By Lee Hyo-sik
State-run banks plan to stop extending credits to shipbuilders and construction firms that submit bids well below market prices in order to win orders, government officials said Wednesday.
The officials view such bidding practices driven by hectic competition as the main culprit behind the deteriorating bottom line of Korea’s shipbuilding, construction, chemical and steel industries over the past few years.
The Ministry of Strategy and Finance, and the Financial Services Commission (FSC) ordered the Korea Development Bank (KDB) and other state financial firms to check those firms from engaging in excessive competition in order to win orders at the sacrifice of financial soundness.
This is the latest in a series of government-led initiatives aimed at overhauling struggling industries.
“The government is running a taskforce to prevent excessive competition among domestic firms, many of whom have secured contracts at lower than their production costs,” said a government official, who declined to be named. “Businesses should not engage in undue competition and try to receive fair prices for their work and products.”
To encourage companies to do so, state-run policy banks will stop extending credits to those who win orders by cutting contract prices excessively, the official said.
Among others, construction and shipbuilding companies have been hit harder by a number of contracts they won at lower than market prices several years ago.
Following the 2008 global financial crisis, local builders were engaged in excessive competition among them to blindly secure orders in the Middle East and other parts of the world. To do so, many offered to build plants and other facilities at prices lower than their production expenses.
Consequently, they incurred huge losses from these unprofitable projects over the past few years, aggravating their financial health.
For instance, Samsung Engineering, one of several domestic builders that won numerous plant projects in the Middle East at low prices, posted a 1.5 trillion won operating loss in the third quarter of the year. The company is widely expected to continue to lose money in the coming months.
The story is not much different for domestic shipbuilders, which won orders to build offshore oil rigs and other exploration facilities at low prices.
As a result, the country’s three major shipbuilders ― Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME) ― have seen their bottom lines deteriorate.
In particular, DSME reported a 1.22 trillion won operating loss in the third quarter because of canceled orders and increasing production costs.