Application for Decision Relating to the Merger between Korea Shipbuilding & Offshore Engineering Co., Ltd. and Daewoo Shipbuilding & Marine Engineering Co., Ltd.

Notifying Party:

Korea Shipbuilding & Offshore Engineering Co., Ltd.

Notifying Date:

12 September 2019

Summary of transaction:

(i) the names of the merger parties;

Korea Shipbuilding & Offshore Engineering Co., Ltd. (“KSOE”) and Daewoo Shipbuilding & Marine Engineering Co., Ltd., (“DSME”) (collectively, the “Parties”).

(ii) a description of the transaction;

This notification relates to the proposed acquisition by KSOE of a majority interest in DSME (“Proposed Transaction”). As a result of the Proposed Transaction, KSOE will acquire sole control over DSME.

Description of the industry

Commercial vessels are manufactured in shipyards and exported to customers globally. The commercial vessels supplied by the Parties to customers in Singapore are manufactured outside of Singapore in Korean shipyards, and subsequently exported to Singapore. Orders are placed via the Singapore branch office or third-party agents. The key components of commercial vessels vary depending on the type of commercial vessel. Universal components that are commonly used for all vessels include main propulsion engines, and integrated automation & control systems.

The Parties submit that in general, the global supply of commercial vessels) is highly competitive. The shipbuilding sector is characterised by the presence of strong players on a worldwide basis. The Parties need to compete against a number of strong Chinese, Japanese and Korean competitors. Japanese and Chinese competitors are increasingly cooperating with each other to leverage their respective strengths. Since most of these leading competitors are capable of building nearly all commercial vessel types, they also compete fiercely in the market for all commercial vessels and will continue to do so in the future.

Ship owners also exercise strong countervailing buyer power, with the top ten ship owners owning more than half the global fleet for most vessel types, and also many ship owners operating multiple vessel types.

Economic and strategic rationale of the Proposed Transaction

According to the Parties, the Proposed Transaction would allow them to create a stronger business with a more efficient cost structure which is able to compete effectively in the global shipbuilding market, taking into account the market’s long-term recession and overcapacity, aggressive competition from new entrants, and increased production costs.

The Parties further submit that the Proposed Transaction will allow them to deliver greater benefits to customers in the shape of improved product quality at a lower overall cost, while at the same time returning a publicly owned global shipbuilder to private ownership.

(iii) a description of the business activities of the merger parties worldwide and in Singapore;

KSOE

KSOE is a Korean company primarily active in shipbuilding and producing a range of commercial vessels. KSOE and its affiliates are also involved in the supply of vessel parts including marine propulsion engines and marine power generation engines.

Globally, KSOE and its affiliates are also involved in:

1. the supply of industrial products for the electricity and construction sectors and robotic technologies;

2. the building of offshore facilities that are used to handle oil and gas resources under the sea; and

3. the supply of construction equipment such as excavators, wheel loaders and forklifts.

DSME

DSME is a Korean company primarily active in shipbuilding and supplies a range of commercial vessels. DSME also builds offshore facilities for use in the oil and gas sector.

In Singapore, both KSOE and DSME are involved in the supply of commercial vessels which generally refers to ships transporting cargo or passengers.

(iv) a description of the overlapping goods or services, including brand names;

The Parties submit that they overlap in Singapore for the supply of commercial vessels.

(v) a description of substitute goods or services;

The Parties submit that while other means of transporting goods exist, such as air freight, train and trucking, these alternative modes of transportation are differentiated from commercial vessel transportation in so far as their ability to carry certain types of cargo for instance.

According to the Parties, from a demand-side perspective, there are no close product substitutes to commercial vessels which are highly specific in terms of use from a customer’s point of view, i.e. ships used for transporting cargo or passengers. Between various types of vessels, demand-side substitutability might be limited to specific categories of cargo. For vessel classes within the same vessel type, demand-side substitutability is particularly high. If the market is to be segmented, it is reasonable to segment it only by way of vessel type and not further.

The Parties further submit that from a supply-side perspective, given the specialised nature of the production facilities involved in commercial shipbuilding, there are no close substitutes from a supply perspective. Notwithstanding this, substitutability within commercial shipbuilding, between different types of vessels, is high as the production facilities and manpower required to build a ship are not exclusive to a certain vessel type. Further, even if shipyards are focused on building a certain vessel type, they can switch to building another vessel type easily. Once a shipbuilder possesses the technology and necessary know-how to build a specific type of ship, and provided that there are no physical limitations at its shipyards in relation to the building of ships of certain sizes, shipbuilders can easily adjust their production to other types of vessels according to market needs.

(vi) the applicant’s views on:

a. definition of the relevant market(s);

The relevant product market is the global supply of commercial vessels (the “Relevant Market”).

From a demand-side perspective, commercial vessels can be classified into “vessel types” based on the characteristics of transported item. Within the relevant vessel types, vessels can be sub-classified into “vessel classes” based on the size of cargo load.

Common types of commercial vessels include:

Type

Description

Tanker

A tanker is a cargo ship that transports liquid cargo such as petroleum in bulk. Regardless of vessel sizes, tankers usually have bulkier hulls than other vessels. The stern of a tanker has major machinery installed, including a diesel engine to drive one propulsion shaft, boiler, and inert gas production equipment. A residential quarter, an area where crew can stay and control the vessel, is also installed on the stern. On the upper deck, a centre passageway is built for the movement and safety of crew.

