Samsung Heavy Industries recently announced that the company will be issued to the production staff, office staff and first-class employees to “Merit Salary for Overcoming Management Crisis”. If it achieves profitability this year, Samsung Heavy Industries will pay merit pay in the form of incentives to the rest of its employees, including executives and senior staff, in 2025.
Samsung Heavy Industries said that the move is aimed at encouraging employees who supported the company during its restructuring as it enters a new “super cycle” in the shipbuilding industry. In 2016, Samsung Heavy Industries fell into financial difficulties due to the deteriorating business environment and subsequently implemented restructuring through layoffs, wage freezes/cuts, and the closure of shipyard terminals. At that time, Samsung Heavy Industries’ office staff and production staff returned 15 to 30 percent and 10 percent of their salaries, respectively.
In 2023, Samsung Heavy Industries’ annual operating profit reached 233.3 billion won (about $175 million), successfully turning a profit after eight years. In the second quarter of this year, Samsung Heavy Industries operating profit exceeded 100 billion won (about $75 million) for the first time in 10 years. According to recent data from South Korea’s shipbuilding industry, Samsung Heavy Industries’ average shipyard utilization rate reached 112 percent in the first half of this year, second only to HD Hyundai Samho’s 118 percent, and its order book for the same period rose 17.4 percent year-on-year to 33.569 trillion won.
In the first half of this year, Samsung Heavy Industries received a total of 22 new ship orders worth $4.9 billion, realizing 51% of its annual order target of $9.7 billion, including 19 LNG carriers, two VLACs, and one shuttle tanker in terms of ship types.
Like other shipbuilding companies, merchant ships (mainly LNG carriers) continue to account for a high share of Samsung Heavy Industries’ total order book, but the company has a clear “Plan B” based on its overwhelming competitive advantage in the field of offshore engineering.
In the first half of this year, the consolidated operating income of Samsung Heavy Industries was KRW 4.879 trillion (about $3.656 billion), of which the shipbuilding and offshore engineering business realized operating income of KRW 4.3703 trillion, accounting for 89.6%. Specifically, the shipbuilding business accounted for about 85%; the offshore business accounted for about 15%, including FLNG, FSO, and FPU.
Among them, FLNG, one of the highest value-added products in shipbuilding and offshore engineering and one of the long-term businesses of Samsung Heavy Industries, costs between $1.5 billion and $3 billion, which is at least five to six times as much as the cost of an LNG carrier.
To date, Samsung Heavy Industries has secured five of the seven FLNGs ordered globally, with a market share of 71.5%. Despite the fierce competition for FLNG orders globally, the industry predicts that Samsung Heavy Industries will continue to be able to sign one to two FLNG construction contracts per year.
However, likeHD Korea Shipbuilding & Offshore Engineering (HD KSOE) and Hanwha Ocean, Samsung Heavy Industries is also facing a strike crisis. The company fears that too many strikes could lead to a slowdown in production and put the brakes on the current super cycle. In addition to the strike, the uncertainty in the field of offshore engineering, which is characterized by a small number of orders and a high level of risk, is one of Samsung Heavy Industries’ concerns.
Typically, due to the large-scale and time-consuming nature of projects, project developers need to raise funds through various channels, during which they are subject to a variety of variables such as interest rates and the macroeconomic environment, and orders cannot be fully and effectively secured. In fact, Samsung Heavy Industries has been forced to deal with project delays, customer cancellations, or contract terminations due to the plunge in oil prices.
However, Samsung Heavy Industries believes that the offshore industry is unlikely to experience a recession as it has in the past. The company does not expect the market to change drastically in the short term and can take steps to mitigate risks based on previous withdrawal experience.
The $1.5 billion FLNG order signed by Samsung Heavy Industries at the end of 2023 was officially confirmed in June of this year with a positive final investment decision by Cedar LNG Partners LP (Cedar LNG) for the Cedar LNG project. The FLNG, with a capacity of approximately 3 million tons per year, is planned to extract natural gas from the rich Montney resource area in northeastern British Columbia. The FLNG will be located near a Canadian LNG plant and powered by renewable energy from British Columbia.