The Heavy At Hyundai Heavy

CEO Yu is telling managers to deliver profits -- or resign

Hyundai Heavy Industries Co. is one of South Korea's mightiest industrial titans. Not only is it the world's largest shipbuilder but it's also a major force in making construction equipment and marine engines. Yet it remains an ailing conglomerate suffering from reckless expansion, with entire divisions bleeding red ink.

Luckily for the lumbering giant, however, Hyundai Heavy has just acquired a valuable asset: Yu Kwan Hong, the new chief executive, who brought with him a reputation as Korea Inc.'s top turnaround artist when he came aboard in March. His mission: to oversee a total remake of three Hyundai Heavy divisions that are losing money. His greatest challenge will be the industrial plant division, which builds power plants and oil refineries worldwide; last year it posted a loss of $105 million, or 19% of its sales. But even the core shipbuilding division, with its backlog of 218 ship orders, makes Yu uneasy. Its profit margin is just over 6%. "It's far from what I would consider a No. 1 shipbuilder," says the 58-year-old CEO.

Yu is wasting no time producing dramatic change. He has told his division heads to hive off money-losing businesses and deliver profits within a year -- or else resign. Yu, a quality-control specialist and production manager at Hyundai Heavy for 24 years, has already reorganized shipbuilding schedules from 2005 to 2007, squeezing in 18 additional orders for new container ships and oil tankers. "With the profit-oriented Mr. Fixit at the top, I think the worst is over for Hyundai Heavy," says Park Jong Min, an analyst at Samsung Securities.

PLAY TO ITS STRENGTHS

It's not hard to see why Yu inspires such confidence. Over the past 4 1/2 years he made his mark as a turnaround artist by overhauling Hyundai Heavy's most troubled divisions -- first its construction-equipment business, which he ran from August, 1999, to January, 2002, and then Hyundai Mipo Dockyard Co., the company's ship repair affiliate, which he managed from February, 2002, to mid-March this year. Yu's strategy is to force Hyundai Heavy to play to its strengths. His goal: to nearly triple the company's profit margin, to 10%, and rake in at least $10 billion in annual revenue, up from $6.8 billion last year, both by 2007.

Yu's greatest success to date was at Mipo Dockyard, which began losing money because of an ambitious plan to not only repair ships but also build them. Before he arrived, Mipo accepted big-ticket orders to build cable-laying ships, drilling rigs, and other special-purpose vessels for which it lacked expertise. Now, besides repairing ships, Mipo builds one type: a refined petroleum product carrier, which is a smaller oil tanker. After posting $79.4 million in combined losses in 2001 and 2002, Mipo had a profit of $27.6 million last year. "It has become one of the most profitable shipbuilders in the world," says Cho Yong Jun, a shipbuilding analyst at Daewoo Securities Co. in Seoul. Mipo's stock has soared more than fivefold in the past three years, to $14.90 a share.

Earlier Yu orchestrated a turnaround of the construction-equipment division, which had never turned a profit until he took over in 1999. He transferred 40% of its 1,500 workers to other divisions to cut costs and improve productivity, moved its 160 design engineers from Seoul to the main production site in the southeastern port of Ulsan, and improved the quality of the excavators, loaders, and fork lifts that it manufactures. Last year the division posted a profit of $105.9 million, with a margin of 15%, against a loss of $52 million in 1999.

If Yu succeeds in his new role, he'll go a long way toward staving off the decline of shipbuilding and other heavy industries in Korea. With wages about 90% lower in neighboring China, shipyards in that country are snatching orders for bulk carriers and oil tankers that otherwise might have gone to Korea, where the industry has a strong reputation for quality control and punctual delivery. "I'm confident Korea will remain the top shipbuilding country for at least the next 15 years," says Yu. If he can pull that off, Hyundai Heavy's shareholders -- and its 26,700 workers -- will rest a lot easier.

By Moon Ihlwan in Seoul

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