Royalties hit Korean shipbuilders? earnings

South Korean shipbuilders are paying large royalties on a core foreign technology for manufacturing LNG carriers, causing a big reduction in their earnings. To build LNG carriers, most Korean and foreign shipbuilders currently use a membrane containment system developed by Gaz Transport & Technigaz of France, a key technology for freezing and storing gas in tanks for transport.

South Korean shipbuilders’ profit margin amounts to about 10% of a gas carrier’s order price averaging $200 million, of which nearly 5% is paid to the French company in royalties. The nation’s top three shipbuilders, i.e. Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries, currently have an order backlog of about 100 LNG carriers. Given the royalty payment ratio, the three shipbuilders will have to pay the French company about $1 billion in the future, which will cut deeply into their earnings.

A Samsung official said “We throw in a workforce of almost 1,000 and spend 28 months to build an LNG ship, but half the profit margin is simply paid in royalties,” Daewoo said it also pays around 5% of the order price in royalties. “With so much money spent on royalties, we need to develop our core technology,” a company official said.

Currently, efforts are being made to develop a homegrown technology for an LNG cargo containment system and, in early 2004, Korea Gas Corp. started a research project to develop such a system.