In 2016, Hanjin Shipping, Korea's biggest container shipping line,
abruptly filed for reorganization.
The company had once been the country's pride and
joy - a worthy sibling alongside flagship carrier Korean Air.
The unexpected insolvency roiled the markets and caused global chaos in the shipping industry.
Once they had been the fourth biggest container line in the world. In 2016,
they had 97 ships and called on 90 different ports in over 35 countries around the world.
But the company sailed into troubled waters after the Global Financial Crisis.
Freight rates crashed through the floor, and the company vanished underneath the waves.
Wikipedia is hilariously terse on the whole incident,
like as if they do not want to talk about it.
So in this video, we are going to do a deep dive into the rise and
fall of South Korea's biggest shipping line: Hanjin Shipping.
Hanjin Shipping was established as a branch of the Hanjin Group, one of South Korea's chaebol.
Chaebol, as in one of the large business groups that dominate South Korea's economy.
Hanjin Group began in 1945 with founder Cho Choong-hoon and a few trucks. His first
jobs came from the US Army, trucking military supplies around the country.
From the very beginning, his companies would focus on the transportation space.
Cho performed well, and for that he received additional American
contracts after the Korean War. Cho needed to scale up
his business to meet this new demand. But transportation is a very risky business.
To get the capital to fund Hanjin's expansion, Cho turned to the national government.
President Park Chung-hee needed loyal companies to buy in on his economic growth plan.
Those who signed on got generous loans from state banks.
Hanjin Group profited handsomely from their cooperation and loyalty.
Then in the 1960s, the United States entered the Vietnam War. The war effort necessitated
an immense logistics effort to bring supplies to the war zones of Vietnam.
The war was good business for one American shipping company - Sea-Land Service. Founder
Malcolm McLean, a former trucker, invented the practice of packing goods into standardized
containers, which made them much easier to ship across various forms of transportation.
The Vietnam War allowed Sea-Land to really shine, and it was there in 1966, Vietnam
that Cho Choong-hoon first saw and experienced the future of marine shipping.
A decade later in 1977, Cho would found Hanjin Shipping. Alongside Korean Air, Korea's flagship
airline acquired in 1969, Hanjin Shipping would be the business group's crown jewel.
If your economy depends on trade, then your economy needs to have maritime shipping.
Shipping is the backbone of globalization - carrying some 80% of the world's trade by volume.
Without it, international trade would be impossible.
Container shipping is one of three categories in the overall seaborne transportation industry.
The other two are bulk and tanker trade.
Bulk carriers ship unpackaged goods like coal or grain.
Tankers carry liquids or gases like oil.
Counting by total capacity volume, bulk and tanker transport are far larger than container. But
because containers can carry more valuable goods, they punch above their weight class in terms of
value of goods shipped. These valuable shipments make the container industry quite competitive.
I briefly talked about the history of the shipping industry in my video about Neptune Orient Lines.
Feel free to watch that for a historical primer.
In 1972, South Korea as a whole had just three container vessels of their own.
Most container trade was carried in and out of the country by foreign liners.
The Korean government decided that it needed to develop its indigenous container capacity.
New policies encouraged the first generation of shipping lines. In four years, the country
had 36 ships and five shipping lines that offered international container services.
Despite this, 90% of Korean container exports and imports still came on foreign carriers.
So in 1976, the Korean government began explicitly subsidizing
Korean container carriers, though never more than a million USD a year in 1976 dollars
to each of the carriers. They also established the Korea Maritime and Port Administration
to guide the industry's development.
Hanjin Shipping came at the right time to take advantage of this national policy push.
Hanjin bought new ships to expand their container service lines as fast as they
could. A year after their founding, Hanjin offered its first Middle East service. In 1979,
the company joined with Sea-Land to offer a low-cost, high-value service across the Pacific.
That same year however, the shipping industry ran head-first into the 1979 Oil Crisis
and the subsequent macroeconomic slowdown. The Korean government
consolidated their shipping lines from 70 to 20, and offered aid to the rest.
Hanjin Shipping did not get bailed out with public money. But in 1986, sister company Korean Air
did have to temporarily step in to help the company through the tough times. Hanjin Shipping
quickly recovered and turned a profit thereafter, but keep that little bit in mind for later.
Hanjin is founded in 1977. Grows like a weed.
Then needs a pseudo-bailout from its chaebol sibling company less than a decade after founding.
I want to stop here and check to see if you are noticing a little pattern developing here.
And that is that the shipping industry has got some serious whiplash issues.
This is not an uncommon pattern situation in the industry.
Demand in the shipping industry has exploded over the years. This demand is tied to
macro-economic factors like the health of the world economy, seasonality, and random new shocks.
Seasonality is often short-term and can be prepared for. For instance,
the holiday seasons - when companies start shipping over Christmas goods.
It is the random shocks - upwards or down - that can really rattle the industry.
