Daewoo Shipbuilding & Marine Engineering was thrown a lifeline while battling to stay afloat as the company’s bondholders agreed to its debt restructuring plan last week. However, a tough path lies ahead for the company, including a large scale restructuring program. On today’s show, we’ll discuss the reasons behind the downfall of what was once the world’s largest shipbuilding company, as well as what tasks lie in store for the firm, with economic analyst Lee In-cheol. First, let’s take a closer look at the decision that decided Daewoo Shipbuilding & Marine Engineering’s fate.

Daewoo Shipbuilding & Marine Engineering has managed to avoid the worst-case scenario of being put under court receivership. The bondholders unanimously approved the government led debt-to-equity swap plan. The bondholders’ meeting was held for two days from April 17 to 18. A total of 99% of the bondholders who voted agreed to the plan, as they decided that accepting the debt restructuring plan would be more advantageous than having the company go under court receivership, or the prepackaged plan. With the decision, DSME is able to avoid court receivership, while the bondholders agreed to swap half of the debt owed to them for equity. In addition to slashing the debt in half, the holders also agreed to allow Daewoo to suspend repayment of the remaining debt for three years. The government will also inject about 2.9 trillion won into the company. So that’s how DSME’s dramatic revival was put together.

Daewoo Shipbuilding & Marine Engineering was saved from a liquidity crisis as the bondholders approved the debt restructuring plan. Under the plan, the shipbuilding firm will receive 2.9 trillion won in a bailout package next month, and begin its corporate reform efforts. However, its road toward normalization is going to be a rough one. DSME must sell its assets and reduce labor costs by 2018. The company’s offshore plant business, which has been deemed a major part of the company’s fall, will be streamlined. How did such a fate come about to what was once the world’s top shipbuilder?

Those who visited Okpo Shipyard on Geojedo Island at the height of the shipbuilding boom would have been amazed. From its sheer scale to its shipbuilding skills and technology, DSME was without a doubt the world’s leading shipbuilder. In fact, DSME still maintains its position as the world’s largest shipbuilder by order backlog since the end of 2014. But the prolonged global recession aggravated its hardships. The company definitely failed to prepare for an economic downturn while at the top, and its expansion of its offshore plant business was met with a drop in crude oil prices. Shipowners were hit hard as they were faced with a sudden drop of work. Adding insult to injury, the company’s accounting fraud was revealed. The shipbuilder reported its fourth consecutive year in the red in 2016, and its debt-to-equity ratio was over 2,700 percent at the end of last year, after hitting its peak of 5,500 percent.

Daewoo Shipbuilding & Marine Engineering’s downfall began following the global financial crisis. The economic slump led to a sharp drop in the number of shipbuilding orders, while the fall of oil prices led to a large reduction in orders for offshore plants which extract oil and natural gas from the ocean floor. In addition, evidence was found pointing to an accounting fraud spanning from 2008 to 2016. The fact is, Daewoo Shipbuilding & Marine Engineering had been virtually without an owner as the shipbuilder had entered into a corporate workout program following the dismantling of the Daewoo Group, and has been in the management of its creditors since 2000. The government intervened in 2015 by investing 4.2 trillion won into the firm to prevent the situation from worsening, but just 17 months later, it decided to offer more liquidity.

The government decided to keep the shipbuilder afloat because if it were to file for bankruptcy, financial institutions would suffer a loss of about 1.4 trillion won. They would lose the chance to take back any of the funds they’ve invested. Shipbuilding starts with ship orders, and intermediate payments are made during the shipbuilding process. When orders disappear, so will more than 40,000 jobs. This would lead to mass unemployment and economic recession in Geoje City, of Gyeongsangnam-do Province where the DSME headquarters is located, and its surrounding areas. The government estimates the direct and indirect losses to amount to as much as 57 trillion won. Also, while there are other Korean shipbuilders, such as Samsung Heavy Industries and Hyundai Heavy Industries, the negative image incurred by the fall of the world’s top shipbuilder in Korea would adversely affect other shipbuilders here too.

As of the end of 2016, 114 vessels remained on Daewoo Shipbuilding & Marine Engineering’s order backlog. If the company files for bankruptcy, 26 trillion won spent on halting the shipbuilding process and 22 trillion won the company owes will be lost. From those who work for the shipbuilder to dispatched personnel and employees at the company’s suppliers, more than 40,000 people would lose their jobs. Also, the international credibility of Korea’s shipping industry has already been hit hard by the bankruptcy and liquidation of Hanjin Shipping. A similar fate of DSME at a time like this would be an even bigger blow. That’s why the government decided to offer help once again. But working toward normalizing the management will not be easy.

At the moment, the shipbuilder has been given a bit of breathing space. Half of its debt will be deducted, and the remaining half will be rolled over for three years, so it has some time. Meanwhile, the company will enter voluntary restructuring led by creditors rather than court-led restructuring. This means that DSME’s future depends on how much the company’s records improve, and how well it administers the reform. It must take the initiative to secure 3.5 trillion won by next year, while also reducing its workforce to about 9,000 employees. In terms of performance, DSME claims that it will be able to record its first surplus in 4 years in the first quarter of this year. But even so, the prevailing expert opinion is that there are more hurdles to overcome to reach management normalization. One of the biggest reasons behind this is that the global shipbuilding market remains in a slump. If the current trend continues, additional public funds may be injected into the firm. In such a case, everyone including creditor banks, financial authorities, creditors, and the National Pension Service will suffer losses, and will not be able to avoid being held responsible.

Daewoo Shipbuilding & Marine Engineering’s drastic restructuring program has begun. Of the company’s 5.3 trillion won self-rescue plan approved last year, DSME has managed to secure 1.9 trillion won so far, and must implement the remaining 3.4 trillion won by 2018. DSME also plans to reduce the number of employees to under 9,000 from its current 11,261 by next year, and slash last year’s sales record of 12.7 trillion won in half in order to bring the operating profit up to the 1 percent range from the current negative level. The government and the creditors’ plan is to turn DSME into a small but resilient firm before promoting its sales to one of the country’s “big 2” shipbuilders, Hyundai Heavy Industries and Samsung Heavy Industries. All that remains for DSME is a radical restructuring program, and much can be learned from what lies ahead for the company.

What we can learn from the fall of DSME is that industrial restructuring has been too slow so far. DSME became an independent entity when the Daewoo Group was dismantled in 2000. Since then, the company was virtually ownerless during the corporate workout process and revolving-door appointments became rampant, preventing a timely large-scale corporate restructuring. The red light came on for the shipbuilding and shipping industries in 2008, and there had been another chance in the early parts of the Park Geun-hye Administration. A bold corporate restructuring program should have taken place then, but it was pushed back and the consequences became more severe. So in a nutshell, the situation surrounding DSME could serve as an example showing what happens when necessary restructuring efforts are neglected.

Korea has been actively pursuing industrial reform since 2015. But without a proper control tower to oversee the process, crises such as those surrounding Hanjin Shipping and Daewoo Shipbuilding & Marine Engineering are emerging one after another. The fact is, restructuring is only effective when a body is in place that is capable of comprehensively assessing the overall situation and setting clear principles and a vision for the future. Korea must learn from the current situation and work toward implementing a well-prepared corporate restructuring scheme.