![The Hyundai Heavy Industry shipyard at Ulsan is among the country's big three shipyards posted a record combined loss of ...](/content/dam/images/g/r/s/8/f/s/image.related.afrArticleLead.620x350.grrtq6.png/1475222785167.jpg)
Dominated by orange Goliath cranes and the hulking silhouettes of nearly complete aqua-hued LNG tankers, the world's biggest shipyard in Ulsan on South Korea's industrialised south-east coast is a busy, discordant hubbub.
Just up the coast in the hub of Pohang, the giant POSCO steelworks is churning out hot-rolled coils on a seemingly never-ending conveyor belt that throws off fierce heat, even through the heavyweight plastic safety curtains protecting the viewing walkway. The site's capacity is more than double Australia's total 5 million tonnes annual production.
But all is not as it seems.
Steelmaking and shipbuilding, two industries that were fundamental in driving South Korea's miraculous economic revival in the decades following the end of the Korean War in 1953, are facing what some say is their worst ever crisis.
Caught in a pincer between low-cost, aggressive upstart China and a Japanese industry resurgent on the back of the weaker yen, the industries – whose spectacular growth was fuelled by Australian commodities – are suffering.
China is doing to South Korea, the story goes, what South Korea did to Japan last decade.
South Korea's "Big Three" shipyards – the Samsung Heavy Industries and Daewoo Shipbuilding and Marine Engineering yards on Geoje Island as well as the Hyundai Heavy Industry yard in Ulsan – posted a record combined loss of KRW7.7 trillion ($9.2 billion) last year.
Speculation rife
McKinsey is preparing a report to the government on the sustainability of the three yards, with speculation rife that while they all should survive separately (rather than merge the two Geoje yards, for example) they should specialise to reduce capacity and lift competitiveness.
It is a tall order. The companies' ability to take action by cutting workforce is severely hampered by Korea's infamously rigid labour laws and powerful unions.
At debt-laden DSME, concerns over liquidity escalated this week as Angola's state oil company Sonangol put off accepting two drilling ships, delaying a final $US1 billion ($1.3 billion) payment. The Korea Exchange has given the shipbuilder, which has been rocked by an accounting fraud scandal, a year to improve its finances or face delisting.
The automobile industry is also suffering: Hyundai Motor, the country's largest carmaker, this week suffered its first outright strike in 12 years as unionised workers baulked over a stalled wages deal.
At HHI, the country's number one shipbuilder which completed the 174,000 cubic metre Woodside Chaney LNG carrier earlier this year, 71 vessels are expected to be handed over to customers in 2016, compared to a capacity of up to 90 ships. Even this year's delivery numbers remain uncertain given doubts that all customers will accept their ordered vessels on time after several instances over the last two years of delays amid a market suffering from oversupply and depressed freight rates.
HHI's diversification, across defence, renewable energy and electrical motors as well as industrial plants and petroleum ships, has softened the blow of the downturn and helped it return to profit in the March quarter after nine straight quarters of losses. But orders were down 42 per cent in the quarter from a year earlier and it is said to be cutting about 10 per cent of its workforce this year, reducing numbers to about 22,000 after losing about 1500 jobs in January 2015 through voluntary redundancies.
Jobs to be lost
"Three years ago we were operating 24 hours, working three shifts around the clock," says my guide through HHI's Engine and Machinery Division as we carefully snake around a wide, low transporter that makes easy work of shifting its heavy load, gliding across the machine room floor on a cushion of air.
"Now it is 16 hours in two shifts."
Across South Korea's industrial south-east, some 20,000-30,000 jobs are expected to be lost as the industries adjust, some sources say.
Not that any of those challenges are made mention of in the propaganda-type corporate videos shown with pride by the young, smartly uniformed, English-speaking officials who greet us with efficiency at the imposing entrances of their respective visitor centres.
Rather, the overriding theme is fierce pride in the spectacular development of the industries that have driven South Korea's economic miracle. Left in "absolute poverty" when the Korean War ended in 1953, the $US1.38 trillion economy is now the world's 11th largest and its sixth largest exporter, according to Foreign Investment Ombudsman Dr Jeffrey Kim. Its world-leading market positions span from petrochemicals to lithium batteries and memory chips.
