Japan’s Economic Retaliation May Hurt Korean Industry as a Whole

Concerns are growing that Japan’s economic retaliation against Korea, which started in the semiconductor and display sectors, may expand and hit the Korean industry as a whole. Japanese media outlets reported that Japan would expand the list of the items subject to export restrictions in the future.

One of the sectors that could be affected by Japan’s additional retaliatory steps is the shipbuilding industry. Hyundai Heavy Industries Group is waiting for Japan’s approval of the merger between Hyundai Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME). As Japan is one of the five countries to which the two Korean shipbuilders have to submit their merger application, if Japan says “no,” their planned merger will be aborted. If the two Korean shipbuilders ignore Japan’s decision, they will not be able to do business anymore in Japan. This means that Japan is in a position to determine the future of the Korean shipbuilding industry.

Hyundai Heavy Industries Group has decided to submit an application for the merger of the two companies to Japanese authorities this month. At first, the group thought that the EU would be the highest hurdle in achieving the merger, but things have changed before a review of the application by Japan.

Korean shipbuilding industry experts say that Japanese authorities will eventually approve the merger, but in the process, can impose various conditions against the two Korean shipbuilders. Japanese companies are also subject to merger reviews in many countries including Korea, so Japan is concerned about backlashes, but they may impose various conditions by appropriately combining political considerations and the interests of the Japanese shipbuilding industry.

LNG carriers are the only item that is being steadily ordered in the global shipbuilding market these days. Hyundai Heavy Industries Group and DSME account for more than 60 percent of the global LNG carrier market. On the other hand, Japanese shipbuilders have been completely ignored. Since 2015, Japanese shipbuilders have failed to win any LNG carrier order. In these circumstances, the Japanese government may introduce a market share limitation in certain fields such as LNG carriers. It may demand that Hyundai Heavy Industries sell off some of its assets after merger. In merger reviews, companies are often requested to sell off assets as a condition for approval.

Not only Korean shipbuilders but Korean shipping companies may also feel the heat. Hyundai Merchant Marine (HMM) recently announced it has decided to join THE Alliance, a global shipping alliance. Yet The Allinace is led by Japanese shipping company ONE. ONE was born out of a merger among three Japanese container shipping companies. As ONE received support from the Japanese government during its merger process, the Japanese government can exert some influence over the alliance. Korean shipping industry experts say that ONE and HMM may clash over routes within THE alliance.

A ban on image sensors by Sony could deal a serious blow to Korean companies. Sony is dominating the world image sensor market. Hyundai Motor and Kia Motors use Sony’s image sensors in their parking assist systems so there is a possibility that the two Korean automakers may have difficulty in producing cars.

The same goes for small Korean firms. First of all, small Korean importers have been put on alert. Many Korean importers deal in production facilities such as those from Hitachi. Industry experts estimate that over 30 percent of all Korean importers deal in durable goods. The problem is that the vast majority of these are facilities for manufacturing semiconductors. With a drop in semiconductor facility investment expected, Korean importers of such facilities are nervous as Japan is aggressively pursuing trade policies against Korea. “It will also be a burden on companies that trade related parts,” they said.

Small household appliance firms and motor companies in Korea are also nervous. This is because Japanese exporters have to obtain separate permits when exporting security-related products such as integrated circuits to Korea as the Japanese government has excluded Korea from its list of white countries. Korea’s small electronics companies are mainly using integrated circuits from Toshiba of Japan. Accordingly, industry observers say that if Japan uses integrated circuits as a tool to retaliate Korea, it will have a big impact on small household appliance and motor companies in Korea.