Bulk Carrier

A bulk carrier refers to a vessel used in the transport of unpackaged bulk cargoes such as grain or ore. The basic structure and components of the ship is the same as the aforementioned tanker. The key differences are outfit equipment to handle cargo and a bigger ballast water tank to improve stability when it is operated empty as a specific gravity of handled cargo is higher than that in a tanker.

Container Ship

A containership refers to a vessel constructed to carry a container, which is a standard container with goods or parcels, loaded on the inside of the cargo hold and on the deck. Containerships have the advantages of improving the efficiency of unloading, reducing costs, improving the operation rate by shortening the lay time of

the ship. Since the containers are standardised into ISO standards, they are highly compatible with containerships of any type.

LNG Carrier

An LNG carrier is a vessel carrying liquefied natural gas which is produced naturally. The main component of LNG is methane (boiling point -162°C), which accounts for more than 90 per cent., and the volume of liquefied methane is 1/600 of the volume of the gas state, and the specific gravity is 0.42. Since the brittleness (breakability) of ordinary metals is greatly increased under very low temperatures, the LNG cargo hold must be made of special steel, and requires a refrigeration and insulation system to maintain low temperatures.

LPG Carrier

An LPG carrier is a vessel carrying liquefied petroleum gas. LPG consists of propane gas (boiling point -42°C) and butane gas (boiling point -5°C), and depending on the method of liquefaction, it can be divided into pressurised type (liquefied by increasing the pressure at room temperature) and low temperature type (liquefied by lowering the temperature under atmospheric pressure)

The Parties consider that there is a single product market for all commercial vessels as supply substitutability between ship types is very high. In any event, the Parties consider that if the market were to be further segmented, it should be segmented by vessel type, as both demand- and supply-side substitutability are high between vessel classes within the same vessel type.

b. the way in which competition functions in this market;

The Parties submit that the Relevant Market is characterised by the presence of strong buyers with considerable purchasing power who typically procure commercial vessels through a tender process, and strong players globally with excess capacity. Within the Relevant Market, shipbuilders compete fiercely to supply commercial vessels. Customers select suppliers based on, among other things, vessel price, payment terms, delivery date and the quality of the vessel supplied.

c. barriers to entry and countervailing buyer power; and

Barriers to entry

The Parties submit that while barriers to entry for entities which are entirely new to the shipbuilding business are high due to the requirement to construct or obtain a shipyard, it is possible to enter the Relevant Market within a short period of time if there is promotion and support at a national level. In this regard, new entrants are well placed to grow their presence through aggressive investment (with governmental assistance) and a low cost base. In contrast with barriers to entry, barriers to expansion are limited and it is generally easy for an existing shipbuilder to supply a new vessel type given the high supply-side substitutability between vessel types.

Countervailing buyer power

The Parties submit that the Relevant Market is characterised by the presence of large ship owners who wield considerable influence and significant countervailing buyer power. Ship owners are also able to procure second-hand vessels or retrofit existing vessels as an alternative to procuring new vessels.

d. The competitive effects of the merger (non-coordinated, coordinated and/or vertical effects, as relevant); 

The Parties submit that the Proposed Transaction will not result in coordinated or non-coordinated effects in view of the following:

1. Strong prevailing state of competition: KSOE and DSME will continue to be constrained by existing competitors after the Proposed Transaction. Shipbuilders generally have significant excess capacity and will have the ability/incentive to use this to secure each and every order that comes to the market. The Relevant Market is also characterised by the presence of strong players with most leading competitors capable of building nearly all types of commercial vessels. The state of competition is likely to intensify with pending consolidation in the shipbuilding industry.

2. High countervailing buyer power of customers and ease of switching: The main customers for commercial vessels are large and sophisticated shipping companies with substantial countervailing buyer power. The top ten ship owners own more than half of the global fleet across most vessel types. The presence of significant countervailing buyer power will deter any attempt by shipbuilders in exercising market power.

3. Low incremental effect of the Proposed Transaction: KSOE and DSME are not each other’s closest competitor in the Relevant Market, and the impact of the Proposed Transaction on competition within the Relevant Market is low and marginal at most.

4. Any coordination would be unsustainable: The shipbuilding industry is characterised by a large number of competitors for a small number of contracts. In this environment, it is extremely difficult for shipbuilders to agree tacitly with other competitors in the market on specific transaction terms such as price. In addition, coordination is not sustainable as any deviation cannot be effectively monitored or punished. Given the excess capacity in the Relevant Market, market players have every incentive to maximise utilisation of existing capacity and undercut any attempt at coordination.

The Parties also submit that while they are active in the supply of upstream components for shipbuilding, the Proposed Transaction will not result in any vertical effects in view of the following.

1. Both KSOE and DSME only have a limited presence in the supply of upstream shipbuilding components and do not have the ability or incentive to foreclose its competitors from access to inputs.

2. Any attempt by KSOE or DSME to foreclose their competitors from access to shipbuilding inputs will have little or no effect given the numerous alternative viable sources of supply for shipbuilders.

 Decision:

Following its assessment, CCCS has concluded that the Proposed Transaction, if carried into effect, will not infringe the section 54 prohibition of the Competition Act (Cap. 50B).

Read the Grounds of Decision.

 Decision Date:

25 August 2020

Read the media release.