Failing Offshore Rigs, Struggling Major Shipyards in South Korea

The plan to venture into offshore oil rigs doesn't seem like a good idea now that major shipyards in South Korea are barely keeping up with debt payments and could lose billions of dollars.

Samsung Heavy Industries Co, Daewoo Shipbuilding and Marine Engineering Co, and Hyundai Heavy Industries Co - the shipbuilding industry's Big Three - intended to avoid competing directly with China and its low-profit tankers. And, considering that oil prices were continuously increasing, going into deeper seas in 2010 seemed lucrative. But it didn't turn out quite what they expected.

Their strategy has backfired and they're faced with numerous difficulties. The lack of technology expertise and the dip in oil prices from June 2014 to March 2015 have prevented further exploration, leading to big debts and financial losses. Building deep-sea rigs that could drill as deep as 1,000 meters was more complex, as well as expensive. The construction timeframe took around 40 months, which was longer compared to building a tanker ship. Payments have to be delayed until delivery, which meant using up cash and reserve funds.

Venturing into offshore rigs started when demand for ships began falling and the three companies wanted to make up for their loss. While shipbuilding has been a major contributor to the country's economy since the 70s, it hasn't fared so well worldwide. Slow economy and the need to provide low freight charges (because of competition) have kept owners from acquiring new ships. In fact, some of the biggest shipyards have to obtain financial assistance due to losses.

It seems like South Korea's major shipbuilders are heading toward the same route, as they're set to report earnings for Q2. According to Daewoo Shipbuilding CEO Jung Sung Leep, they have to assign employees in other departments, reduce expenses and sell assets to avoid possible debt restructuring.

The challenging second quarter has seen plunging shares for the three companies - 13% for Hyundai Heavy, 32% for Samsung Heavy and 59% for Daewoo Shipbuilding. The good news is they can still recover. They just have to "learn from their mistakes and focus on increasing their technical competitiveness", according to Yang Jong Seo - a researcher at the Korea Eximbank Overseas Economic Research Institute.