s
hull, the accountants tracking the project. Thus, the missing 145,000 jobs in shipbuilding today translate into
a loss of 580,000 jobs for the U.S. economy.

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Klein estimates that if a U.S. airline is forced to cut a single daily round-trip international service, it results
in a loss of between 1,700 and 2,200 American jobs. If a Gulf carrier replaces a U.S. airline’s international
route, only 15 percent of those jobs would remain in the hands of American aviation workers. Just as in the
shipbuilding industry, the jobs lost from the Gulf carrier subsidization are good-paying, middle class jobs.
The average wage for an airline employee is about $67,000, almost 50 percent higher than that of the typical
private sector employee.
Aviation and shipbuilding are both industries where the employment base is more concentrated in specific
communities. Unlike national chains, they are heavily localized and form the backbone of a community.
The closing of shipyards devastated communities like Chester, Pennsylvania, resulting in a 25 percent
decrease in population after the shipyard closed.
Airline hubs have a similar symbiosis with their cities. One study estimates that “the existence of a hub
airport in a region increases that region’s new economy employment by over 12,000.” Unlike shipyards, a
hub city has a much greater ripple effect on a local economy, as hub city airports connect the community
with other cities, facilitating easier trade and commerce. Klein notes that reduced traffic to hub cities will
ripple throughout the local and national economy. For every 100 jobs lost in aviation, almost 475 more are
lost as a result of these direct and indirect effects, through the loss of additional jobs in businesses within the
community.
Those additional job losses are particularly acute near airline hubs, where an extra 12,000 jobs are created
as a result of that city being used as a hub.
Potential losses affect not only hubs but also the spoke cities across the United States served by U.S. network
airlines. Many of these smaller communities are not served by other U.S. carriers. And although these small
cities are not served directly by the subsidized Gulf carriers, they are very much at risk of losing air service
if U.S. carriers are forced to shrink their hubs and pare back less profitable flights due to subsidized foreign
competition on international routes.
Loss of service for these small communities would mean a loss of jobs and economic opportunity for some
businesses in the local area.
Klein writes that while industries can change and national competitiveness within an industry can shift over
time, these changes should be the result of free and fair competition, not as a result of foreign government
subsidies. When American companies face foreign subsidized competition, there can be sharp and disastrous
repercussions. This happened to American shipbuilding and it could happen to American aviation.
Those concerned about American workers and middle-class jobs should be particularly concerned about the
potential threats to aviation jobs, as they are the type of middle-class jobs that are the key to propelling
sustainable and inclusive economic growth
Klein notes that there is still time to act – and that Congress has already shown signs of responding to this
current situation. In April 2015, a majority of members of the U.S. House of Representatives signed a letter
to the Secretaries of State and Transportation urging them to get involved “in an effort to stem the tide of
subsidized capacity that state-owned airlines are deploying on international routes to the United States.” This
was followed by a similar bipartisan letter from 22 U.S. Senators to regulators urging action.
Per the Open Skies agreements, the Obama administration has the authority to request consultations with
Qatar and the UAE to address the massive subsidies they are providing to their state-owned airlines. Klein’s
study of the devastation to the shipbuilding industry foreshadows the damaging effects government inaction
could have on the aviation industry, making the case for the U.S. government to request these consultations
immediately.
TOPIC: Sustaining competitive advantage in the global economy TITLE: Competition in the shipbuilding
industry SUB TITLE: Can the Korean Shipbuilding Giants Sustain their Competitive Advantage? DATE:
November, 2009 AUTHORS: Anh Nam Sung is a professor at SolBridge International School of Business.
He studied Systems Dynamics Modeling in MIT and is currently teaching Systems Thinking and Strategic
Management at SolBridge International School of Business. Naima Samuel is an MBA student at SolBridge
International School of Business from Pakistan. Peyanard Mahasuwan is an MBA student at SolBridge
International School of Business from Thailand. Polawat Pupipat is an MBA student at SolBridge
International School of Business from Thailand. Zhong Shanna is an MBA student at SolBridge International
School of Business from China. ABSTRACT For many decades, Korean shipbuilders have been the leader
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of the global market. They offer cost effective and high quality vessels based on their advanced
production technologies, good management and process control which helps them utilize their economies
of scale and learning effect. Korean shipbuilders top the industry with highest market share. However,
China is a powerful rival with the low labor cost and huge amount of domestic demand. Chinese shipyards
are rapidly closing the gap with Korean companies. This research is conducted to explore how the Korean
shipbuilding industry can maintain its competitive advantage in the long-run. The methodology used was
the use of classical strategy analysis framework which involved analyzing the industry structure and
conducting macro-environmental analysis, SWOT analysis and value creation frontier analysis. The paper
attempts to provide a detailed analysis of the Korean shipbuilding industry stressing the competitive
advantage strategy of Korean shipbuilding firms.
1.0 INTRODUCTION
The world shipbuilding industry holds the largest portion of the global transportation sector and is
continuously growing. The industry’s main driving force is economic growth because sea is the main source
of exportation and importation of goods and services across countries and continents. The shipbuilding
industry constitutes the building and modification of ships for commercial and military use. The shipbuilding
market is divided into the tanker sector and the dry bulk sector. The tanker sector consists of ships that carry
oil while the bulk sector constitutes ships that carry dry bulk cargo. Another type of ship called the combo
or combination carrier can carry both dry and wet cargo. Most ships are created to function in one of these
markets. The industry requires huge investments in capital, labor and technology. Creating ships is a very
long process and orders in the shipping industry are placed long before they are needed to allow time for
building of the ship. Shown below is a feedback loop that depicts how economic conditions influence
demand for ships. As can be seen from the loop, if the world economy improves, then the desired shipping
capacity increases as there is more economic activity across the global such as exportation and importation
leading to the desire for more ships for transportation purposes. When the desired shipping capacity
increases, the gap between the current shipping capacity and the desired shipping capacity also increases
which in turn leads to an increased order rate for building ships. Once the order rate goes up, shipbuilding
increases which in turn reduces the order rate as more and more orders are completed. Completed orders
also increase the current shipping capacity which in turn decreases the gap between desired and current
shipping capacity.
Shipbuilding earlier on was dominated by Western nations and more recently by Japan1 . Currently however,
Korea tops the industry with other Asian competitors like China and Japan following close behind. The
major firms in the Korean industry are Hyundai Heavy Industries, Daewoo Shipbuilding and Marine
Engineering, Samsung Heavy Industries, and STX Shipbuilding 2 . The market share held by geographic
regions in the global shipbuilding industry are shown below:
An important fact to note in the graph is that the total market size has decreased from 2005 to 2008 due to
the economic recession. Despite this decrease in the total market size, Korea has been able to increase its
market share from 31% to a striking 51%. This can be attributed to the competitive advantage strategy
employed by Korean shipbuilders (Refer to section 5.3 of the report for details).
2.0 INDUSTRY STRUCTURE An analysis of the shipbuilding industry was done using Michael Porter’s
five force model 3 to understand its nature. The following characteristics of the industry were identified:
· There are high entry barriers in the shipbuilding industry. The major barriers include huge capital
investments, acquisition of highly specialized equipment, establishing strong distribution networks to
compete with existing firms, high taxes and tariff by government, requirement of high-skilled labor, and
flexibility in operations . Due to these factors, most potential entrants are reluctant to enter the industry.
· The bargaining power of buyers in the industry is quite high. This is so because there are few buyers.
These buyers base their decision on price, quality, delivery and government policy. Buyers are
knowledgeable and are sensitive to price. They purchase in large volumes and switching cost of buyers
is low particularly during exchange rate fluctuations. Key buyers are commercial clients who place very
large orders giving them a high bargaining power.

