SEOUL/TOKYO -- South Korea's two largest shipbuilders are pushing ahead with plans for a merger even as trade tensions with Japan raise concerns that politics could throw a wrench in the 1.8 trillion won ($1.5 billion) deal.
The proposed merger is also raising concern among Japanese shipbuilders of "mega shipyards" creating greater competitive pressure in an industry already facing headwinds.
Hyundai Heavy Industries Group, the world's largest shipbuilder, aims to acquire compatriot Daewoo Shipbuilding & Marine Engineering in a stock swap deal. The acquisition, which will give Hyundai Heavy an even bigger global presence is subject to approval by various antitrust bodies, including those in China, the EU and Japan.
HHIG said that its shipbuilding subsidiary, Korea Shipbuilding & Offshore Engineering, plans to apply to the Japan Fair Trade Commission soon for approval to purchase Daewoo Shipbuilding.
In June, HHIG set up a holding company called KSOE that put Hyundai Heavy Industries -- the shipbuilding arm of HHIG -- under its wing. Korea Development Bank has agreed to invest its entire 55.7% stake in Daewoo Shipbuilding in the holding company.
If the deal is completed, HHIG will be the largest shareholder of KSOE with a 28% stake, while KDB will be the No. 2 shareholder with 7% stake and preferred shares worth 1.25 trillion won. KSOE will control 68% stake in Daewoo Shipbuilding.
The Japan Fair Trade Commission said it will review the application impartially. The timing, however, is raising eyebrows. On Wednesday, Japan officially removed South Korea from its whitelist of preferred trade partners, the latest development in a steadily escalating trade spat between the two countries.
Japan in July restricted exports of three key semiconductor and display chemicals to South Korea and in the following weeks decided to drop the country from its whitelist of trade partners countries benefiting from simplified customs process. South Korea has since announced it will drop Japan from its own whitelist in September.
"We will submit an application for the approval with the Japanese authority when it is ready. We will do so no later than the end of this year," said Park Zoon-soo, a spokesman for HHIG. "We expect that the authority will review the case according to laws and regulations."
Hyundai said it has already filed for approval with South Korea's Fair Trade Commission and the Chinese authority in July. It is also in talks with the European Union over the matter.
A spokesperson for Japan's FTC said politics will not be a factor in its decision.
"Japan-Korea relations will not affect our examination," the spokesperson told Nikkei. "Our examination and judgment is always based on the law and facts."
According to the commission, a primary screening will be conducted within 30 days of the company submitting its application. If extra examination is needed, the JFTC will request additional documents from the company and will conduct a second screening in the next 90 days, which will also include third-party opinions.
Analysts say the deal may face obstacles, though they expect it to be approved in the end.
"There are concerns over the approval of the deal due to worsening South Korea-Japan relations recently, but we believe that it is unlikely that the deal fails to pass," said Jeong Dong-ik, an analyst at KB Securities. "Basically, disapproval ratio [for foreign companies] is very low because they do not want their companies are treated same way in other countries."
Japanese shipbuilders, meanwhile, are watching the case carefully as it would create an even larger No. 1 player in the global shipbuilding market.
"The emergence of mega-shipyards could lead to intensified competition," said a spokesperson for Mitsui Engineering & Shipbuilding Holdings. "South Korea, as a national policy, may be strengthening support toward shipbuilding companies, and we are worried that will affect not only Japan's shipbuilding industry but also overseas joint ventures."
Kawasaki Heavy Industries, Japan's manufacturer of transportation equipment and industrial goods, stated that "Although the scale of shipbuilding will be a threat, the impacts to our business is still unclear."
Mitsubishi Heavy Industries, Japan Marine United, and Imabari Shipbuilding declined to comment.