Hyundai changes tack to outpace China

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Executives at Hyundai Heavy Industries, the world’s biggest shipbuilder by sales, grumpily switch channels when latest South Korean soap opera Flames of Passion comes on.

Loosely set around their dockyard at Ulsan, the drama depicts the nation’s shipbuilding elite as unbalanced tycoons, consumed by family power struggles.

If anything, the real battle for survival in the battered shipbuilding industry is more dramatic.

Starved of orders for conventional ships and facing rising competition from China, Hyundai is having to reinvent itself rapidly by diversifying into offshore oil facilities, wind turbines, solar power and electrical power stations.

As a share of expected revenues of Won27,000bn ($24bn) this year, compared with Won22,000bn last year, shipbuilding will represent only 35 per cent, down from 58 per cent five years ago.

Seeking to branch into areas where China cannot easily compete, Hyundai plans to more than double annual revenue from offshore facilities from $3.5bn to $8bn by 2016. Few analysts reckon big oil companies will entrust inexperienced Chinese yards with multibillion-dollar orders for offshore oil and gas production units.

But Hyundai’s push is not without frustration. Brazil, keen to bolster its domestic knowhow, has not placed the bumper orders for drilling facilities and offshore energy vessels that the Koreans hoped for.

But Cho Hyung-rai, vice-president of shipbuilding, stresses that Hyundai acquired 10 per cent of the shares of Brazilian shipbuilder OSX to build a joint offshore facilities yard.

He adds that the scale of offshore investments by Brazilian oil company Petrobras mean it would ultimately have to charter drilling ships built by Hyundai in South Korea.

“Petrobras’s investment is $220bn,” he says. “That’s such an amazingly high amount that those who are ordering drill ships today are, one way or the other, now looking at Brazil.”

Orders for drillships are accelerating and in January alone Hyundai received $1.6bn in orders for three such vessels, with the option of a fourth.

South Korean yards had expected that international oil companies would also soon look to build massive offshore facilities to produce liquefied natural gas, but financing doubts are thwarting so-called floating LNG production.

While waiting for Brazil and offshore LNG production to turn into big business, Hyundai is seeking to specialise in building 300-metre vessels that process offshore oil, known as floating production storage and offloading units. While there are dozens of small FPSOs in offshore fields around the world, only the big Korean yards compete for the giant hulls that store some 2m barrels.

Hyundai is completing a $1.7bn FPSO for French oil group Total’s work in Nigeria. It looms in the snow flurries sweeping the Ulsan dockside, more like a towering refinery than a ship. Kang Chang-june, chief operating officer of Hyundai’s offshore business, says he is hoping to hear soon from BP on whether he has won a similar order for use off the Shetland Islands. “I am looking to be awarded one large-size FPSO each year and deliver one each year, maybe two,” he says.

Equity analysts are almost unanimous in praising Hyundai’s shift away from conventional ships. Its executives do not expect orders of dry-bulk freighters or tankers to recover for three years. But net profit soared 75 per cent last year to Won3,800bn, partly thanks to orders in hand of 210, or 2½ years’ worth.

According to data collated by Reuters, 34 out of 35 analysts rate Hyundai’s stock at “outperform” or “buy”.

Only 24 out of 34 analysts have such faith in Samsung Heavy Industries. For rival shipbuilder STX, only two out of six do. Credit Suisse classes Hyundai as one of the 10 most undervalued stocks in Asia. Its shares have soared almost 160 per cent since January 2010.

Despite investors’ support for the diversification, Mr Cho insists South Korean yards are still well placed to compete with China in some conventional sectors. While the dry-bulk carrier market remains dead, he still expects big container ship orders. Indeed, Hyundai’s rival Daewoo received a $2bn order from Denmark’s Maersk for 10 of the world’s biggest container ships in February.

Mr Cho says it is wrong to view Korea as simply preserving a technological advantage over China. Instead, he says China will now face a more balanced fight with Korea as Chinese yards really took off in the 2003-08 boom characterised by over-ordering and weak competition. “This is not a particularly high-tech industry.” says Mr Cho. “Any nation can build ships. The question is, can they do it efficiently, delivering on the deadline day?”

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