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The threat of substitutes in the shipbuilding industry is very low. The only available substitutes are
airplanes, but these substitutes are not a threat because they have very high costs3 . · The bargaining
power of suppliers is low in the shipbuildingnindustry. The main reason for this is that there is a fairly
low concentration of suppliers. Suppliers to the shipbuilding industry are mostly steel manufacturers or
parts manufacturers and these suppliers do not have high influence because the switching cost of
suppliers in quite low. There is also very low threat of forward integration in the industry currently.
Suppliers like POSCO have attempted to forward integrate with Daewoo5 . Nevertheless, the bargaining
power of the suppliers remains low. In addition, the Korean shipbuilders are also vertically integrating
to reduce costs and increase productivity. Recently, companies like Hyundai and STX created and
acquired steel manufacturing companies respectively to ensure that there is a constant supply of raw
materials such as steel, at stable prices and on time.
The global shipbuilding industry is geographically divided among the major competitors. Competitors are
therefore identified by geographic locations rather than as firms. The industry is geographically highly
concentrated because market shares held by the major rivals Korea, Japan, and China are much larger than
shares held by less dominant players .There has been a high degree of competition in the shipbuilding
industry as seen from the history of the industry resulting in a less disciplined environment. Nevertheless,
the rivalry among firms in the shipbuilding industry is quite intense and is mostly based on price competition.
In addition, firms are diverse and can accept lower profits than competitors due to differences in geographical
locations and economic conditions. Also, there is low product differentiation which results in higher
competition for securing orders from buyers. There are high exit barriers in the industry due to high
investments in facilities and infrastructure making most firms reluctant to leave the market .
3.0 MACROENVIRONMENTAL ANALYSIS
The macro-environmental analysis for the shipbuilding industry was done using the PEST model. The four
aspects of the environment and their impact on the shipbuilding industry are discussed below:
3.1 POLITICAL/REGULATORY FACTORS As stated earlier, government imposes high taxes and tariffs
in the shipbuilding industry. Government also supports firms through subsidies in certain countries like India
8 . In addition, governments also invest in capacity such as green-field investment and new facilities in low
cost regions like China Vietnam, Philippines and India. The Korean shipbuilding industry is also supported
by the Korean government9 . In the past, there have been few formal rules for governing the shipbuilding
industry and firms are state- supported. However, currently the International Maritime Organization (IMO)
is responsible for setting up rules and regulations governing the shipbuilding industry10 .
3.2 ECONOMIC FACTORS Due to the high level of economic activity in recent years, trade has also
increased leading to greater demand for shipbuilding. In addition, the increase in demand for oil has also led
to a rise in demand for ships to transport the oil. In the current economic conditions, the movement of
business to low-cost areas where economic growth is increasing has also created greater demand for
shipbuilding. Also, the fluctuations in the exchange rate in recent years led to higher profits for shipbuilders
like Korea where the currency exchange rate went up. However, due to the present economic recession the
demand for ships is lower than before.
3.3 SOCIO-CULTURAL FACTORS Shipbuilding industry brings huge revenues to countries and directly
influences the welfare of the people by affecting the GDP. However, there are some negative effects the
industry has on the environment. An example is oil-spillage caused by many carriers in the ocean that results
in water pollution and death of sea creatures. Recently IMO set up anti-fuel- pollution rules for shipbuilders
to protect the environment1. In addition, shipbuilders are focusing on building environmentally friendly
ships using green technology in an effort to protect the environment.
4.1 MAJOR CHALLENGES Although China has many advantages, it also has some weakness. China still
lags far behind the top shipbuilding countries in many ship functions, especially in structural design and
technology. It is far behind the other countries in many key technologies, with no domestic brands to provide
support products for exported ocean ship. And a lot of key components simply cannot be manufactured in
china at the present time. The country’s capacity to provide the products with high added-value ship is
woefully insufficient. However, the international ship prices have declined since 2005, so the competition
becomes more and more fierce. Raw materials like steel, iron, RMB appreciation and exchange rate
fluctuation are all key factors for manufactures to take into consideration. In addition, issues of lack of
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professionals in shipbuilding industry and brain drain are also very prominent. There is also increased risk
of excess capacity in the industry which is seen as a major threat14 . The graph below shows the productivity
per person in the Korean, Chinese and Japanese shipbuilding industries From this chart we can know that
China’s productivity is only about 1/6 that of the productivity of Korea and Japan, making it unable to
compete with them on high-value added products such as gas and container carriers. Even though China is
a major competitor of Korea right now, in the long run China may not able to maintain its low cost advantage.
Nowadays, China’s currency is appreciating and the Chinese government has tried to keep low factor costs
such as fuel, electricity, environment and social security costs in order to encourage exportation but China
shipbuilders still lack high skilled workers. Compared to Korea, China needs to spend more man-hours to
build vessels. This delays completion and delivery of the end product and also prevents the production of
high-value added vessels that could otherwise have resulted in higher profits. Also, despite the increase in
orders received, China has a major weakness in terms of long term production costs. Currently, the variable
cost for example, for steel plate price (which is the main components of shipbuilding) is increasing
continuously. The costs for other equipments and local wage inflation is also on the rise. This will affect
Chinese shipbuilders who use the advantage of low cost labor and material to gain profit directly because
they need to maintain low capital in order to sell at a lower price than their Korean counterparts. Especially
in 2008, China’s shipbuilding variable costs rose higher than its revenue. Furthermore, the costs of
shipbuilding are underestimated in China and the variable cost for building the ship are higher than the price
of the ship which means that as they build more ships, they experience losses. These factors make it hard for
the Chinese shipbuilders to improve their productivity and survive in the long run .
5.0 KOREAN SHIPBUILDING INDUSTRY According to Korean times 2005, Korea has been the home of
seven top 10 global shipbuilders16. The seven shipbuilding giants include Hyundai, Daewoo, Samsung,
Hanjin, STX, Daesun and Shina Shipbuilding. Among them, five key groups are Hyundai, Daewoo,
Samsung, Hanjin, and STX. These companies can achieve success by constantly developing their production
with innovative processes, keeping customer satisfied with best quality and offering on-time delivery at
competitive prices.
The major strength of the Korean industry is its highly sophisticated technology. In addition, the price of
products, on-time delivery, economies of scale, quality, brand power and highly skilled labor are also the
strong points of the Korean industry. The weakness of the industry is basically its high labor costs as
compared with China. Also, the firms also have excess capacity due to the economic recession in the country.
The sources of threat to the Korean industry are mainly China, India, and Vietnam who compete with Korea
on price. Another major threat is decrease in shipbuilding orders in recent years due to the economic
recession. The opportunities afforded to the Korean industry are investment in Research & Development and
entry into emerging markets. Higher profits will increase if the Korean shipbuilders focus on investment in
one of these.
5.2 VALUE CREATION FRONTIER ANALYSIS Korean shipbuilding business is analyzed through the
concept of Value Creation Frontier. According to the graph below Korean shipbuilders position themselves
in the middle between cost leadership and product differentiation meaning that they offer competitive price
with value-added vessels. Compared to Korea, European shipbuilders who are known as major cruise ship
providers, offer more sophisticated vessels with higher price than Korean shipbuilders. Nordic Industries
Development Asia Pacific said that European shipbuilders are more fragmented than Korean shipbuilders.
They have smaller yards which are not suitable for producing high volume. Therefore, they focus on
producing more luxurious vessels with one-off designs such as cruise-ships . China and Japan build similar
vessel types. Their business models fall on the cost leadership with less product differentiation. Comparing
to Japan, Korean shipbuilders have been emphasizing more product differentiation. As in mid 80’s, Korea
aimed to produce different types of ships. Eventually, this strategy has proven successful. Nowadays, Korea
has become a specialized and a global leader in VLCC, LNG and large container ships. Nonetheless,
Japanese shipbuilders have continued the strategy of producing low resolution and less value-added bulk
carriers and middle-sized containers. Similar to Japan, China offers competitive price to the market.
Definitely, China can take advantage from the low labor cost and produce in high volume at low price. From
this fact, Chinese shipyards are speedily closing the gap with Korean shipbuilders in the world market.
Korean shipbuilders can create value by offering reasonable price with high value-added vessels on the

