Korean FTC Fines Daewoo Shipbuilding Over Treatment of Subcontractors

In the latest example of the business practices of the South Korean shipbuilding industry coming under scrutiny, South Korea’s Fair Trade Commission announced actions against Daewoo Shipbuilding & Marine Engineering (DSME) for its treatment of subcontractors. Last week the FTC fined France’s GTT over its business practices related to the licensing of LNG technologies and the sale of services to the shipyards. The FTC has a history of taking action against the shipyards.

 In the latest case, the FTC fined DSME nearly $14 million for abusing its power over small suppliers. In addition, the FTC said it plans to sue the shipyard for breaching South Korea’s fair trade laws.

The FTC said it had launched an investigation into the shipyard’s business practices and contracts after receiving several complaints from small businesses. Three different trade practices toward the subcontractors were cited by the investigation.

Between 2016 and 2019, DSME reportedly set the price for more than 1,400 contracts involving 91 subcontractors below production costs. The FTC said that a budget office at DSME routinely cut the value of contracts after they had been estimated by the DSME team working with the contractors. As a result of this practice, the FTC estimates that subcontractors were underpaid by over $1 million versus actual labor costs.

Also, the FTC reports that DSME failed to issue contracts to subcontractors in more than 16,000 instances. Work was started on the projects between 2015 and 2019 before the contract was issued involving 186 subcontractors. The FTC said that contractors had no choice to accept the contracts because work was already underway on the projects.

DSME was also cited for canceling over 11,000 contracts with 194 subcontractors between 2016 and 2019. The subcontractors routinely supplied materials to DSME, often manufactured to its specifications, only to have DSME change or cancel the contract without consideration for the financial impact on the subcontractor.

In all of the instances, the commission contends that DSME often presented the terms without explanations of the changes. Contractors were forced to accept the terms without input from DSME on the changes to the agreed contracts.