Wednesday, July 30th, 2014
After Samsung Heavy Industries announced a large operating loss in the first quarter, Hyundai Heavy Industries followed suit in the second quarter with "earnings shock" level operating loss, leading analysts to believe the nation's major shipbuilders have fundamental problems in their competitive edge.
The biggest reason for Hyundai Heavy to post an operating loss of 1,103.7 billion won in the second quarter was the bad performance of its offshore plant division. Since the 2008 global financial crisis that dried up newbuilding orders in containerships and bulk carriers, Korea's major shipbuilding companies have focused their order-winning effort on the offshore plant area.
In the process, the companies competed excessively by offering increasingly lower prices. According to a shipbuilding industry official, the offshore plant business is quite different from the commercial shipbuilding business in which design and shipbuilding processes have been highly standardized and there is little room for cost differential. In contrast, offshore plants are highly customized and thus there are many occasions for delays and cost overruns.
The Goliat FPSO (floating production storage and offloading) commissioned by a Norwegian company is the case in point. The original price tag for the cylindrical FPSO at the time of contract in 2010 was US$1.2 billion. But the price went up as high as $2.2 billion now as its completion time was postponed repeatedly to July last year, May this year, and the second half of this year.
Although some parts of cost overruns due to delays or design changes are borne by the shipowner, it is still a loss for the shipbuilder as it is unable to use the dock while the plant is under construction and the additional labor cost for full-time workers and contract workers.