Hanjin Shipping's Bankruptcy: The Rise and Fall of South Korea's Largest Shipping Line

Hanjin Shipping, once South Korea's largest and most successful container shipping line, filed for bankruptcy in 2016. At the time, the company had 97 ships and served 90 ports in over 35 countries. The insolvency shocked the market and caused disruptions in the global shipping industry. Prior to the financial crisis, Hanjin Shipping was the fourth largest container line in the world.

The company was founded as a branch of the Hanjin Group, one of South Korea's chaebols, or large business groups that dominate the country's economy. The group's founder, Cho Choong-hoon, started with a few trucks in 1945 and quickly gained contracts with the US Army to transport military supplies around South Korea.

In the 1960s, during the Vietnam War, Cho saw the future of marine shipping while working with American company Sea Land Service. He then founded Hanjin Shipping in 1977 alongside Korean Air, which had been acquired by the Hanjin Group in 1969.

Container shipping is a highly competitive industry, as it transports valuable goods that make up a significant portion of the world's trade by value, despite only comprising a small part of the overall seaborne transportation industry by volume. The other two categories of the industry are bulk carriers, which transport unpackaged goods like coal or grain, and tankers, which carry liquids or gases like oil.

In 1972, South Korea had only three container vessels and relied on foreign liners for most of its container trade. In an effort to develop its own container capacity, the Korean government implemented new policies and began subsidizing Korean container carriers in 1976. The government also established the Korea Maritime and Port Administration to guide the industry's development.

Hanjin Shipping, founded in 1977, was well-positioned to take advantage of these policies and quickly expanded its container service lines. However, the shipping industry faced challenges in 1979 with the oil crisis and subsequent economic slowdown. The government consolidated its shipping lines and offered aid to some, but not Hanjin Shipping. The company eventually recovered and turned a profit.

The shipping industry is known for its volatile demand, which is influenced by macroeconomic factors such as the state of the global economy, seasonality, and unexpected shocks. Supply, on the other hand, is not as adjustable. Shipping lines have three main options for expanding or shrinking their fleet: acquiring a competitor, commissioning a new ship, or chartering a ship. Each option has its own risks and requires careful evaluation and balancing of market share and risk. A poor decision can be disastrous.

In the late 1980s and early 1990s, South Korea experienced a significant export boom, with international trade tripling in volume from 1987 to 1997. This growth benefited the Korean shipping industry, which positioned itself as a low-cost alternative to Western shipping lines. The government carefully managed the industry, allowing only certain companies to operate on certain routes and restricting new entrants from entering the domestic market.

Hanjin Shipping, the largest container shipping line in South Korea, more than doubled its carrying capacity from 1986 to 1990. In 1988, it acquired the struggling Korea Shipping Corporation to become the 13th largest container shipping line in the world. In 1997, Hanjin acquired DSR Senator, Germany's second largest carrier, making it the fourth largest shipping line in the world.

However, after 1997, conditions began to decline for Hanjin Shipping. The Korean export boom ended with the Asian financial crisis, and the International Monetary Fund (IMF) required policy changes in exchange for a financial bailout.

The Korean government was forced to liberalize its shipping business and open the market to foreign players, and mandated that all business conglomerates reduce their debt-to-equity ratio to below 200%. Hanjin Shipping was required to sell off ships and charter new ones to meet this requirement, leading to higher operating costs.

This, combined with increased competition from foreign players, led to a long-term decline in Korea's indigenous shipping lines. In 2002, Hanjin's founder Cho Chung Hoon died, and his children inherited the company. Cho Yang-ho, the eldest son, became chairman of Hanjin Group, but his brothers received other parts of the empire, including Hanjin Shipping. This led to infighting and a decline in the company's performance.

In 2007 and 2008, Hanjin Shipping saw an opportunity to grow and decided to invest in the future by purchasing new mega ships like market leader, Maersk. However, Hanjin made the mistake of ordering these ships at the exact wrong time, just before the global financial crisis of 2008 caused a shipping overcapacity crisis and a decline in trade between the United States and Asia.

As a result, Hanjin and other shipping companies suffered significant losses and saw their debt soar. In an effort to pay off this debt, Hanjin sold off its most profitable assets, including domestic and overseas terminals, its liquefied natural gas tanker ship division, and its bulk shipping division.

By 2016, the company was left with only its volatile container shipping line, and was unable to come up with the $615 million demanded by its largest creditor, the Korea Development Bank (KDB).

When KDB refused to provide a bailout, Hanjin filed for bankruptcy, causing chaos in the shipping market and stranding $14 billion worth of goods, including critical Korean export goods.

The collapse of Hanjin also led to the loss of thousands of shipyard jobs in South Korea and the Philippines, and protests from trade groups and unions.

In contrast, Singapore's national champion container line, Neptune Orient Lines, divested itself of the industry before Hanjin's collapse and was sold to French operator CMAC GM for $2.4 billion. This helped the company turn a profit shortly after the sale.

In the fourth quarter of 2016, the Taiwan government bailed out its own container shipping lines, Evergreen and Yang Ming, due to the importance of shipping firms in transporting large quantities of goods to the country's economic development.

In contrast, Hanjin Shipping collapsed due to poor chartering practices that left the company with unprofitable ships, as well as a lack of government bailout.

Despite still owning profitable assets, Hanjin was unable to negotiate with its chartering and debt partners for a way out and declared bankruptcy in 2017.

The last ship belonging to Hanjin was sold off in March 2017 for demolition.

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