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frontier. Yet, Korea stays on the same curve as China, meaning that Korea cannot achieve competitive
advantages over its major rival. Therefore, Korea aims to move to another frontier to create higher value and
maintain the competitive advantage. This reflects from the direction of the Korea Shipbuilding Association
that “ultimately, the shipbuilders are required to convert the concept of the shipbuilding industry dramatically
to a new business mode by switching from ‘Shipbuilders’ to ‘Ocean Developers’”. By adopting this new
concept, Korean shipbuilders are trying to diversify their business models by changing their way of thinking.
Consequently, they do not see themselves as carrier builders but ocean developers which could dramatically
change their business approach to marine development, marine plant construction and ship finance, for
example18 . In order to gain competitive advantages over the whole industry, these Korean giants are
working on creating another frontier and are aiming to move towards the product differentiation side by
developing technological innovations, entering into other markets and achieving more efficiency.
KOREA’S COMPETITIVE ADVANTAGE Korean shipbuilding companies are focusing on three aspects
of the business to gain a competitive advantage in the shipbuilding industry: technology innovation,
efficiency, and entry into emerging markets. Each of these aspects is discussed below.
5.3.1 TECHNOLOGY INNOVATION Korean shipbuilders have been developing their technology for many
decades. Their current strategy is to offer the new concept of digital ship. Examples of three major Korean
Shipbuilders’ technological development are the follows: · Hyundai Heavy Industries (HHI) – makes use of
production technologies such as offline welding robots, indoor production of 40m long blocks, and a two-
component proportioning system in painting . · Samsung Heavy Industries (SHI) – is using multidirectional
oil tanker that can change in all directions (180 degrees) in order to find new ways to break ice when the
ship is trapped by icebergs. Also, first Eco-Friendly LNG-powered passenger boat that reduces emissions of
nitrogen oxide, sulfur oxides and CO₂ emission is being used . · Daewoo Shipbuilding & Marine Engineering
– uses hydrodynamics design which helps to decrease the loss of propulsion power caused by waves and
slamming .
5.3.2 EFFICIENCY One way that Korean Shipbuilders achieve their competitive advantage is to improve
their efficiency by improving production process and human resources. This s done as follows: · Decreased
ship construction time and raised production efficiency Technological innovation also plays a crucial role,
as technology simplifies the complex production process, it reduces ship construction time and cost. The
examples of their current supportive technology are the following: o T-shaped dry-dock: utilize a tandem
shipbuilding process in which two ships can be simultaneously constructed at one dock. o MegaBlog: The
blocks completed through the processing, assembling and fitting of iron plates, which are then moved to
docks to be taken into ships24 . o On-land construction: Building ships on land, then loaded out on a semi-
submersible barge by using air pad and skid. Then, float ships by submersing the barge.

SOUTH KOREA – A WORLD-CLASS SHIPBUILDING MAGNATE COMPETES FOR


THE THRONE THROUGH NEW CHANNELS By Minghui Gao
The development of the cluster South Korea’s large water area and over 12 000 km long coastline provides
the nation natural advantages of developing maritime industries. Aiming to become a major marine power
in the world, South Korea ranks high in the world in terms of shipbuilding industries, shipping and ports.
(Blue Revolution 2013) Shipbuilding has been at the heart of South Korea’s economic development over the
past few decades (World Maritime News 2013). During the late 1970s–90s, South Korea made remarkable
successes on shipbuilding (Collins & Grubb 2008). Through its low cost shipbuilding, South Korea
surpassed Japan (Mickeviciene 2011) and ranked first in the world in 1993 in terms of its new shipbuilding
orders with a share of nearly 38% of the world market (KOSHIPA 2011; 2013a). Though the trade friction
between South Korea and the EU has caused many inconveniences to South Korea’s shipbuilding industry
in the early 2000s, and the increasing labor costs and material prices have weakened the nation’s
competitiveness on shipbuilding since the first decade of the new millennium, South Korea is still an
important player in the world shipbuilding market (Mickeviciene 2011). In 2011, South Korea built 13
million gross tons of ships which created a total value of more than EUR 430 billion, and hence, shipbuilding

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has become the nation’s number one export industry which represents more than 15% of its total exports (World Maritime News 2013).

According to the Korea Shipbuilders’ Association (KOSHIPA), there are nine major shipbuilders in South
Korea, which are Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, Samsung heavy
Industries, Hyndai Samho Heavy Industries, Hanjin Heavy Industries & Construction, STX Offshore &
Shipbuilding, Hyndai Mipo Dockyard, SLS Shipbuilding, and Dae Sun Shipbuilding & Engineering.
(Shipbuilding Korea 2011; Kim 2009; Chen et al. 2010) While shipbuilding industry makes great
contribution to South Korea’s exports, shipping and port industry are also vital to the nation’s economy as
almost all of its imported and exported goods are transported via the sea (Shipbuilding Report: Marine and
Shipbuilding, 2013). In South Korea’s shipping industry, private enterprises have been playing significant
roles on strengthening competiveness and coping with the changes in the global market. According to United
Nations Conference on Trade and Development (UNCTAD), South Korea’s Hanjin Shipping (Hanjin) and
Hyundai Merchant Marine (HMM) enter the list of top 20 leading container shipping operators in the world
(Review of Maritime Transport 2012; 牛序谋 2013). STX Pan Ocean and Korealines Corporation (KLC)
used to be the third and fourth largest shipping companies in South Korea after Hanjin and HMM; however,
due to the current economic situation, which does not seem to be optimistic, these two have been confronting
difficulties on sales in recent years and already entered the auction market for merger and acquisition (牛序
谋 2013). As an important sector of the national economy, the ports of South Korea have been developing
on the path to become “a load center in Northeast Asia” (Jung 1996; 肖钟熙 2013; 杨钰池 2013) and later
“Northeast Asia’s logistic hub” (Ducruet, Lee & Roussin 2009; 肖钟熙, 2013; 苏海河 2013). The biggest
ports in South Korea are the Port of Busan, the Port of Kwangyang and the Port of Incheon, which are all
free trade zones (肖钟熙 2013). Among the three, the Port of Busan, with its throughput over 16 million
TEU, is the biggest port in South Korea and ranks in the world’s top 20 container terminals in terms of
throughput (Review of Maritime Transport 2012). Cluster actors and networks In the South Korean
“chaebol” economic structure, shipbuilders – except naval facilities – are all private capital-accumulating
corporations (Collins & Grubb 2008) and therefore these corporations build up their business network on
their own. In South Korea, while many smaller shipbuilding companies have joined in Korea Shipbuilding
Industry Cooperative (Kim 2009), almost all of the major and medium-to-large shipbuilders have joined in
KOSHIPA. KOSHIPA is a non-profit organization which was established in later 1970s when South Korea
started to develop its shipbuilding industry. This organization aims to “enhance cooperation among its
member companies and to promote their common interests”. (KOSHIPA 2013b) In turn, in the area of
shipping and ports, South Korea has developed the “two-hub port strategy” which aims to increase the
competitiveness of South Korean ports. The strategy is based on the Ports of Busan and Gwangyang, and
emphasizes the functions and positions of the two ports. However, this strategy is currently confronting
intense competition from Chinese ports. (Ducruet, Lee & Roussin 2009; 肖钟熙 2013) Shipyards overseas
have been adding strengths to domestic shipbuilding companies in South Korea. South Korean shipbuilders
operate in different regions in the world; among all of the subsidiaries abroad, STX’s shipyard in Dalian,
China, Hanjin’s Subic Shipyard in the Philippines, Daewoo’s Mangalia Shipyard in Romania and Hyundai’s
Vinashin Shipyard in Vietnam are operating the best. The STX group also enters Azerbaijan shipbuilding
industry. (Shipbuilding Korea 2008; Kim 2009) Samsung Heavy Industries (SHI) has acquired stake from
shipbuilders in Brazil and other countries in Latin America, and provide them with technology support,

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https://www.utu.fi/en/units/tse/units/PEI/research/Documents/SmartComp%20Research%20Report%20October%202013%20final.pdfindustry
has become the nation’s number one export industry which represents more than 15% of its total exports (World Maritime News 2013).

