▲ The Seoul Central District Court. Provided by NewsTomato.
On February 17, 2017, Hanjin Shipping Co. Ltd. met an end after 40 years of operations when the Seoul Central District Court declared the company bankrupt. During its heyday, Hanjin Shipping was South Korea’s largest container line and one of the world’s top ten container carriers in terms of capacity. On January 2016, it boasted 104 ships and 626,217 TEU (twenty-foot equivalent unit) capacity. Within a year, Hanjin Shipping’s terminal decline left it with a fleet of seven ships and a TEU capacity of 44,321.
Hanjin’s first fracture leading up to bankruptcy can trace its roots back to April 19, 2007, when Hanjin leased five container vessels on a 10-year contract from the Greek company Danaos Corporation. An aggressive decision at heart, Hanjin braved the waters in response to a global economic boom that substantially increased the need for shipping capacity. However, such times came to an end when a subprime crisis caused the Lehman Brothers to collapse, kickstarting the infamous 2008 financial crisis.
By 2013, the company had faced three consecutive years in the red. Penniless and marred with expenses it could not afford, Korean Air—whose CEO is related to the then-CEO of Hanjin—loaned 150 billion won (132.4 million dollars) as emergency funds on October 13, 2013. Korean Air loaned a further 60 billion won (53.1 million dollars) on September 21, 2016, but such efforts proved futile. Soon, Hanjin pledged office shutdowns, worker layoffs, asset sales, and service network dismantling. In a few months, Hanjin and its 40 year legacy stood dead in the water.
Aftermath and Response
Although Hanjin Shipping demonstrated signs of fatal fractures long before its declared bankruptcy, the news shocked the world nonetheless. Hanjin Shipping was once the world’s 8th largest integrated logistics and shipping companies, and a large fraction of Korea’s imports and exports depended upon the company. According to the Chosun Ilbo, South Korean transport companies accounted for 11.9 percent of the Asian and North American transport industry. Without Hanjin, the figure fell to 6.3 percent.
For the foreseeable future, Hyundai Merchant Marine, Korea’s second largest shipping company, may need to fill that gap. However, Hyundai has been operating in the red for the last six years, as has most of the shipping industry. In 2016 alone, the company had suffered an operating loss of 833.3 billion won (723 million dollars)—198.4 percent more than that of 2015. With Hyundai’s finances in turmoil, experts suggest it will be difficult for Hyundai to expand operations without risking further distress, placing itself at risk of meeting Hanjin’s fate.
Lamentably, Hanjin’s lapse may be too large of a chasm to fill for Hyundai. Hanjin was once the fourth largest logistics company and was part of THE Alliance, a coalition of container lines accounting for 17.9 percent of the global transport industry. Hyundai, on the other hand, is only the 15th largest, and was not part of any alliances until one year ago. On a different note, however, Hyundai was able to lower its debt-to-equity ratio from >1600 percent to <200 percent, heralding positive news for the time being.
The logistics industry in Korea is by no means a negligible portion of Korean economy, generating 31 trillion won (27.5 billion dollars) which accounts for more than 3 percent of its Gross Domestic Product (GDP). While the volume of international cargo is projected to increase 9.2 percent per year until 2018, there are 36.7 percent more container units than necessary. The resuscitation of the Korean transport industry may prove a slow progress, as will the revival for the global economy.
▲ Infographic on Hanjin Shipping. Provided by Tuscor Lloyds.
Reviving Logistics in Korea
The first breath of air reached Korea on March 8, when SM Line began operations after having absorbed the logistical network of Hanjin. Two days prior, SM Line’s CEO, Kim Chil Bong, stated his optimistic outlooks for the company, stating their goal is to reach 5 trillion won (4.4 billion dollars) in revenue. According to Lee Kook Heon (Department of Economics), the feasibility of this statement is a non-story.
“SM Line cannot revive the Korean logistics industry,” he said. “Instead, streamlining the issues surrounding Hyundai’s management and having Hyundai expand operations to fill the gap of Hanjin is the more realistic option.” Hyundai, in reality, has no de facto head. As it lacks a managerial head, the CEO of its major shareholder, Korea Development Bank (KDB), takes the reigns. However, Lee believes that the management must change.
“Logistics and transport is a highly specialized piece of the industry. Not only does the CEO of a bank not have the necessary skills, Lee Dong Geol (KDB’s current CEO) lack the enthusiasm to lead Hyundai,” said Lee. The best course for the transport industry, he believes, is to hold an open bidding for Hyundai so that the proper management can lead its head and begin mending the chasm left behind by Hanjin.
Due to the previous financial crises, most transport companies have a debt-to-equity ratio higher than 200 percent. On top of that, Korean banks such as Hana, Kookmin, Shinhan, and others have been reluctant to loan companies with a ratio over 200 percent, since the Asian financial crises in 1997. Government funded banks, however, have no such limitations in place, presenting logistics companies with a carte blanche to loan from banks, primarily the KDB. Lamentably, its coffers are filled with taxpayer funds.
“Much needs to change, and soon,” Lee said. “The good news is, it is very unlikely that another logistics company the size of Hanjin will fall,” he added. Surely, another blow the size of Hanjin may prove detrimental, even crippling for the logistics industry. The road to resurrecting the fallen logistics industry in Korea will be a prolonged and uphill effort. The circumstances that brought upon this reality is both multiple and complex— the solution to untangling this mess may prove more so.