Supply is nowhere near as adjustable as demand. Demand can spike or shrink by 20% year over year,
but liners’ options for growing or shrinking capacity are nowhere near as flexible.
I will briefly go through three major options.
Number one: Acquire a competitor. The larger a shipping line gets,
the more economies of scale they have. But these purchases are never that clean. Few companies
are good at integrating different lines. If companies aren’t careful it can ruin them.
Number two: Commissioning a brand new ship to be built at the shipyards.
But since it takes years to build a new boat, the timing and pricing at which you do this
is essential. You are putting down millions of dollars for a boat
that might launch at the exact wrong time in the business cycle.
At the opposite end of the spectrum, the company also scrap a boat to reduce the size
of the fleet during times of low demand and over-supply. This is pretty drastic though.
Finally, number three: Chartering. Which is kind of like renting a ship from its actual owner.
The charterer takes care of cargo and voyage expenses like fuel,
while the ship's owner takes care of operations and capital costs like interest.
Charter contracts can last for just a few weeks or up to 20 years.
These three options all suck in their own way,
and companies have to properly evaluate and balance market share
and market risk when deciding to expand or shrink their fleet. The wrong decision can be disastrous.
The late 80s and early 90s saw a massive Korean export boom. From 1987 to 1997, South
Korean international trade tripled in volume. This tailwind benefited the Korean shipping industry,
who positioned themselves as the low cost alternative to high priced western shipping lines.
Throughout this period, the Korean government carefully managed the industry
like a bonsai tree. Companies could only operate on specific routes,
and new entrants could not enter the domestic market.
For instance, Korea Marine Transport Corporation and Hanjin got the lucrative Korea to US West
Coast lanes. Hyundai was forced off those routes and could only run to Japan and Taiwan.
Between 1986 and 1990, Hanjin more than doubled its carrying capacity from 24,856
TEU (which stands for twenty-foot equivalent units, a unit of carrying capacity) to 53,140
TEU. It achieved this growth organically and through merging with competitors.
In 1988, Hanjin was allowed to acquire the struggling Korea Shipping Corporation
to become the 13th largest container shipping line in the world and the largest in South Korea.
And then in 1997, they acquired DSR-Senator, Germany's second largest carrier.
This made them the fourth largest shipping lane in the world.
Only Sea-Land, Maersk, and Evergreen were larger.
1997 would see the very peak of the conditions creating the Hanjin Shipping monolith.
After this, those forces began to dry up and things started to decline.
The Korean export boom years of the 1990s ended with the Asian Financial Crisis.
Korea had been one of the worst offenders throughout this period
and needed a financial bailout from the International Monetary Fund or IMF.
IMF money comes with strings attached.
They required policy changes in line with neoliberal governance beliefs
of the time. I am not really going to comment on the wisdom or long-term benefit of these.
It is what it is. I’ll run through a few of the ones significant to the story.
First, the Korean government was forced to "liberalize" its
shipping business and open the market up to foreign players.
A little bit of deregulation had already been on the way, but the IMF forced it
through much faster. Now suddenly, the Korean shippers were fully exposed to the open market.
Second, the Korean government mandated that all of its business conglomerates reduce their
debt to equity loads to below 200%. This is regardless of business or industry conditions.
Hanjin Shipping, along with many other Korean lines, was forced to sell off ships they owned
to pay off debt and charter new ships to fill in for the loss in capacity.
Sometimes they would sell the ships to a third party and then charter them back into the fleet.
Hanjin had to do this with 29 of their own ships.
This sale-leaseback type of transaction helps improve a company's debt-equity ratio, since those
debts come off the books. But the catch is that the company now has to bear significantly higher
operating costs. Because those banks and third parties get to charge higher short-term prices.
I don’t think it was the government’s intention. But nevertheless,
this combination of higher operating costs amidst new competition from foreigners
would lead to a long term decline in Korea’s indigenous shipping lines.
In 2002, Hanjin founder Cho Choong-hoon died at the age of 82.
For the most part, the media was pretty complimentary.
The Hanjin patriarch was lionized in the media as a great industrialist (and I guess, artist)
who helped contribute to Korea's rise to riches. The 'godfather' of Korea's transport industry.
But Cho's death papered over the fact that the guy was being investigated for massive
tax evasion fraud dating back to the 1970s. And his heirs were nowhere near as respected.
Cho had five children, including four sons.
Like with the founder of the Ming Dynasty, the sons warred over the various parts of the empire.
The eldest son Cho Yang-ho was named the Hanjin Group chairman. But his brothers received pieces
of the empire - the shipbuilding arm, and the securities and insurance divisions. Son Cho
Soo-Ho received Hanjin Shipping. They all broke off from the main Group,
leaving the eldest Cho with Korean Air and what remained of Hanjin Group.
Famously, Cho Yang-ho's daughter would be the one involved in the 2014 Nut Rage incident.
Thought that was hilarious.