shipyard construction and ship design. Furthermore, STX Group has taken over more than 88% of the stake
of Norway’s Aker yards in 2008, and operates shipyards in Norway, Finland, France and Canada. Recently,
as the STX’s shipyards in Europe have been confronting financial troubles, the group decided to sell some
of the yards. (Kim 2009; France24 2013) In September 2013, STX Rauma Shipyard in Finland has been
announced to be closed, and hundreds of employees will lose their jobs (Finland Times 2013). In the field
of marine supply, South Korea has extended network with foreign suppliers. For instance, Wärtsilä
Corporation provides services on ship power in South Korea (Wärtsilä Press Releases 2008), and Baltimore’s
Maritime Applied Physics which is based in the U.S provides engineering and manufacturing for Hyundai
Heavy Industries (Tradeology, the ITA Blog 2012). In addition, South Korea has also been actively involved
in international organizations and activities, for instance, OECD WP6 Meetings, IMO activities, Asian
Shipbuilding Expert’s Forum as well as shipbuilding cooperation with China and Japan (KOSHIPA 2013a).
Cluster competitiveness In general, the South Korea’s shipyards, ports and shipping industry are well
developed for instance in terms of infrastructure and the size of the fleet (杨钰池 2009; Chen et al. 2010).
Moreover, the development of the industries is strongly supported by the government, which provides
advantages for the development of ports especially in terms of free trade zone policy, as well as incentives
and driving force for the shipbuilders and shipping operators (Jung 1996; Ducruet, Lee & Roussin 2009;
Chen et al. 2010; 杨钰池 2013; 肖钟熙 2013; 苏海河 2013). At the same time, the strong network of
domestic shipbuilders, shipping operators and suppliers assures the efficient process of manufacturing and
operating (Chen 2009). The high technology of South Korea’s maritime industries has also brought the
nation competitive advantages. It on the one hand provides the technological leverage for shipbuilders to
build highcomplexity and therefore highly profitable vessels, and on the other hand increases production
efficiency (Mickeviciene 2011; Review 2012 2013; Collins & Grubb 2008). Furthermore, the highquality
labor force also guarantees the production efficiency. However, the operating costs of South Korean
maritime industries have been increasing rapidly, due to higher fuel costs (Hand 2013; 中国 海事服务网
2011), and higher labor costs (South Korean Shipyards: Opportunity or threats 2013; Chen et al. 2009). At
the same time, due to the over-speeded increase of the supply of shipping operators in the global range, as
well as the sharp decrease of shipping price (Hand 2013; 中国海事 服务网 2011), South Korea is
confronting a hard time when seeking profits. As South Korea operates much in the global market, the
currency used in the trade may have a large impact on its maritime industry. Due to the using of South
Korean currency “won” and the major appreciation of this currency, the profit margins of the nation’s
maritime industries have been weakened (South Korean Shipyards: Opportunity or threats 2013). South
Korea has been actively cooperating with international players in the maritime industries, which may provide
more opportunities for the nation to maintain its competitive advantages and to improve its industrial
structure. Since 2005, South Korea has been working on and promoting the development of eco-friendly
ship construction-related technologies, which creates a niche market for South Korea’s ship products, and
helps in maintaining competitive advantages in comparison with late-started shipbuilding countries, such as
China, in the future (Review 2012 2013; Hand 2013). However, South Korea’s focus on global maritime
market has distracted concentration away from the domestic market, which may decrease the domestic
demand (Chen 2010). Furthermore, South Korea is struggling to win the competition with its rivals,
especially China and Japan, in the field of shipbuilding, shipping and ports (Ducruet, Lee & Roussin 2009).
In addition, The South Korean government has made different development plans for each port based on

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https://www.utu.fi/en/units/tse/units/PEI/research/Documents/SmartComp%20Research%20Report%20October%202013%20final.pdfindustry
has become the nation’s number one export industry which represents more than 15% of its total exports (World Maritime News 2013).

their own features and advantages (Review 2012 2013). The strong support from the government may
accelerate the development of the port sector of South Korea.

The future of the cluster South Korea has the advantages in the maritime industries brought by governmental
support, knowhow of high technology, high production efficiency, as well as extensive international
cooperation (Kim 2009). Moreover, the credible shipyard training centers and maritime education in the
universities guarantee the continuous support of skilled and professional human resources. In the meantime,
the nation is also confronting intense competition in the global market. Therefore, the maritime industries of
South Korea might need to find their niche market and further international cooperation in order to maintain
their own competitive advantages and be profitable. Considering the fact that South Korea is already quite
advanced in terms of maritime technologies, it might be suitable for the nation to keep its path on developing
high complexity and eco-friendly shipbuilding. Furthermore, the Arctic region is believed to become a new
market area for South Korea maritime industries. In August 2013, South Korea has made and published their
plan on Arctic policies. With the full supports from the government, South Korea sees their primary mission
as developing and taking advantage of the shipping through the Arctic region. The Arctic shipping routes,
on the one hand, can bring South Korea large market potential and shortened distance between Asia and
Europe, but on the other hand, reveal a problem that South Korea is presently lacking icebreakers. (中华航
运 2013) In this case, further international cooperation becomes necessary for South Korea on seeking
technological support. In terms of this matter, South Korea and Norway have started their cooperation in
Arctic shipping, which is as considered an opening of new shipping route between Europe and Asia (Barents
Observer 2012). From this perspective, South Korea’s focus on the Arctic shipping may also provide
maritime companies in the Central Baltic Sea region with technological expertise more business
opportunities, especially in the field of icebreaker designing and manufacturing. With the strong support
from the South Korean government, it is believed that the business environment for foreign companies will
be welcoming.

S.Korean shipbuilding industry under massive restructuring


South Korea's shipbuilding industry has been under massive restructuring since 2006 as global shipbuilders
are undergoing one of the biggest structural changes in their history. Currently in the global shipbuilding
sector, the biggest restructuring has fallen on small shipbuilders that focus on small ships while mega-sized
builders such as Hyundai Heavy Industries, the world's largest shipbuilder, have avoided streamlining.
Small shipyards have been undergoing restructuring for the past five years due to the limited number of
yards that have received new orders and a stronger outlook for small ships stemming from huge replacement
demand. A new mega-trend -- fuel efficiency and lower carbon dioxide ( CO2) emissions -- has already
caught on in the global shipbuilding sector, set to bring about an upheaval across all the shipyards. Top-tier
shipbuilders have been on the move far ahead of CO2 regulations by the International Maritime
Organization (IMO) while leading shipping companies have been buying fuel-efficient ships on concerns
over higher oil prices and weaker freight rates. "Restructuring in South Korea's shipbuilding sector will
kick into high gear from this year," Lee Sok-je, a Seoul-based shipbuilding analyst at Mirae Asset Securities,
told Xinhua. "The restructuring, initiated since 2006, will begin to further materialize starting this year as

32
more than half builders of small ships have been struggling with lack of new orders for more than two
years."

Small is competitive
The resturturing of small shipyards came when new orders were given only to a handful of top-tier builders.
The number of yards with new building contracts declined to 130 in 2010 from 405 back in 2007, according
to Mirae Asset Securities and a London-based Clarkson, the world's largest shipbroker. Builders of small-
sized bulk carriers and tankers suffer a bigger headache. In 2009, 169 ships were ordered to 50 yards among
the total 198 yards globally. In 2010, the number of ships ordered increased by more than three times to 525
ships, but the opportunities were given to only 75 yards. Of the total 198 yards building small bulk carriers
and tankers, more than 100 of them received no new orders over the past two years. If shipyards go without
contracts for more than two years, they are considered actually open with no business while their fixed cost
sharply rises. Contrary to more than 100 inactive yards, less than 100 yards will likely be very competitive
down the road due to positive outlook for small ships coming from strong replacement demand. The demand
outlook for small-sized ships is better than for large ships because of the decrepitude of small vessels.
According to Clarkson, handysize bulk carriers, over 15 years old, amount to 54.7 percent of the total fleet
compared with 25.1 percent in handymax, 30.5 percent in panamax and 30.1 percent in capsize respectively.
Handysizes, the smallest vessels among bulk carriers, have a carrying capacity of between 10,000 and 40,000
deadweight tons ( DWT), with handymaxes at between 40,000 and 60,000 DWT, panamaxes at between
60,000 and 100,000 DWT and capesizes carrying at least 180,000 DWT. Meanwhile, new orders for small
ships are not sufficient to replace the decrepit vessels. The new orders-to-15 years old ratio in handysizes
reaches 61.1 percent, much lower than 169.9 percent in handymaxes, 184.6 percent in panamaxes and 209.1
percent in capesizes. "In case of bulk carriers, freight rates in small-sized ships stabilized more than large-
sized ones, reflecting lack of supply in small vessels," Lee said in an interview with Xinhua. "The biggest
beneficiary will be the builders of small vessels which have been neglected over the past 20 years because
of their small scale." FUEL EFFICIENCY IS EVERYTHING .Competitive small shipbuilders will be the
biggest beneficiaries from the new fad of fuel efficiency and greenhouse gas controls. Top-tier shipping
companies are increasingly focused on fuel efficiency as fuel prices remained relatively firm in contrast to
weaker freight shipping rates. Historically, shipping rates moved in proportion to fuel costs because shipping
firms shifted their burden of increased fuel prices to freight rates. But such trends have been reversed since
September 2008 when fuel prices and freight rates collapsed. Oil prices recovered from the 2008 rock
bottom, reflecting strong demand from developing countries and supply shortage while freight rates had a
limited upside. According to Clarkson, the price of Singapore 380-centistoke bunker, used mainly as marine
fuel, is currently trading at 450 U. S. dollars per ton, doubling the bottom price back in September 2008. In
contrast, average shipping rates stand at around 15,000 dollars per day, far away from 45,000 dollars at the
peak. The reversal in moves between fuel prices and freight rates forced shipping lines to focus more on fuel
efficiency. According to Mirae Asset Securities, a 10 percent improvement in fuel efficiency can save costs
equivalent to as much as 100 percent of a new ship's price. For example, containerships, handling 11,000
20-foot equivalent units (TEU) of cargo, can save 11,450 dollars per day, 4 million dollars per year or 120
million dollars throughout its 30 years of life if it ameliorate its fuel efficiency 10 percent higher. 11, 000
TEU containerships are priced at 110 million dollars.

