Doosan Group struggles to revive

Doosan Heavy Industries’ main plant in Changwon, South Gyeongsang Province

Global economic slump weighs down on 12th-largest group

By Lee Hyo-sik

Doosan Group Chairman Park Yong-maan, one of Korea’s most influential business tycoons, has been in the hot seat lately for the group’s deteriorating performance.

This is because the country’s 12th largest family-controlled conglomerate, which focuses on construction and making heavy equipment, has been hit by credit downgrades and a worsening cash flow amid the prolonged global economic downturn.

According to some industry analysts, Doosan’s deteriorating bottom line could adversely affect the group’s bid to win a license to operate a duty free shop in Seoul as the authorities may question its financial ability to raise funds, amounting to hundreds of billions of won, to open and run the store.

“Companies like Doosan are more prone to the global economic downturn as it depends heavily on overseas businesses,” said the head of research at a Seoul-based securities firm, who declined to be named. “Unless oil and other commodity markets recover, which would fuel infrastructure development projects, Doosan will likely remain in the doldrums.”

A slowdown in China and other emerging economies, among others, has dealt a blow to the conglomerate, which does business in 16 countries across the globe.

In 2013, the group earned 64 percent of its revenue outside Korea, up sharply from 12 percent in 1998. Doosan employs 21,000 people abroad, accounting for nearly half of its 42,600 workforce.

The securities analyst said if the global commodities and infrastructure markets fail to recover over the next year, some Doosan units may face a severe cash shortage, stressing that the conglomerate has to do everything it can to secure as much cash as possible.

“Doosan should streamline its workforce, dispose of unprofitable units and take all other possible measures to raise cash,” he said. “Only those with ample liquidity can ride out the current business downturn.”

Worsening bottom line

Doosan Heavy Industries and other key group units have been underperforming market expectations as they have suffered declining sales in China and other emerging economies.

In the first half of this year, Doosan Heavy Industries earned 8.2 trillion won, down 6.1 percent from the same period last year. Its operating profit plunged 21.7 percent to 381 billion won, while posting a net loss of 114 billion won.

Doosan Infracore’s revenue declined 6.3 percent to 1.98 trillion won in the second quarter from a year earlier and its operating profit fell 11.7 percent to 128.6 billion won. Doosan Engineering and Construction (E&C) also saw its operating profit plunge 64 percent to 11 billion won in the second quarter.

In addition, Doosan Heavy has to service corporate bonds worth 210 billion won, which will expire over the next year. Doosan Infracore, Doosan Corp., the group’s holding firm, and Doosan E&C also have to pay back maturing bonds, amounting to 405 billion won, 210 billion won and 50 billion won, respectively.

On Oct. 16, the Korea Investors Service (KIS), affiliated with Moody’s, cut its credit ratings by one notch for Doosan Infracore, Doosan (E&C) and Doosan Engine, while downgrading its outlook for Doosan Corp. and Doosan Heavy Industries.

“Doosan’s biggest problem is that its ability to generate cash has deteriorated amid sluggish business. It desperately needs more cash than it earns to service debts and finance new investments. Things don’t look good for the group,” the analyst said.

Can Doosan enter duty free biz?

In a bid to improve its cash flow amid declining core businesses, Doosan is seeking to open a large-scale duty free shop at Doosan Tower in Dongdaemun, eastern Seoul, a shopping district frequently visited by Chinese and other Asian tourists. The group has vowed to take one of Lotte’s two licenses, which will expire in December.

However, a duty free industry official, who declined to be named, said Doosan’s deteriorating bottom line would likely negatively affect its bid to win a duty free license.

“The duty free business requires an operator to invest a significant amount of money in advance to open a store and secure luxury goods and other items," the official said. “The Korea Customs Service is certainly looking at bidders’ financial soundness during the selection process.”

In addition, Doosan lacks warehouses and other infrastructure to operate a duty free store, he said. “I don’t think the group has enough cash to build a large-scale warehouse near Incheon International Airport and other necessary facilities, which will cost hundreds of billions of won. Many people are also raising doubt about Doosan’s ability to attract a wide range of luxury good brands to its envisioned store.”