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[Editorial] In rough seas

Korean shipbuilders plunge into crisis

The shipbuilding industry, once a major source of pride for Korea Inc., is sailing through rough waters. While the sluggish global economy is primarily to blame for the current situation, there is a bigger cause for concern.

A simple look at figures shows how bad the situation is. Hyundai Heavy Industries, the world’s top shipbuilder, recorded its biggest-ever operating loss of 3.25 trillion won ($2.84 billion) in 2014.

Another world-class shipbuilder, Samsung Heavy Industries, which managed to record an operating profit of 183 billion won last year, is expected to post an operating loss exceeding 1 trillion won in the second quarter of this year.

The situation at Daewoo Shipbuilding and Marine Engineering is no less dismal, with the firm posting a net loss of 172 billion won and an operating loss of 43.3 billion won in the first quarter of this year.

There are some common causes for the hardships faced by the major shipbuilders: Orders for new ships, especially for oil tankers, are shrinking amid the global economic slump and falling oil prices, costs are rising, and competition -- particularly from Chinese firms -- is heating up.

Some of these may get better when the global shipbuilding industry recovers, but the latest developments, especially those at DSME, show that there are some entrenched problems.

Unlike Hyundai and Samsung, whose profits nosedived last year, DSME reported a 450.8 billion won operating profit last year, an increase of 30 billion won from the previous year.

No one questioned how the shipbuilder could make such a stellar performance amid a severe industry slump. But what we hear now is that the firm concealed losses of about 2 trillion won for last year, which should be counted in this year’s balance sheet. This would plunge its operating profit in the second quarter to 3 trillion won.

This apparent cooking of the books is all the more shocking because the company is under the control of Korea Development Bank, a state-funded lender. KDB holds a 31.5 percent stake in DSME and the posts of the chief financial officer and auditor at the shipbuilding firm are usually taken by the bank’s former executives.

What happened at the DSME shows that these executive appointments were not above board. Accounting firms and securities houses also cannot avoid responsibility for their lax auditing and evaluation of the shipbuilder. It is incomprehensible that the major accounting firm hired by DSME did not find any problem in its reports for both 2013 and 2014. No wonder securities firms kept advising investors to buy DSME stocks.

It is a big problem if the accounting firm and Korea Development Bank, which is also the main creditor of DSME, did not know about the apparent accounting fraud. It is a much bigger problem if they knew about it, but overlooked it or conspired to hide it.

Authorities should launch a probe into the case immediately, and hold all people involved in the wrongdoing responsible -- including not only those from DSME and KDB but also those from accounting firms, credit rating agencies and securities firms.

DSME also requires a bold restructuring and debt rescheduling program, including selling noncore units, since its debt ratio had already jumped to 325.96 percent last year, up from 255.71 percent two years ago. The sinking of a company as big as DSME would cause immense damage not only to the shipbuilding industry but also to the national economy as a whole.

The case of DSME should also offer lessons to other industries and public enterprises, whose restructuring is essential for the Korean economy to get over the low-growth trap caused by slumping exports and sluggish domestic consumption.
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