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The proposed greenhouse gas regulations by IMO, the U.N. shipping agency, from 2015 is expected to force
shipping companies to buy more fuel-efficient vessels.
The IMO will likely regulate CO2 emissions through greenhouse gas (GHG) fund starting 2015 by forcing
shipping firms to trade carbon credit. For example, a shipping line with poor fuel efficiency should pay 450
dollars for bunker prices as well as 150 dollars for carbon tax imposed by the GHG fund.
The fund gives the received carbon tax to other shipping firms with better fuel efficiency as incentives. All
in all, fuel- efficient shipping companies pay only 300 dollars with the help of 150-dollar incentive while
non fuel-efficient companies pay 600 dollars for fuel prices and carbon tax.
Top shipbuilders have already been on the move to meet increasing demand for fuel-efficient vessels.
Hyundai Heavy Industries has developed a shaft generator that can alone result in fuel savings of up to 7
percent. STX Offshore and Shipbuilding received Energy Efficiency Design Index (EEDI) certification and
proved its fuel efficiency is 20 percent better than existing vessels.
New building contracts are subject to required EEDI with CO2 reductions by 10 percent from 2015, by 20
percent from 2020 and by 35 percent from 2025 respectively. If actual EEDI exceeds required EEDI, the
vessel cannot be delivered.
"The winners in the global shipbuilding sector have been large builders for the past 20 years, but more
opportunities will be given to small builders which survived the current restructuring and achieved
technological developments of fuel efficiency," Lee said. RECLAIMING NO.1 POSITION
South Korean shipyards will reclaim their No. 1 position in the global shipbuilding industry from 2011 due
to competitive design skill, lots of skilled labors and technological achievements, Lee forecast.
Fuel efficiency of a vessel is determined not by engines, but largely by design skill, manufacturing skill and
qualified component suppliers, according to Mirae Asset Securities. South Korean yards secured all these
requirements that cannot be copied easily by second-tier competitors.
Furthermore, South Korean small-ship builders were equipped with skilled labors and technological
development. Historically, the technological and quality improvement of small vessels was much slower
than of bigger vessels. Most yards were replicating old-fashioned ships because of their small scale.
Lee said that Hyundai Mipo Dockyard and STX Offshore and Shipbuilding emerged as the big leaders of
the small ship segment from 2002, predicting they will be the biggest winners among the country's shipyards.
Hyundai Mipo and STX O&S have outstanding advantages over peers, including bigger scale, flexibility of
product type and in-house design skill.
According to Mirae Asset Securities, Hyundai Mipo can deliver 80 vessels per year while most of its rivals
are only delivering three to five. STX Dalian, a subsidiary of STX O&S in China, can deliver 50 to 60 vessels
per year with its capacity fully utilized.
Both Hyundai Mipo and STX O&S are able to build any type of vessel while their rivals are only sticking
with only one or two kinds. Hyundai Mipo can expand its product mix from PC tankers to containerships,
bulk carriers and Liquified Petroleum Gas (LPG) carriers.
They secured in-house design and engineering resources to lead the industry, thought to be required to meet
the upcoming environmental regulations and rising fuel prices. In-house design is also essential for
operational efficiency. No shipyard has achieved a high level of operational efficiency without the help of
in-house designers, Lee added.
South Korea has grown tremendously over the last 30 years by following a strategic approach to science,
technology, and innovation to create world-class companies. In technology innovation, South Korea’s
34
success in leapfrogging technology generations has been underscored by a pragmatic strategy of starting at
the low end of the market in new product segments and continuously improving their product sophistication,
using economies of scale to secure a competitive market share.
South Korea’s rapid economic growth in a compressed timeframe has not been without its challenges and
social pressures. There is a widening gap between prosperous, urban South Koreans and those who have
been left behind in the country’s sudden rise to prosperity, characterized in part by marked rise in income
inequality. Traditional cultural values and a desire for security have inhibited the growth of entrepreneurship
and a startup culture, particularly among the highly educated, technically-minded youth; however, increasing
involvement by US-based venture capitalists in the Korean diaspora may slowly change that. Looking ahead,
many of South Korea’s investments in science, technology, and innovation are driven by national security
priorities such as energy efficient and green technologies, high-energy physics, and space. Recent policies
suggest the government and private sector leaders in South Korea are transitioning from technology and
commercialization-driven R&D toward more ambitious, long-term, and transformational science. The
government’s long-term (technology agnostic) investments in basic science R&D as well as raising the
standards of universities and emphasizing global collaborations will go a long way toward realizing Korea’s
vision for a knowledge-based economy, but only if paired with an increased tolerance for risk taking.
A national innovation system emerges from the belief that a nation’s technological capabilities are its
primary source of competitive performance and that these capabilities can be built through national action
(Nelson 1993). A nation’s innovation system is shaped by how the nation leverages its endowments—natural
resources, culture, history, geography, and demographics—through policies that create a thriving market-
oriented (firm-centric) economy and accelerate the transition of new technologies, processes, and services
to the market (Branscomb and Auerswald 2002). The core of a nation’s innovation system, then, are its
endowments and how government and industry leverage these endowments—the nation’s government
through policy investments, incentives, and, regulations and industrial firms through strategies, investments,
and training. For this report, we define innovation as the introduction of a new, or improved upon, product,
process, model, or service in any field that produces a new advantage or value, and is either widely
disseminated into the market, or influences the market such that economies are impacted (OECD 2005).
Stone et al. (2008) describe the breadth of the term by pointing to its presence in new or improved products,
processes, experiences, or business models, and this definition covers a broad spectrum of business activity.
Innovation is often spoken of as an interconnected innovation system because it is not limited to only science
and technology but can cross over into many fields, such as business practices, design, and services. By
definition, it requires successful transition into the economy. The concept of a national innovation system
was proposed in the 1990s by economists such as Freeman (1995), Lundvall (1992), and Nelson (1993).
These and other economists attempted to explain the relationship between a nation’s investment in science
and technology and its economic development. By contrast to an innovation system in general, a national
innovation system is made up of primary actors whose relationships and interactions foster innovation within
a nation.
A national innovation system also encompasses many innovation “pipelines,” which are strategies for
advancing innovation to industrial output. Such strategies are not necessarily linear. These pipelines aim to
create a healthy innovation ecosystem through functional policies that guide primary actors to foster
innovation. National governments may have a range of motives for pursuing innovation. Chief among them
is economic development to increase national wealth and prosperity via the creation of new products and
35
services and, in turn, high-paying jobs. For high-wage countries like South Korea, this may mean having
more attractive products or better production processes than firms in low-wage countries. Endowments such
as a nation’s size and natural resources provide comparative advantages and drive conscious decisions to
develop and sustain economic strength in certain areas. Countries with abundant natural resources, for
example, may benefit from revenues and foreign investment that leverage those resources. Differences in
endowments change how a government structures its innovation policies. While industry firms draw
extensively on external sources like universities and government laboratories, most of the innovative effort
is made by the firms themselves. Profiting from innovation requires the coordination of R&D, design,
production, and marketing, which tends to proceed more effectively within an organization. South Korea
does not have natural resources. However, natural resources are not necessarily a nation’s only endowments.
Socio-economic, cultural, and political circumstances are also important. South Korea has compensated for
its lack of natural resources by achieving the highest literacy rate among Organisation for Economic
Cooperation and Development (OECD) countries. The government has done this by investing heavily in
education, science and technology, and a “knowledge-based” economy. The government also ensures that,
through its support of industry-oriented research centers, there is a central locus of research and development
in the disciplines associated with particular technologies.
The South Korean government has developed a robust science and technology capacity following two
parallel tracks: • Creation of a state-led research and educational capacity • Corporate research and
development efforts by the country’s large conglomerates The government’s science and technology policy
is implemented in the form of Science and Technology Basic Plans every 5 years. The most recent, the 577
Initiative, focuses on sector-specific strategies, including automobiles, shipbuilding, semiconductors, steel,
machinery, textiles, and materials. South Korea is also developing in the three broad areas of green
technologies, value-added services, and technology convergence, such as the convergence of
telecommunications and network technologies into a single system or device (MKE 2010). South Korea has
focused historically on manufacturing but has shifted the focus to services and creation of a knowledge
economy as the nation has developed. To achieve the goal of increasing R&D investments as a share of gross
domestic product (GDP), the government launched a variety of financial incentives to encourage private
investment in R&D, notably by encouraging private financial institutions to turn their collateral-based loans
into technological value-based loans. The government also spends extensively on infrastructure; Korea is
ranked thirteenth in the world in infrastructure, and leads in broadband penetration (WEF 2012). The
government’s investments have been largely effective in spurring S&T-based innovation and progress. South
Korean companies have achieved high levels of global competitiveness in leadingedge technologies, ranking
second globally (behind the United States) in innovation in 2013 (Bloomberg Rankings 2013).
Over the past two decades, South Korea has transformed itself into a leading innovator by adopting Western
business practices and making aggressive R&D investments while capitalizing on the strengths of a
consolidated manufacturing supply chain. Today, innovation in the South Korean economy is primarily
driven by the private sector, which is dominated by chaebol, such as Samsung, Hyundai, Pohang Iron and
Steel Company (POSCO), and LG electronics. These firms typically span a broad spectrum of related and
unrelated businesses and control about 70% of South Korea’s total spending on R&D (with government
contributing about 25%). For example, Samsung is diversified across the food, infrastructure, shipbuilding,
life insurance, surveillance, recreation, advertising, and financial industries, among others, leading many to
refer to South Korea as the “Republic of Samsung.” South Korean companies have moved from safe
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technology investments and incremental innovation toward cutting-edge science-based innovation.
Capitalizing on future possibilities in science and technology requires disruption and risk taking. Koreans
prize efficiency; their desire for success leads them to be highly strategic in their approach. They emphasize
planning for R&D in government and industry and using metrics to track success. The government’s long-
term (technology agnostic) investments in basic science R&D, raised standards for universities, and
emphasis on global collaborations will secure Korea’s evolution of a knowledge-based economy, but only
if paired with an increasing tolerance for risk taking.

