McKinsey: DSME "Least Likely to Survive by 2020"

Leading consulting firm McKinsey & Co. has issued its preliminary report on the state of South Korea's shipbuilding industry, and its conclusions are dire: McKinsey believes that Daewoo Shipbuilding and Marine Engineering may not survive past 2020, due to a forecast negative operating margin and a liquidity shortfall reaching as much as $3 billion.

"Due to the global downturn in the shipbuilding industry, it's inevitable that Korea's three shipbuilders will face harsh losses. Of them, DSME has the weakest financial structure and without a responsible management group is least likely to survive by 2020," McKinsey Korea wrote.

McKinsey recommended cutting DSME's operations and workforce back and retaining it as an independent entity, rather than integrating it with the other Big Three shipbuilders, Hyundai Heavy and Samsung Heavy Industries. In an interim report in August, McKinsey recommended cutting all three yards' capacity back by half by 2020. 

DSME lost $1.1 billion in the first half of the year, despite its internal forecast for positive earnings. In addition to a sharp decline in orders, difficulty in securing delivery payments for at least two high-value ships is creating challenges for the firm's balance sheet.

In a statement Wednesday, DSME rejected the McKinsey report, asserting that it was "based on completely false assumptions about DSME's situation."

"It does not include the Big Three shipbuilders' future strategies and self-rescue efforts. We made our position clear with the Korea Offshore & Shipbuilding Association that the report is unacceptable," the firm said. 

However, DSME appears to be acting in line with the report's recommendations for downsizing. On Wednesday, it announced that it would accelerate its workforce reduction plan by "transferring" 2,000 workers to a new company. The transfer comes in addition to a recently announced plan to offer voluntary retirement for 1,000 employees, with applications open through October 21.

DSME intends to cut its payroll to less than 10,000 employees by years' end (not including contractors); overall it plans to cut its combined company and contractor head count to 30,000 by 2019, down from the present level of 42,000. 

In addition to its internal efforts, the firm has received billions in equity and loan assistance from its main creditor banks, state-owned banks KDB and Eximbank. Under a restructuring proposal, the two banks are expected to provide DSME with $2.8 billion more in debt-for-equity swaps and capital reduction measures.