How To Keep South Korean Shipbuilders From Running Aground In America

The U.S. Secretary of the Navy, Carlos Del Toro, has made no secret of his desire to tap into South Korea’s vast shipbuilding know-how. Big South Korean conglomerates have responded, making bids for U.S.-based shipyards, and establishing cooperative agreements with U.S. shipbuilders. But any honeymoon between U.S. and South Korean shipbuilders will be brief. Despite all of today’s energy, enthusiasm and good-will, emotions should not drive foreign investment in U.S. shipbuilding.

South Korea’s future investments in the U.S. waterfront will only be successful if they are well thought out, collaborative, and accompanied by years of steady, long-term engagement from every shipbuilding stakeholder in America.

An emotional rush to purchase a struggling American shipyard, done without a full understanding of the tough financial, operational, and cultural challenges in America’s gritty government-bound shipbuilding sector is a risky path for both countries. Failure could send U.S. shipbuilding into complete disarray, and, in turn, ruin South Korea’s reputation as an elite shipbuilder. Bad feelings from a derailed South Korean shipbuilding venture in the U.S. could do real damage to the strong U.S-South Korea alliance, weakening shared security arrangements.

South Korea is certainly no stranger to the United States. Overall, South Korea is doing a wonderful job of engaging America’s shipbuilding industrial base through targeted investments and incremental collaborations. South Korea’s HD Hyundai Heavy Industries Co., Ltd., took a measured approach recently, forging a Memorandum of Understanding for a partnership with Philly Shipyard. That step appears to promise all the benefits of a long-term collaboration, while avoiding the massive array of concerns and immediate operational challenges that come with foreign control of any U.S.-based shipbuilder.

On the other hand, having been thwarted in an earlier effort to gain a controlling interest in Philly Shipyard, South Korea’s Hanwha Ocean (Hanwha)—a branch of the massive, globe-spanning Hanwha conglomerate—is now taking a far more aggressive approach. Emboldened by the U.S. Navy Secretary’s encouragement, Hanwha made an unsolicited bid for the cash-strapped naval shipbuilder Austal Ltd, the Australian-based parent of Mobile Alabama’s Austal USA—one of the largest naval shipbuilders in America.

Launching a high-profile, full-court press to make the sale, Hanwha is putting a lot on the line. Hanwha’s wide-raging international influencing efforts are working. Despite an initial rebuff of Hanwha’s offer, the Australian government has now signaled that is has “no concern” with Hanwha ownership, ramping up the pressure on Austal Ltd. executives and encouraging U.S. regulators to accept the inevitability of Hanwha’s stewardship of Austal USA as well.

There are a lot of reasons for Austal to sell itself to a South Korean company. Austal is in a very fragile cash position. It needs cash to build new production facilities and faces a big potential fine from the U.S. Department of Justice for financial irregularities. An ugly public trial of former Austal USA executives is set to begin in early 2025. Given those liabilities, an offer from a deep-pocketed conglomerate is a lifeline. To Austal’s beleaguered stockholders (of which I am one), an above-market buyout is a hard-t0-resist balm. And, after christening America’s last Littoral Combat Ship, the future USS Pierre (LCS 38), on May 18, Austal’s move into a bewildering array of critical governmet shipbuilding programs—salvage ships, dry docks, landing craft, unmanned vessels, surveillance ships and Coast Guard cutters—is underway. Unfortunately, these efforts seem destined to suffer some tough early-stage losses.

A sale can happen, but, before any transaction is approved, everyone on both sides of the Pacific must be realistic about the challenges. They may well be insurmountable, making the investment a poor choice given the fascinating alternative of starting anew, in an entirely modern U.S. shipyard.

America Has Already Defeated Great Shipbuilders:

Any optimism over South Korea’s prospective waterfront investments must be tempered by cold, hard realism. America has been here before. In 2002, a state-owned Singaporean conglomerate, ST Engineering, bought Halter Marine’s shipbuilding facilities for $66 million. Known for their shipbuilding prowess in Singapore, ST Engineering tried hard, but, after twenty years of struggle and hundreds of millions in shipyard investments, Singaporean managers liquidated their U.S. shipyard holdings, selling everything for a mere $10.25 million—pennies on the dollar for an essentially failed shipbuilding enterprise.

In 2008, the Italian-government-owned shipbuilding giant, Fincantieri, bought Manitowoc Marine Group’s three Great Lakes shipyards. After making additional investments to expand their new yard’s capabilities, Fincantieri’s direct investments in shipyard infrastructure span to at least $670 million. It is now busy reconstituting another shipyard in Florida. But, after watching the Fincantieri-built Freedom Class Littoral Combat ships struggle and Finantieri’s high-profile Constellation-class frigate contract with the U.S. Navy turn into a lemon, disillusionment is settling in.

