Facing headwinds at home, anxious Korean shipbuilders court U.S. Navy

Midsize Korean shipbuilders are eyeing the U.S. Navy maintenance, repair and overhaul market as they seek new sources of revenue amid declining orders.

The USNS Wally Schirra, owned by the U.S. Navy, undergoes maintenance, repair and overhaul (MRO) by Hanwha Ocean. [HANWHA OCEAN]

Midsize Korean shipbuilders are setting their sights on the maintenance, repair and overhaul (MRO) market for U.S. Navy vessels, as they seek new sources of revenue amid declining orders.

Industry insiders say the MRO market could eventually serve as a stepping stone into the U.S. military shipbuilding sector.

HJ Shipbuilding & Construction and SK oceanplant have already declared their intent to enter the MRO business while Daehan Shipbuilding and K Shipbuilding are reviewing the option, industry sources said May 28.

Midsize shipbuilders showed strong performance last year. The three main players — Daehan Shipbuilding, K Shipbuilding and HJ Shipbuilding & Construction — returned to profitability amid a shipping industry supercycle. Daehan Shipbuilding reported a record-high operating margin of 14.7 percent, with 158.1 billion won ($114.8 million) in operating profit. K Shipbuilding and HJ Shipbuilding’s shipbuilding divisions both posted a turnaround after losses.

Still, the outlook is less rosy going forward. New orders have declined. A report by the overseas economic research institute of the Export-Import Bank of Korea, otherwise known as Eximbank, noted that orders for tankers by midsize Korean yards amounted to 250,000 compensated gross tons last year, down 40.8 percent from the previous year. Order backlogs at year-end also fell 4.6 percent on year.

Hanwha Group acquired a 100 percent stake in Philly Shipyard in Philadelphia, Pennsylvania, in 2024. [HANWHA OCEAN]

The report pointed out that the yards failed to secure enough orders to exceed their annual production volume.

Industry insiders say one factor is the difficulty in securing refund guarantees, which are crucial for signing new contracts. A refund guarantee ensures that a financial institution will reimburse an advance payment if a yard fails to deliver the ship. Contracts are typically difficult to secure without a refund guarantee.

“The price of ships has gone up since 2021, but refund guarantee ceilings remain fixed,” said one industry insider who requested anonymity. “A yard that could previously take orders for 10 ships can now only handle seven. It’s natural to look for alternative revenue streams that don’t rely on RGs.”

Four liquefied natural gas carriers are built simultaneously at Dock 1 of Hanwha Ocean’s Geoje, South Gyeongsang shipyard. [MINISTRY OF TRADE, INDUSTRY AND ENERGY]

Lower entry barriers draw Korean yards

One draw of the U.S. Navy MRO market is that, for now, companies don’t need a special license to bid. Aside from major shipbuilders, only HJ Shipbuilding and SK oceanplant have formally declared their entry. While both hold Korean defense industry licenses, they have yet to acquire a U.S. Navy Master Ship Repair Agreement (MSRA).

In January, the U.S. government relaxed regulations to allow companies without an MSRA to bid on noncombat ship MRO projects. At a company briefing on May 16, an SK oceanplant spokesperson said the company’s extensive experience building and repairing small Korean patrol ships makes it well-equipped to handle U.S. Navy MRO work.

K Shipbuilding and Daehan Shipbuilding are also considering entering the market. A K Shipbuilding spokesperson said, “A defense industry license is not required for the MRO business, and we have experience in building special purpose vessels, so we’re planning to make a move.”

The USNS Wally Schirra, owned by the U.S. Navy, undergoes maintenance, repair and overhaul (MRO) by Hanwha Ocean. [HANWHA OCEAN]

Hopes rise for government support

With U.S. President Donald Trump having emphasized Korea-U.S. cooperation in shipbuilding, industry insiders hope that the next U.S. administration — regardless of who wins — will invest in fostering MRO as a strategic industry.

Korean presidential candidates have also pledged support. Liberal Democratic Party candidate Lee Jae-myung has proposed fostering the special purpose shipbuilding and MRO sectors, while conservative People Power Party candidate Kim Moon-soo has pledged to expand participation in the U.S. MRO market.

Local governments are joining the push. A K Shipbuilding spokesperson said the company is in talks with South Gyeongsang on MRO-related initiatives.

The USNS Wally Schirra undergoes maintenance in Hanwha Ocean’s Geoje, South Gyeongsang shipyard on Sept. 3, 2024. [HANWHA OCEAN]

Experts believe midsize shipbuilders, which have more available dry dock space compared to the busy large yards, may be better positioned to secure MRO contracts.

“For Singapore’s ST Engineering, MRO accounts for 40 percent of marine revenue and serves as a cash cow,” said Oh Kyung-won, a professor of aircraft maintenance at Howon University and former Navy lieutenant commander. “Midsize shipbuilders can compete by offering lower labor costs.

“Think of MRO like an auto repair shop — some jobs just replace the bumper, others overhaul the whole vehicle,” said a shipbuilding industry insider. “As more players enter the market and volumes grow, large and midsize builders will be able to secure projects suited to their scale.”

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff. BY LEE SU-JEONG [kim.minyoung5@joongang.co.kr]