And few seem to be betting against the chances of Korea's suffering industries overcoming the hefty challenges ahead. After the Asian financial crisis in 1997 and the global financial crisis in 2008, South Korea showed its resilience and recovered. It now has to find a way again.
Back in Seoul the talk in government and business circles is of the new industries that are hoped to take over as the drivers of further growth: batteries, robotics, biopharmaceuticals, cosmetics and potentially education services if that market were to be opened up.
But South Korea's overall competitiveness has stalled, holding 26th spot for the third straight year in the World Economic Forum's global ranking published this week, dragged down by lowly scores on labour-market efficiency and financial market development.
Macquarie Securities former local head and now private entrepreneur Ross Gregory is also critical of Korea's restrictive foreign exchange rules, a need for visa reforms, and for further deregulation where he says talk has not been matched by action during the two last administrations, posing problems in particular for financial and other services.
'No longer competitive'
"Korea's still got a mindset that, 'we're a manufacturer and an exporter', rather than 'we've got to grow our services sector'," Gregory says. "That's where Korea needs to change because Korea is no longer a competitive manufacturer."
ANZ's Korean head Tareq Muhmood is less critical, pointing to healthy engagement and dialogue with regulators on improving the financial services sector, and creating jobs and growth.
"There are restrictions on FX etcetera but the counteract of that is the stability of the system is phenomenal," Muhmood says. "The sovereign rating is better than Japan's, the foreign reserves are extremely strong, so that gives us stability, it allows access to debt for the larger outfits."
Muhmood says Korea is "clearly going through a transition as an economy" as it tackles union issues and adapts its shipbuilding and steel sectors.
Still, others call for a sharper focus on business policy as the administration of President Park Geun-hye remains absorbed by the all-consuming preoccupation of South Korea's unpredictable and increasingly belligerent neighbour to the north. Foreign relations too are seen almost exclusively through the lens of relations with North Korea.
However, for Australian exporters, the Free Trade Agreement signed with South Korea in April 2014 has brightened the prospects for industries such as beef and wine that had been losing ground to rivals, US in beef and Chile in wine.
Capitalising on its "clean, green" image, Australian beef has captured more than 52 per cent of the import market so far this year, says Je Hyun Jung, a research fellow at the Korea International Trade Association.
Consumer products
Australian wine has benefited from sales campaigns, while Australian dairy companies "should be more aggressive in marketing their products in the Korean market", Je says, pointing to an opportunity, too, in consumer products such as cosmetics and craft beers.
Horticultural products have already benefited from the FTA, with mangoes, cherries, brussels sprouts and macadamia nuts all growing from a low base.
For LNG too, the scrapping of a 3 per cent tariff when the FTA came into effect in December 2014 eliminated a competitive disadvantage to rivals such as Indonesia and Malaysia, and gave a modest edge over other major suppliers into Korea such as Qatar and Oman.
For oil and condensates, the 3 per cent tariff is being removed over five years, with the charge finally eliminated on January 1, 2018.
On the Korean side, car manufacturers are making gains in the Australian market.
When it comes to Australian investment, Korea remains a relatively minor player, ranking about 15th among overseas investors despite its long history as a major buyer of coking coal, iron ore and increasingly LNG.
But that could be set to change.
South Korea's $US500 billion National Pension Service, the world's third largest pension fund, has been bidding on Australian real estate projects and is known to be looking carefully at opportunities for investment in ports, roads and rail, such as Brisbane's proposed Cross River Rail project.
Samsung C&T;, the principal contractor at Gina Rinehart's $10 billion Roy Hill iron ore mine in Western Australia and a contractor on the WestConnex project in NSW, is looking for other opportunities.
On the resources front, Korean companies are already investors in several dozen Australian mining and energy projects, including Santos's $US18.5 billion GLNG venture in Queensland. But it is opportunities in Australia's renewable energy industry – a sector heavily constrained in South Korea due to a lack of available land – that is attracting most interest at present, trade sources say.
The writer was hosted in Korea under a joint initiative of The Walkley Foundation, the Australia-Korea Foundation and the Korea Press Foundation.