Storm builds over ship yard ‘dirty tricks’

Date: 03/12/1998

By Bruce Barnard

THE EU risks being bounced into a trade war with South Korea from which both will emerge losers.

European shipbuilders have convinced their politicians, including key figures in Brussels, that South Korea is bending every rule in the book in an attempt to drive them out of business.

That is the message which Industry Commissioner Martin Bangemann will deliver to South Korean officials when he visits Seoul in the new year - and, with it, the hint of trade action to follow if South Korea does not bow to the EU's demands for an end to such practices.

The dispute escalated when Bangemann alleged that Seoul was misusing funds from the 51-billion-ecu bail-out it was given by the International Monetary Fund (IMF) a year ago to help its shipbuilders undercut competitors' prices. The Commissioner has dismissed Seoul's claims that the 30% gap between European and Korean prices was mostly due to the collapse of its currency, the won.

There are also claims that Seoul is using the failure of the US administration to ratify a global Organisation for Economic Cooperation and Development (OECD) accord which would outlaw shipbuilding subsidies as a shield for continuing to give handouts to its yards.

The European industry's anger boiled over when creditors wrote off the 641-million-ecu debt of Halla Engineering and Heavy Industries, which spent hundreds of millions of ecu building one of the world's biggest shipyards. The deal reminded European yards of the bail-outs to other Korean yards in the late 1980s.

Shipbuilders in Europe are piling pressure on Brussels to act, warning that the industry's 125,000 jobs are on the line and that a large slice of the 400,000 indirect jobs which it generates could go down with them. Jose Perez, secretary of the Committee of EU Shipbuilders Associations, has accused South Korea of "exporting unemployment" to Europe.

But South Korea is playing for much higher stakes and is unlikely to bow to European demands.

The Bank of Korea last week reported that the economy had contracted by 6.8% in the third quarter, plunging the country into its deepest recession since the Korean war ended in 1953.

The shipbuilding industry is not just one of the country's most vigorous exporters, but also a militant hotbed which could erupt at the slightest sign of its government buckling to western pressure.

Ironically, the dispute turned nasty just as figures showed South Korea actually ceded market share to biggest rival, Japan, in the third quarter of this year. More surprising, the aggrieved Europeans increased the size of their order book to 9.36 million gross tons from 8.9 million tons in the summer quarter, maintaining their 20%-plus share of the global market, according to the Lloyds Register of Shipping. Japan increased its world market share from 33% to 35%, while Korea's remained static at 33%.

Europe's bigger shipyards say they have enough work to keep busy until 2000, but claim that bankruptcies and mass layoffs are inevitable if they do not win new contracts by next spring. However, some industry watchers believe European yards are using South Korea as a propaganda tool to try to persuade the EU to drop plans to phase out the current subsidy regime, which caps handouts to 9% of a ship's contract value, by 2000. Shipbuilders say 9% counts for little given the 30% gap between their prices and those of the ships built in Korea.

The industry's campaign got an unwelcome fillip recently when the French government decided to pull the rug from under Chantiers et Ateliers du Havre, one of France's largest shipyards.

The industry's plight came under the spotlight again following the ousting of Erik Tonseth, the chief executive officer of the Anglo-Norwegian Kvaerner group, after the profits and share price of the largest shipbuilder in Europe and number three in the world crashed.

Kvaerner's problems do not stem from its portfolio of 13 shipyards, stretching from Scotland to Russia, but from the construction business of Trafalgar House, the British group it expensively acquired a few years ago.

And even as European shipbuilders go on the war path over underhand South Korean tactics, Kvaerner is busily spending the 342-million-ecu handout it received from US taxpayers to transform the moth-balled Philadelphia Naval Yard into a commercial shipbuilding facility.

What's more, Kvaerner hopes to make a killing by targeting the notorious Jones Act which the EU tried to bury during General Agreement on Tariffs and Trade (GATT) trade talks in the early 1990s.

That act, which reserves the American coastal trade for US-built, flagged and crewed ships, is more protectionist than any measures Japan, and more recently Korea, have conjured up to help their maritime industries.

Kvaerner is training American workers at its Warnow Werft yard in eastern Germany, plans to hold a flagstone ceremony at the Philadelphia yard on 19 February next year and is talking to would-be American buyers for the three container ships it is committed to build under a deal with the US authorities.

The Philadelphia venture is, however, a side-show as the US is not a player in the global market; and that market has undergone seismic changes in recent weeks as Korean yards pile up the orders. Hyundai recently booked contracts for 13 ships in a one week, taking its order book to 120 vessels amounting to 7.5 million gross tons - the biggest it has been since the company started building ships in 1972.

Its rival Daewoo has just bagged a 513-million-ecu order for four supertankers and sealed a breakthrough 342-million-ecu deal for 13 cable-laying vessels for the New Jersey-based CTR group.

The Korean boom, largely fuelled by tanker and bulk carrier orders, has been at the expense of Japanese yards whose competitiveness has been clipped by the recent rise in the value of the yen, and not the Europeans, who do not build these mass-produced vessels anymore.

But the Koreans are also making deeper inroads into the Europeans' traditional markets for container ships, ferries and sophisticated products tankers. Germany, for example, won orders for only two container ships totalling 12,700 tons in the third quarter, while Korea booked contracts for 25 vessels of nearly 1.25 million tons. More worrying, the Europeans have just experienced a setback in a sector which they have, until now, completely dominated - luxury cruise liners - after Norwegian Cruise Line postponed a 284-million-ecu order for a 76,000 tonner which was to have been built at Germany's Lloyd Werft yard.

It is probably too late for the EU to act over alleged 'dirty tricks' which may have helped South Korea to fill its order books. Industry analysts say it appears prices have now bottomed out and that the current order binge, set off by shipowners scrambling to get bargain-priced ships for delivery in 2000, will taper off.

But the EU will have to persuade Seoul to 'open its books' and ensure it no longer bails out bankrupt yards. Otherwise it will face irresistible calls from its own industry for protectionism and anti-dumping measures before next summer.

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