Hanjin collapse offers lessons to current South Korean shipping industry

Be prepared.

Shipping industry experts warned that the current economic boom in South Korea is in danger of ending its good run soon.  To extend the momentum, companies need to learn from the causes that led Hanjin Shipping to its demise, and implement the necessary pre-emptive measures during the good times. 

Hanjin Shipping, once one of the world’s biggest shipping companies, officially went out of business in February 2017 as the Seoul Central District Court declared the company bankrupt.  Hanjin filed for receivership in August 2016 and it was reported its debt totaled almost US$5 billion.

As can be expected, the collapse of Hanjin had major repercussion.  The transshipment traffic of Busan Port decreased, Korean shipping companies were boycotted, and there was massive unemployment.  As also can be expected, after a few years of stabilization and recovery, the shipping industry is now doing well.  There is an e-commerce boom, Busan Port’s transshipment traffic hit a record number in January, and there are more orders for new ships to meet soaring demand.

Lesson one: Hanjin did not invest in own container vessels

Shipping companies often owned their vessels, especially ones with big capacities, in case of unexpected financial risks and lack of charter vessels in the market.  Hanjin did not own big container vessels (with over 13,300 TEU capacity) and had chartered them under long-term contracts instead.

“Other liners, including Maersk Line, MSC, and COSCO, had consistently invested in purchasing containers (to avoid financial risks),” Jeff Koo, logistics professor at Baehwa Women’s University, told Maritime Fairtrade. “But Hanjin Shipping overlooked the importance of investing in vessels, container terminals, and containers.”

Hanjin had been using seven 10,000 TEU container ships at high charter rates for 10 years, hoping that the slump in the shipping market would improve soon. But the market did not recover as expected, and Hanjin was soon unable to pay the high rates. 

Taylor Lee, logistics professor at Gyeongsang National University, said that Hanjin had chartered the container ships at a bad time. In July 2016, as the company struggled with high charter rates, there was an overcapacity of global container fleet of 20 million TEUs.

“The economy was heading down unlike what the company had expected,” Prof. Lee said during an interview with Maritime Fairtrade. “It was not the best situation to charter vessels then.”

Lesson two: Hanjin suffered from poor leadership

After Hanjin went bankrupt, there was a barrage of criticism against the management, including former chairperson Choi Eun-young, who is the wife of Hanjin Group Chairman Cho Yang-ho’s younger brother Cho Su-ho. Without much experience, Choi stepped into the role after her husband passed away.  Some of her aides, whom Choi handpicked, had non-relevant backgrounds.

“This led the leadership to focus on seizing personal power rather than making productive decisions for the company,” Prof. Koo said. “During the seven years of Choi’s administration, the company’s debt ratio (total debts to total assets) amounted to 1445 percent, a ten-fold increase from 155 percent in 2007.”

“Choi obtained ownership of profitable, valuable ventures within the company,” Prof. Lee said. “For example, she founded subsidiaries like Hanjin Shipping Holdings and Eusu Holdings for her personal benefit while the company’s finance was getting worse.”

Choi was guilty of using insider information in pursuit of her own interest.  In December 2017, Choi was sentenced by the court for unloading her family’s stakes using insider information to avoid 1 billion won (US$820,000) of possible losses, according to the Seoul Central District Court’s ruling. 

Many industry insiders thought Hanjin was “too big to fail” as it was a 40-year-old company.  Nonetheless, Prof. Lee said that there is no guarantee that an event like Hanjin’s failure will not be repeated. 

“The market won’t be always booming. We cannot be certain that an event like Hanjin Shipping’s bankruptcy won’t happen again. There will again be a time when companies need to overcome the overcapacity of the global container fleet. This is why it is important to look back at how the events around Hanjin Shipping unfolded and learn from them.”

Prof. Koo said shipping companies should improve their business now by investing in good governance and the necessary operational infrastructure. 

“Any industrial sectors and companies have to maintain future-oriented strategies to survive the competition,” Prof. Koo said. “The companies will have to make more aggressive investments in developing their business against global shipping companies.”

Photo credit: iStock/ hansenn

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