Put bluntly, foreign investment in existing U.S. shipyards is not for the faint of heart.

Even the most well-intentioned investors can lose everything.

Start New Or Get Trapped:

For South Korean companies, taking over an established U.S. defense contractor is a tough, time-consuming process. The U.S. Committee on Foreign Investment in the United States must weigh the transaction over a period of months. Then, if the merger or takeover is approved, each foreign-owned U.S. naval shipbuilder gets weighed down with a labyrinth of Foreign Ownership, Control or Influence (FOCI) regulations. For shipbuilders working on classified contracts, the regulatory firewall between U.S. subsidiaries and parent organizations becomes even more difficult to manage. The complex rules are often breached, which makes integrated operations a challenge. Partial compliance can be catastrophic, leading to criminal liability and hundreds of millions in fines.

These are all manageable things, but, if Hanwha survives all the bureaucracy and gains control of Austal, there’s no time for the new owner to learn. There’s no ramp-up. Given Austal’s financial state and the hard-pressed status of Austal’s big U.S. shipbuilding contracts, everything gets quite complex, quite quickly. Almost immediately, Hanwha will find itself locked into an adversarial relationship with the Navy, fighting to recover ground long lost. There’s no coming back from that.

There’s also a tricky international component to this potential sale. To support the wide-ranging AUKUS agreement, Australia and the United States are set to ease information-sharing protocols, allowing U.S. companies to easily transfer critical defense information to Australia. With Austal USA set to build classified submarine components for the U.S., efforts to speed information-sharing with Australia may facilitate the unplanned transfer of critical submarine-building technology from the U.S. to South Korea, where, in time, it could all pop up in South Korea’s aggressive, export-minded shipyards. The necessary security mitigation need to prevent accidents is neither fast nor easy, and it could, potentially, force a wide-ranging reconsideration of America’s submarine production plans and the recasting of certain aspects of the AUKUS agreement.

There are other challenges. American shipbuilders are encumbered by restrictive bureaucracies and enjoy only occasional spurts of government interest. Industry partners can only watch in envy as South Korean shipbuilders, such as Hanwha, enjoy massive state guarantees of hundreds of millions of dollars. The South Korean government pays shipbuilders up to $6,000 dollars in direct training support and primes the shipbuilding technology pump with over $20 million in R&D support a year. U.S. shipbuilders have no guarantees or worker handouts, and R&D budgets are, at best, laughable.

The uncompetitive environment fostered by America’s own government is what keeps American shipyards from performing. Unless Congress, the Administration, and the U.S. Secretary of the Navy puts some hard work into building a workforce, enabling the development of modern, green-field shipyards, all while fixing Naval Sea Systems Command and the U.S. Maritime Administration (MARAD) excesses, American-based shipyards—regardless of who might own them—will remain challenged.

Right now, America’s expectations from South Korea’s high-performing shipbuilders are unrealistic. South Korean shipbuilders are no magic cure-all for America’s shipbuilding woes. Korean shipyards are competitive and modern because they have benefitted from South Korea’s robust industrial policies, workforce development efforts, technical development support—and of course, steady demand.

At the end of the day, South Korea’s shipyards are as prone to mistakes as any other shipyard—and South Korea has made some big ones. Right now, two six-year-old South Korean-built liquified natural gas tankers are scrapyard-bound, a $290 million loss due to technological overreach. According to Splash247.com, the tankers never “entered the gas trades.”

In the tough world of American shipbuilding, foreign ownership makes it even harder for U.S. shipyards to compete. A better route for South Korean shipyards is to keep their reputations intact, collaboratively entering the U.S. business on their terms, via new, modern shipyards, designed to meet the best shipbuilding manufacturing standards in the world. By working in tandem with the U.S. Navy, these new waterfront participants can, at new and modern shipyards, can build a healthy business producing much-needed civilian cargo and auxiliary ships, introducing South Korean subsystems and, in time, South Korean-designed combatants and battle management systems.

Emotions and the thrill of a fast-paced merger-acquisition is running high. But the message is clear. Rather than fight to make a troubled U.S. shipyard better, a brand-new yard offers a far more productive route to a happy, long-term U.S./South Korean maritime relationship. By placing a smart bet on a new shipyard, it becomes a high-profile and viable means to begin encouraging the U.S. Government to adopt an array of pro-shipbuilding policies South Korea began demonstrating decades ago.

Organic growth via the accretion of a solid performance record is a time-honored American tradition, and a strategy South Korean automobile-builders have, to date, successfully leveraged with American automakers throughout the United States.

American shipbuilding shouldn’t be any different.