Here at the largest shipyard in the world, amid dry docks the size of small valleys and steel carcasses the size of hills, Hyundai Heavy Industries Co. pumps out 6 percent of the world's ships and 20 percent of its ship engines. The company has spewed out more than 610 vessels since 1973.

Along the way, Hyundai has invested billions and taken some big gambles, built Korea's first liquefied natural gas ship and wrested market share from the Japanese.Industry officials proudly point out that while Japan had 200 years of experience behind its rise to the top of the shipbuilding world, Korea, led by Hyundai, did it in just 25 years.

Not surprisingly for a company used to rolling the dice in a big way - especially if it offers a chance to beat Japanese archrivals - executives said they see no cause for concern in South Korea's enormous run-up in shipbuilding capacity.

"There are analyses of demand, but they're just a guess," said Jong Ok Lee, director of ship sales with Hyundai's shipbuilding division. "Nobody knows. We don't worry."

Since the Korean government lifted its moratorium on expansion in early 1994, Hyundai announced plans to add two dry docks specially designed for very-large crude carriers. Each can handle two VLCCs, the world's largest vessels exceeding 250,000 deadweight tons each.


New VLCC-size dry docks at Samsung Heavy Industries Ltd. and at Halla Engineering & Heavy Industries Ltd. and productivity improvements are expected to boost Korean capacity 60 percent, to about 9 million gross tons annually compared with Japan's 10.5 million.

Hyundai officials said this isn't a threat to industry stability. The real danger comes from abroad, they said, including Japan, which last year cut prices sharply in a bid to fill its order books.

Hyundai officials said that even medium-sized Korean players, like Halla, can prosper by concentrating on niche markets such as the 40,000-dwt.-vessel sector it has specialized in.

Even with a weakened yen helping the Japanese recently, Korean shipyards have a lower-cost basis, they said. Japanese yards would still need to see yen levels closer to 110 to the U.S. dollar to break even, they said.

But the recent dramatic weakening of the yen - by more than 10 percent within a couple of weeks - is clearly a setback for Korean carriers, assuming these exchange levels are maintained.


Mr. Lee said in a recent interview that the currency shift has led to a noticeable change in the profile of competing Japanese shipbuilders.

"Now they're taking a very aggressive approach toward newbuildings with very competitive prices," he said.

Hyundai is still assessing the longer-term impact of the recent currency

shift, watching to see whether the weaker yen is a permanent trend and crafting its own response, he said. Obviously a weaker won and a stronger yen would help Hyundai out, he said.

Analysts said the gamble could pay off with a structural shift in business

from high-cost Japan to Korea. But if the yen weakens and Korean labor costs rise further, Korean shipyards could find themselves overextended, said Peter Boardman of UBS Securities Ltd., a brokerage house.

Also driving this high-stakes race is competition among Korean shipbuilders themselves, most of whom are part of huge industrial conglomerates known as ''chaebol" that compete fiercely in a host of areas.


''There's still quite a lot of macho in shipbuilding in Korea," said Andrew Blair-Smith, Tokyo analyst for Barclays de Zoete Wedd Research. ''It's seen as competition between the different industrial groupings and a case of 'me too.' "

That's not to say that every Korean shipbuilder is rushing into the fray.

Daewoo Heavy Industries Ltd. is taking a different course and concentrating on improving productivity. Kook-ho Kim, Daewoo senior executive managing director, said he is concerned with the Korean race.

Some analysts, like Mr. Boardman, believe Daewoo's strategy is far more sound. Expanding capacity leaves companies vulnerable if domestic wages and other costs continue to rise, he said. They could find themselves struggling to pay off the cost of expansion programs just as profit margins narrow.

But Mr. Blair-Smith believes an expansion strategy can severely damage the Japanese, provided the yen remains strong. Ultimately, price will determine who wins contracts, and while Japanese quality still may be better, customers won't pay much of a premium for it.


''Five to 6 percent more is OK, but 15 percent more and they'll make it in Korea," he said.

Still, Mr. Blair-Smith also sees risks from Korean wage increases, inflation or continued appreciation of the Korean won.

Hyundai officials said they're concerned about lower profit margins but believe conditions will improve.

Three years ago, a VLCC sold for $150 million. Now it's down as low as $85 million. Still, Hyundai expects prices to begin rising later this year, Mr. Lee said, as ships built in the mid-1970s are scrapped and orders for double- hull ships increase.