Historical Perspective
The Republic of Korea (South Korea), one of four “Asian Tigers,” has achieved a degree of economic growth
that has been described as miraculous.1 From a per capita GDP on par with sub-Saharan Africa in 1962,
today it has surpassed the Organisation for Economic Cooperation and Development (OECD) average and
is on a growth trajectory similar to that of the United States, while balancing growth with democratic
governance. South Korea’s economic growth is a story of the primacy of institutions over geography. Driven
by a paucity of natural resources and a deep seated need for security, South Korean leadership has
consistently invested in science and technology along with human capital as a lever for economic growth.
Figure 2 presents a comparison of South Korea’s per capita economic growth over time, compared to that of
North Korea and the United States. Today, South Korea is reaping the rewards of more than five decades of
S&T-fueled economic growth, and over the past five years has emerged onto the global stage as a technology
and innovation leader. This report examines the main actors of South Korea’s national innovation system—
the government policies that have been instrumental in spurring innovation; the impact of these policies and
strategic directions undertaken by the private sector; the role of the education system; and the interactions
among these actors to facilitate innovation.

Primacy of Institutions over Geography South Korea is located on a peninsula on the Eastern coast of Asia,
separated from China by the Yellow Sea to the west, and from Japan by the Sea of Japan to the east. (See
Figure 3.) South Korea is small with a dense, culturally homogenous population. At just under 100,000
square kilometers (39,000 square miles), it is roughly the geographic size of the state of Indiana, but with a
population of 50 million, resulting in one of the highest population densities in the world.

South Korea’s population is 49 million with 8 out of 10 people living in urban areas. The capital, Seoul, is
one of the most populous urban areas in the world. The median age is 39 years and there are 1.25 times more
people under 25 than over 55, indicating an aging population. The country’s GDP has increased steadily
over time (see Figure 2 and Table 1). A comparison of the Gini Index, a commonly used measure of income
inequality on a scale of zero to 100, shows South Korea at 42 and the United States at 45.

Political History South Korea’s economy is closely tied to its political history. Before the 20th century, the
Korean peninsula was a politically isolated “hermit kingdom,” wary of foreign influence after centuries of
successive invasions by neighboring countries. Japan’s invasion and annexation of Korea to its empire in
1910 increased its distrust of foreign powers. After Japan’s defeat in World War II, the homogenous
communist North Korea was backed by the Soviet Union and China, and South Korea by the United States.
In 1950, North Korea invaded the South, and the resulting Korean War ended in a stalemate with the
peninsula divided as before. Both countries started with autocratic governments—Kim Il Sung heading the
communist North and Syngman Rhee leading the South. A student uprising in 1960 overthrew the oppressive
South Korean government, but the new government was fleeting and General Park Chung-hee subsequently
rose to power via military coup. Over 20 years later, South Korea held free and direct presidential elections.
During the rule of Park and his similarly autocratic successor, Chun Doo-hwan, political liberties were
37
severely restricted even as the economic foundations were laid for South Korea’s meteoric rise from poverty
to preeminence. In 1960, Korea’s economy was on par with sub-Saharan Africa. Only a few decades later in
1994, Korea had entered the OECD. The country currently has a per capita income of $32,100, higher than
the EU average (Economist 2011). Views of downtown Seoul circa 1950s and in the past decade show the
strides that Korea has made over the past decades, being the only country in the world to go from aid recipient
to donor in such a short timeframe (Figure 4). See Figure 5 for a brief timeline of key historical events in
South Korea.

Role of the Chaebol South Korea’s economic success followed aggressive industrial development on the
part of the government and the pursuit of an export-driven economy. Additionally, the government nurtured
close ties with the large, family-owned industrial conglomerates known as chaebol that have dominated the
Korean economy for decades. During this crucial developmental time, the Korean industry had import and
FDI restrictions, direct credit, and tax relief, which allowed it to develop in a protected economic
environment and become internationally competitive. The government, in turn, wielded influence through
industrial policy, choosing and nurturing strategic industry sectors like shipping, refining, and
semiconductors. Exports from the huge multinational chaebol continue to drive the Korean economy, and
their competitiveness drives innovation. The four largest chaebol: Samsung, Hyundai, LG, and SK2 are
strong in a wide range of activities from automobiles to shipping to banking to tourism to consumer
electronics. Continued government assistance and economies of scale allow the chaebol to be extremely
competitive. South Korea is currently the largest shipbuilder in the world, with close to 50% of the world
market (Maritime Bulletin 2012); the largest electronics company (Samsung) (Bishop 2013); and the eighth
largest auto maker (Hyundai). 3 The southeastern industrial district of Ulsan alone contains the largest
automobile factory, the largest shipyard, and the third largest oil refinery in the world. South Korea is also a
major player in the manufacture of liquid crystal displays (LCDs), which now account for 5% of exports.4
South Korea’s total exports and imports and primary trading partners are as follows:

• Exports—$548.2 billion (2012 est.) – China 24.7% (2011 est.), United States 10.1% (2011 est.), Japan
7.1% (2011 est.) • Imports—$520.5 billion (2012 est.) – China 16.5% (2011 est.), Japan 13% (2011 est.),
United States 8.5% (2011 est.), Saudi Arabia 7.1% (2011 est.)

Despite Korea’s competitiveness in industry, the expectations are for the Korean economy to slow down,
driven by demographics and increasing competition in key areas. Korea, like Japan, has a rapidly aging
population and a rapidly shrinking labor force that will have to support the increased costs of the aging
population. Additionally, the rise of China with lower wages and massive, state-owned companies threaten
competition from South Korea’s position of dominance in the electronics, auto, and heavy industry sectors.
Current Innovation Leadership Structure The S&T policy governance structure in South Korea in many ways
resembles that of the United States. The two main advisory and coordination bodies serving the executive
branch are the South Korean National Science and Technology Council (NSTC) and the Presidential
Advisory Council on Science & Technology (PACST). The two ministries most responsible for setting
innovation policy in South Korea are the Ministry of Education, Science, and Technology (MEST) and the
Ministry of Knowledge Economy (MKE). MEST is the most influential, as it is primarily responsible for
formulating policies for S&T development and R&D investment and supporting the nation’s universities and
research institutes (both government and private). MKE, on the other hand, works primarily with industry.
See Appendix B for detailed descriptions of the governing bodies. Figure 7 shows the structure of the Korean
government institutions that have a role making policy related to science, technology, and innovation. Over
the past decade Korean government policies have increasingly focused on fundamental science (as opposed
to a historical emphasis on technology development). Gross domestic investment in R&D has grown at
10.5% annually since 2002. South Korea spends 3.5% of its GDP on R&D (NSB 2013). 6 This is the highest
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among the OECD countries, totaling USD $56 billion in 2012. The government’s share accounts for 24% of
this, with industry covering the balance (NSB 2013, Appendix table 4-44).