Anyway, the big thing that happened was that Hanjin Shipping could no longer
rely on its siblings to carry it through times of hardship.
Remember, Korean Air had to pull an undeclared bailout in 1986. The sibling rivalry put the
company on dangerous ground, at a time when it needed all the backing it could get.
2007 and 2008 saw a new recovery after several tough macro-economic years.
Hanjin saw the opportunity to grow. So they decided to invest in the future,
following leader Maersk in purchasing a new round of mega-ships.
The problem was that they ordered at the exact wrong time. By November 2008, two months after
the Lehman Brothers bankruptcy, Hanjin had committed to orders for nearly a quarter
million TEU worth of ships. This corresponded to a 40% increase in their fleet size.
The titanic economic slowdown that followed the Global Financial Crisis of 2008
sparked a shipping overcapacity crisis. Trade between the US and Asia declined by 10%.
On the company front, Maersk lost two billion that year. CMA-CGM,
$889 million. And those were the market leaders.
It takes years to work off an over-supply cycle like this. So the losses continued to roll in
and debt soared. In 2012, Hanjin had about 195 billion Korean Won or $165 million USD in debt.
By 2014, that number soared to 440 billion won or $375 million.
To pay for this, Hanjin began stripping itself of its most profitable assets.
They sold domestic and overseas terminals. They sold their Liquified Natural Gas
tanker ship divisions. They sold their bulk shipping division.
Soon, all that was left to Hanjin Shipping was the volatile container shipping line.
But it would not be enough. Korea Development Bank or KDB
was the largest creditor. In 2016, they demanded 700 billion won
or $615 million. The best the company could come up with was 500 billion won or $440 million.
The last chance was for a government bailout. Other countries bailed out their shipping lines.
Denmark lent $6 billion to Maersk in 2011. Germany lent $1.8 billion to Hapag-Lloyd. France,
$660 million to CMA-CGM. China gave $9.5 billion to COSCO and China shipping. So why not Korea?
But KDB had to deal with another troubled shipping line - Hyundai Merchant Marine. They demanded the
two restructure their chartering contracts, cut their debt further, and get capital injections
from their ownership families. Hyundai was able to do it. Hanjin could not. And that was that.
The Korean government's decision not to bail out Hanjin has echoes of the Lehman bankruptcy
in 2008. The point is legitimate. Nobody wants to shovel taxpayer money to corporate fat cats.
Least of all to the family of the Nut Rage lady.
But perhaps there could have been a better way to deliver such a message.
Hanjin’s August insolvency would roil the markets and lay utter chaos to the entire shipping market.
159 companies found themselves unable to bring in their cargo.
Hanjin stopped paying its terminal fees and $14 billion worth of goods
were stranded at sea. This included critical Korean export goods,
as Hanjin shipped 40% of Samsung's electronics and 20% of LG's electronics.
Walmart had 3,000 containers at sea or in terminals at the time of Hanjin's collapse.
They had to purchase additional shipyards to store empty containers after unloading.
Hanjin's collapse also annihilated tens of thousands of shipyard jobs in both Korea
and the Philippines - they had been the owner of the Subic Bay shipyard there.
Trade groups and unions protested vigorously, but the Korean government stood firm.
Knowing what is known now,
I wonder if the Korean government would still make the same decision again.
Singapore for their part had faced a similar decision with their national champion container
line - Neptune Orient Lines. They opted to divest themselves of the industry, tired of the years
of operating losses. Shortly before the Hanjin collapse, NOL was sold to French operator CMA CGM
for $2.4 billion USD. Hanjin’s collapse helped the NOL division turn a profit shortly after its sale.
On the other hand, in the fourth quarter of 2016, the Taiwan government bailed out
their own two container shipping lines - Evergreen and Yang Ming.
“The nation relies on shipping firms to transport goods that come in large quantities,
which is key to our economic development,” said Wang Kwo-tsai,
Taiwan’s deputy minister of transportation. "[Hanjin's collapse] shows us that the
government has to provide support to the industry before the damage becomes uncontrollable.”
At the heart of it, Hanjin died for two reasons. The first was that the company
ran into a working capital crisis despite still owning a plethora of profitable assets.
Poor chartering practices left the company with unprofitable ships.
And after the founder's death and the splitting up of his transportation empire,
there would be no rich sibling company to step in with extra cash to save the day.
The second big reason was that the government decided not to bail the company out.
Other companies made the same mistakes Hanjin did, but they got backing from their governments.
But after many years of supporting the industry as a core national interest,
the Korean government seemed to have made a decision that it would no longer so.
After entering court receivership, Hanjin attempted to negotiate with its chartering
and debt partners for a way out. But with over 1.3 trillion Korean won or $1 billion
in charter fees owed over the next 12 months, the company could do nothing.
They declared bankruptcy and that would be that.
The last ship belonging to Hanjin Shipping finally sold off in March 2017 for demoliton.