Geoje Island in South Korea is an unlikely catalyst for major changes in how global trade is conducted. Tourists flock to its rolling tree-clad mounts to hike through the spring blossoms. But nestled among the hills in Ogpo Bay sits one of the world’s largest shipyards.
Amid the mammoth offshore platforms, tankers and military submarines under construction, Maersk’s Triple E series of vessels stands out, almost dwarfing one of the 900-metric ton-capacity Goliath cranes aiding its construction. When the first in the series makes its maiden port call in the Asia-Europe trade at Busan on July 14, it will be the biggest ship steaming the high seas and will immediately change the dynamics of the Asia-Europe container shipping business.
There is a fundamental sense of pride among workers at the yard, which is run by Daewoo Shipbuilding & Marine Engineering, one of the world’s biggest shipbuilders. Eh Yang, a 32-year DSME veteran, takes personal pride in being part of a company and a Korean industry that can build a ship as globally significant as the Triple E. “This involves a lot of attention to detail, and nobody wants to let the team down,” he told The Journal of Commerce.
Maersk’s decision to build the Triple E in South Korea was an important boost for a domestic shipbuilding industry that has been crucial to the miraculous development of the economy since World War II, but is now suffering from the global economic downturn, rising labor costs and stiff competition.
DSME, for example, has worked hard to focus on niche markets at the upper end of the shipping market. It racked up orders worth more than $10 billion each year from 2010 to 2012, yet the company declines to comment when asked if it’s profitable.
China last year overtook South Korea as the world’s foremost shipbuilding nation as total exports plummeted some 30 percent year-over-year to $37.8 billion, according to the Korea International Trade Association. Moreover, the combined debt of South Korea’s seven largest shipyards spiked 44 percent in 2012 as yards borrowed to cover losses.
Shipbuilding exports were also down 45 percent year-over-year in April, and the long-term prognosis is poor. The latest forecasts from shipping association Bimco suggest global shipyards will suffer from a major overcapacity gap for at least the next seven years.
South Korea, of course, has gradually reoriented its economy to reduce its reliance on traditional industries such as shipbuilding by establishing itself as one of the world’s largest producers of electronics, automobiles and high-tech consumer products.
Japanese investment bank Nomura predicts South Korean GDP growth of 2.7 percent in 2013, a figure reflected in container volumes. Thomas Lindy Sorensen, president of Maersk Korea, said he expects full-year volume growth in the country of 3 to 4 percent.
Once known for protecting its domestic industries from outside competition, South Korea is opening its economy to competition by negotiating a string of free trade agreements in the wake of the U.S. pact that took effect last year. The strategy is expected to eliminate duties on some 95 percent of bilateral trade within five years and eliminate most other tariffs within a decade.
Trade already is getting a boost, said Young-Kyu Song, chief executive of Hanjin Shipping’s container business unit. In the six years leading up to the U.S.-South Korea FTA, trade grew at a steady 4 to 8 percent annually. Since the agreement took effect, U.S. imports to and exports from South Korea have jumped 12.7 and 7.6 percent, respectively.
“Cargo volume transported to the U.S. in 2012 was much larger than the average volume from 2005 to 2011,” he said.
The agreement’s impact on agriculture, Song added, has not been as significant as many had feared. “It may be too early to evaluate the full effect of the FTA, but increasing cargo volume in and out of South Korea to the U.S. is considered a positive signal in terms of trade as well as for liner business,” he said.
Hyundai Merchant Marine, South Korea’s other major shipping line, agrees. “There is no doubt the FTA has had a positive effect on the shipping industry in terms of demand,” a carrier spokesman said. “We’re seeing an increase in trade volume benefiting from this program, including machinery, auto parts, fabrics and plastic products.”
Even as they’re pushing through more FTAs, South Korea’s political leaders could do more to boost the economy and international trade. Despite restructuring over the last two decades, some believe the economy still remains in the unhealthy grip of dozens of family owned industrial conglomerates with strong political connections.
Known as the “chaebol” in Korea, they helped establish the country as an economic force from the 1960s to the 1980s as names such as Samsung and Hyundai became world-renown brands. But many analysts now fear their dominance of South Korea’s major industries is preventing the development of entrepreneurial small and midsize enterprises. Critics also accuse the chaebol of corruption and oligarchic practices.
In her election campaign, new South Korean President Park Geun-hye pledged “economic democratization,” which voters understood to mean more help for SMEs and more regulation of the chaebol. In the wake of the electoral rhetoric, however, some accuse the president of backtracking in more recent statements on the subject.
Many suspect pressure from powerful chaebol lobbyists might be coming to bear as it has on so many before her. Others blame the president’s reticence on family history — her father, former general Park Chung-hee, is both credited and blamed for creating the chaebol after he took over the country in a 1961 military coup, and ruled as president from 1963 to 1979.
After only a few months in power, most voters say the jury is out on whether Park Geun-hye is willing and able to free South Korea’s economy sufficiently from the chaebol to secure the country’s future success.
The extent to which reform is needed came clear on a recent visit to a medium-sized Korean logistics company that previously supplied a number of services to chaebol companies while also racking up major international accounts. Now the company is struggling for business in its home market. Why? Managers point to a former chaebol customer that recruited many of its top staff and set up a direct competitor — in the same building.
Contact Mike King at email@example.com.