Government Innovation Policies


A recent development in Korea’s innovation policy was a newly empowered National Science and
Technology Commission formed in 2011, with broad authority for the allocation of the government R&D
budget (up to 70% of the total budget7 ). Of the National Science and Technology Commission’s $16 billion
budget in 2012, almost half of the allocation was made to public research institutes, and about one-fourth
each to universities and to industry.8 Technology areas selected for long-term funding in the 2012 National
Science and Technology Commission budget were space and avionics, high energy physics, construction
and maritime industry, renewable energy, ICT, system-on-chip semiconductors and LEDs, and machine and
equipment technology (Campbell 2012). Technology selection considers a large number of factors, including
U.S. S&T policy. The National Science and Technology Commission’s technology planning and investment
is a consensus-based adaptation of U.S. and European Union science, technology, and innovation plans.9
The programmatic technology selection is based on input from evaluation studies. This approach has been
criticized for putting excessive pressure on researchers, incentivizing short-term research, and therefore
dampening creativity in scientific research. (Mahlich and Pascha 2012) At the operational level, the MKE
and MEST have the power to allocate about 30% of the R&D budget. The MKE’s science, technology, and
innovation policy is implemented in the form of Science and Technology Basic Plans every 5 years. Since
the implementation of the first of four S&T Basic plans in the late 1990s, the government has emphasized
investment in R&D, highlighting the role of researchers in the economy and strengthening innovation policy.
The most recent is the 577 Initiative which focuses on seven technology areas. These are key industrial
technologies, emerging industrial technologies, knowledge-based service technologies, state-led
technologies, national issues related technologies, global issues-related technologies, and basic and
convergent technologies. Table 3 presents 50 critical technologies and 40 candidate technologies grouped
by these seven areas. Each area has one or two primary themes. For example, the first group, key industrial
technologies, focuses on next-generation environmental automotive technology; shipbuilding; intelligent
production systems; high-precision machining and instrumentation controls; next generation networks;
mobile internet and communications; non-memory semiconductors; semiconductor equipment and
processes; and display technologies. Critical technologies (column 2 of Table 3) build on existing strengths
and candidate technologies (column 3 of Table 3) push into new areas. The MKE is also focusing on
developing sector-specific strategies for what they consider their primary industries. These include
supporting their automotive industry, as well as shipbuilding, semiconductors, steel, general machines, high-
technology textiles, parts, and materials. They are also broadly developing their green technology, advanced
Information, Communications, and Technology (MKE 2012) and value-added services sectors (MKE 2011).

There has been concern about the lack of space and defense motivated research among Korean policymakers,
highlighted by the recent provocation from North Korea. A 2009 report by the Samsung Economic Research
Institute (2011) found support in the research community for focus on space exploration, launch vehicles,
and satellite technology as well as basic science areas such nuclear fusion and particle physics; these are
addressed in the 577 Initiative. The 577 Initiative provides incentives for corporate research investment,
improving research universities, and cultivating human talent, and plans to expand investment in basic
research from 25% to 50% of government R&D budget.10 The government spends extensively on research
infrastructure. Korea is ranked thirteenth in the world in infrastructure, and leads in broadband penetration
(Schwab 2012). In addition, an extensive network of Government Research Institutes (GRIs), both at the
national and state levels, support domestic companies. During the years when technologies were largely
acquired from foreign firms, GRIs were used extensively to support domestic companies in technology

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development and provide R&D talent, in the manner of the Fraunhoffer Institutes. By the 1980s, Korean
firms had significantly increased their corporate R&D spending, and GRIs were no longer considered
relevant by the industry.11 Today, they are seeking to re-establish their relevance by specializing in basic
science areas and long-term research undertakings (OECD 2009b). To achieve the goal of increasing R&D
investments as a share of GDP, the government has launched a variety of financial incentives to encourage
private investment in R&D. Many government departments have set up funds for direct financial support to
small and medium enterprises (SMEs). Large and small corporations both benefit from tax deductions to not
only research activities but also human development cost (including a 50% income tax reduction for foreign
experts) (O’Donnell 2012). C. Impact of Innovation Policies The government’s investments have been
largely effective in spurring S&T-based innovation and progress. The 5-year plan for S&T innovation in the
1990s and the basic S&T plans in the 2000s were developed with the aim of improving capacity and funding
for R&D, developing an R&D workforce and increasing funding for basic science. The policies have resulted
in increased R&D intensity, a rise in patents and publications, and an increase in high-technology exports,
all of which have contributed to Korea’s shift from a fast follower to a leadership position.
Innovation output trends show a marked increase in human capital and patenting activity, and the rate of
scientific publications have also grown significantly, although Korea ranks lower in publication quality
(citations) than in raw number of journal articles. Figure 9 shows that the relative number of researchers
engaged in R&D in South Korea over the past decade has more than doubled from 23,000 to 54,000
researchers per million people and closing the gap with Japan and the United States. Taiwan shows a similar
increase in the percentage of workforce engaged in R&D. Figure 10 shows the long-term trend in scientific
publications for South Korea steadily increasing over the past 15 years, reaching parity with Italy and India.
Patent activity worldwide remains highly concentrated with only five patent offices (China, Japan, the
European Patent Office, the Republic of Korea and the United States of America) accounting for 77% of all
patents filed and 74% of all patents granted. 20,000 25,000 30,000 35,000 40,000 45,000 50,000 55,000
60,000 2000 2002 2004 2006 2008 2010 Number of Researchers per Million People Korea Japan Taiwan
United States 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 1985 1990 1995 2000 2005 2010
Number of Publications Korea, Rep. Japan Italy India Singapore 22 Strength of intellectual property
protection and domestic and foreign patent filings in South Korea have grown rapidly in the past decade
(reflecting a higher level of integration of South Korea with worldwide economic activity) (WIPO 2007).
Figure 11 shows a steady rise in patent applications by South Korean residents (either through the Patent
Cooperation Treaty or the national patent office) starting in the mid-1990s, when innovation laws
incentivizing intellectual property creation started coming into effect. The World Intellectual Property
Organization (WIPO) ranks South Korea fifth, after the United States, Japan, Germany and China, in filing
patent applications under the Patent Cooperation Treaty (PCT12), reflecting an increase in Korea companies
filing abroad. South Korea’s manufacturing sector leads the world growth of patenting activity (patents
granted as percentage of applications submitted and applications granted worldwide today) (Bloomberg
Rankings 2013) and close to 40% of the filings are in the fields of electronics and communications (KIPO
2013). Table 4 shows the top 10 South Korean applicants for PCT filings in 2012.
Protection of intellectual property combined with long-standing government priorities on export orientation
and competitiveness in S&T-related sectors have moved Korea (like Taiwan) to the top ranks in terms of
exporting high-technology products, behind China, the United States, and Germany (Figure 12). In value
added of hightechnology manufacturing industries, South Korea ranks fifth in the world, behind the United
States, China, Japan and Germany. However, in terms of the value added to knowledge-intensive industries,
South Korea ranks eleventh, indicating that the economy is strong only in select sectors (Science and
Engineering Indicators 2012). Overall, Korean companies (discussed in the next chapter) have achieved high
levels of global competitiveness in leading-edge technologies, ranking second globally in innovation in
2013, behind the United States (Bloomberg Rankings 2013).
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The Korean economy is heavily reliant on manufacturing, which makes up close to 27% of the economy.
When measuring manufacturing value added as a percentage of GDP South Korea ranks second after China.
The industrial structure is primarily composed of chaebol, the small and medium-sized companies that
primarily comprise the supply-chain, and service providers for the chaebol and other service-providing small
industry. Innovation in the Korean economy is primarily driven by the private sector, which is dominated by
the top conglomerates (Samsung, Hyundai, POSCO, and LG). These chaebol typically span a broad spectrum
of related and unrelated businesses. An example is Samsung, which is diversified across the food,
infrastructure, shipbuilding, life insurance, surveillance, recreation, advertising and financial industries
among others, leading many to refer to Korea as the “Republic of Samsung.” These four dominate Korea’s
private spending on R&D. These chaebol were handpicked by the government in the 1960s to lead Korea’s
industrial revolution (Chung 2011), and started out deeply rooted in the Japanese model of low-cost
manufacturing with a focus on quality and process improvement. Over the past two decades, they have
transformed themselves into leading innovators by adopting Western business practices and making
aggressive R&D investments while capitalizing on the inherent strengths of a consolidated manufacturing
supply chain. Today, Samsung is ranked fourth among the world’s most innovative companies, right behind
Apple, Google and 3M (Jaruzelski, Loehr, and Holman 2012). In a different ranking of innovative
companies, Hyundai is the top ranked among the auto companies (Taylor, Wagner, and Zablit 2013), moving
up 12 rankings in the past 2 years to surpass Toyota. As Figure 13 shows, South Korea’s strengths are in
electronic integrated services, shipbuilding, automobiles, and petroleum refining. Other areas are emerging
as well.
Industrial Innovation: Evolving from Fast Follower to First Mover South Korea has adopted several
innovation strategies that allowed its firms to overcome their initial technological disadvantages and to
surpass Japan and other southeastern Asian manufacturers in the past decade. 1. Global Sourcing of
Knowledge and Business Practices Over the past two decades, Korea has systematically built up a global-
savvy brain trust by strategic external sourcing and assimilation of knowledge at the university and
workforce education levels. This state-promoted endeavor, reinforced by its educationfocused culture, gives
Korea an advantage over Japan. In the past decade, leading Korean firms such as Samsung and Hyundai
have been incorporating western business practices into their “Japanese system,” disrupting the traditional
organizational structure by bringing in outsiders into an insular culture and sending company executives
overseas to get first-hand experience of foreign markets, resulting in knowledge sourcing on a global scale.
This has allowed them to succeed in understanding the customer in emerging markets, while also improving
their marketing and design competencies to gain recognition in established markets (Khanna, Song, and Lee
2011). In addition, there are several Korean organizations such as the Korea-U.S. Science Cooperation
Center (KUSCO), a non-profit that sponsors about 140 students yearly for 18-month internships at U.S.
companies. These internships immerse students in business, accounting, marketing, and public relations
functions.13 The number of Korean students going overseas for university education has steadily increased
over the past two decades, increasing 32% between 2006 and 2011 (Woo-young 2011) and is the highest
with 19.99 per 10,000 people, followed by Japan (4.92), China (3.07), and India (1.19) (APEC 2008). The
United States is the top destination for students, followed by China and Japan. While STEM fields account
for 25% of enrollment, business management and social studies degrees (areas where Korean universities
are particularly weak) attract more than 40% of Korean foreign students (Institute of International Education
(IIE) 2012).
Private R&D Investment Business innovation in South Korea has been accelerated by substantial R&D
investments by South Korean industry over the past decade. Samsung’s R&D investment has doubled over
the past 3 years from $6 billion in 2009 to $12 billion in 2012 (with an additional $30 billion in facilities and
capital investments), going mainly to research in memory chips, LED displays, and systems-on-chip, a next
generation semiconductor technology. As a comparison, leading competitors Intel Corp spent $11 billion in
41
2012, and Taiwan Semiconductor Manufacturing Corporation (TSMC) expects to spend $9 billion in 2013
(Gupta, Kim, and Levine 2013). Hyundai Motor spent $12 billion on R&D and facilities in 2012 (compared
with Toyota which spent $9.9 billion in 2011). Of the $12 billion, $4.4 billion was allocated to fuel efficient
cars (Beene 2012). Patenting activity in top Korean companies has risen to fourth place behind the United
States, China, and Japan (Toor 2012; IFI CLAIMS 2011). Korea follows the United States in nanotechnology
patents (Shapira and Wang 2010). More significant than the increase in number of patents is the trend in
types of patents. While patents were predominantly process and product patents 10 years ago, with the
chaebol increasing their investments in fundamental research, the number of patents related to platform
technologies is slowly increasing, an indicator of growing expertise at the forefront of new technology
paradigms. For example, Samsung, a leading competitor in the smartphone industry, is also gaining ground
in the battle on patenting technological platforms (such as 4G) on which future telecommunications services
will be delivered. Owning the patents to the technological infrastructure on which mobile devices are based
means that any company that chooses to develop a product compatible with the underlying platform is
required to pay a royalty to the firm that controls the platform (Kim 2012). A similar story can be seen in the
automotive sector’s investments in wireless energy transfer for battery recharging, an underlying and critical
technology for the hybrid and electric car industry (Zachary 2012).
Drawbacks to South Korea’s Chosen Innovation Path South Korea’s chosen route to industrial catch-up has
its drawbacks. The legacy of siphoning off capital, top talent, and other resources toward developing South
Korea’s industrial chaebol has come at the cost of a widening gap between big and small firms, and between
manufacturing and services. It has created a sharp dichotomy in the industry, a world with “a few big fish
and lots of minnows.”14 Outside the chaebol, much of Korean industry is imitative and faces low profit
margins and competition from China and other foreign competitors. SMEs which supply parts and
components to the chaebol are disenfranchised compared to their counterparts in Japan and Taiwan (which
operate in a similar structure) in that they are locked into fairly closed production networks with very limited
decisionmaking power, which has denied them learning opportunities with diverse firms, both foreign and
domestic, to improve internal competitiveness. Recently, the government has been pushing for financial
incentives and technology commercialization opportunities for small and medium-sized firms (although the
human capital equation is difficult to address, as employment by chaebol is far more socially prestigious),
and their effectiveness remains to be seen. South Korea’s service sector is the second smallest in the OECD
area, accounting for almost 58% of its GDP (OECD 2012). Only 4 of its 30 largest enterprises are in services;
small and medium-sized companies dominate the service sector, accounting for about 80% of output and
90% of employment. Productivity in services is 53% of the productivity level of the manufacturing sector,
much below the OECD average of 87%; this mirrors the ratio of wages between the two sectors (OECD
2012). Figure 16 shows the value added by services in South Korea as a percentage of GDP compared to
other countries.

Tasking
With the goal of better understanding how different countries implement innovation policies, the Office of
the Director of National Intelligence asked the Institute for Defense Analyses (IDA) to examine the industrial
and innovation policies of South Korea, Russia, and Brazil. A team of IDA researchers reviewed the
literature and interviewed experts to provide an overview of the political, economic, demographic, and other
factors that are brought to bear on each country’s industrial and innovation policies, relative to other
countries.
This report documents the outcome of this examination for South Korea. It examines
• Drivers behind South Korea’s innovation goals;

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• Mechanisms South Korea uses to execute its innovation policies aimed at achieving those goals; • Trends
that indicate the effectiveness of the mechanisms/policies; • Socio-cultural characteristics that could affect
success or failure;
• Primary partners in South Korea’s innovation activities; • Implications of South Korea’s innovation
policies for the United States, particularly U.S. national security; and
• Future vision relative to how changes in innovation policies translate to threats and opportunities for U.S.
national security, innovation, and economy. South Korea’s National Innovation System The primary
components of a national innovation system are a country’s endowments and how government and industry
leverage those endowments. A scarcity of natural resources has motivated South Korea to look at its human
capital as its biggest endowment, and the country has invested heavily in education, science and technology,
and a “knowledge-based” economy. iii Government’s Role in Innovation Through state-led research and
education and corporate research and development (R&D), South Korea has developed a robust science and
technology capacity. The country is currently emphasizing R&D in the areas of green technologies, value-
added services, and technology convergence—merging telecommunications and network technologies into
a single device, for example. The government also ensures that, through its support of industry-oriented
research centers, there is a central locus of research geared towards the development of platform and
infrastructural technologies (fundamental technologies that enable subsequent creation of other products and
processes). Industry’s Role in Innovation South Korea’s industry and economy is dominated by business
conglomerates called chaebol (e.g., Samsung, Hyundai, Pohang Iron and Steel Company, and LG
electronics). These companies have moved from safe technology investments and incremental innovation
toward cutting-edge science-based innovation by adopting Western business practices; as the country has
developed, South Korea’s historical focus on manufacturing has shifted to services and investing in research
and development (R&D) at the forefront of technology. In a Booz & Company ranking (The 2012 Global
Innovation 1000: Key Findings), Samsung is ranked fourth among the world’s most innovative companies,
behind Apple, Google, and 3M. In a different ranking of innovative companies (“The Most Innovative
Companies 2012: The State of the Art in Leading Industries”), Hyundai gained the top spot among the
automotive companies moving up 12 rankings in the past 2 years to surpass Toyota. The South Korean
private sector’s strengths provide opportunities for the country to continue on its innovation trajectory. But
South Korean business practices face challenges as well. While the chaebol culture is a source of South
Korea’s success, it is not a transparent culture, and many of its business practices are considered corrupt.
The growth of the chaebol has come at the expense of small and medium sized companies, as they attract
the top talent in the country, creating a dichotomous economy. The presence of the chaebol also creates
obstacles for entrepreneurs and has depressed the prospects of a venture-backed, start-up culture. South
Korean social issues also pose threats to continued success. Summary and Conclusion Summarized in the
following tables are the strengths and weaknesses of South Korea’s national innovation system and the
opportunities and threats that are of potential relevance to U.S. interests.

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44
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