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GEOJE, South Korea (Reuters) - Geoje Island, off the southeastern tip of the Korean peninsula, appears as prosperous as ever: foreign cars cruise the streets, young mothers pushing strollers converge on coffee shops, and workers on motorcycles pour into bustling shipyards.

It is what comes next that worries people in Geoje, the world's largest producer of ships by tonnage.

South Korean shipbuilders are facing their biggest ever crisis, with mass layoffs expected later this year as finished vessels leave the shipyards and few new orders come in.

"We've never had a serious downturn - ever," Kim Hyeon-gyu, director of Geoje's main industrial park, said on the sidelines of a public hearing to discuss looming layoffs.    

Because it takes about two years to build a ship, Geoje's docks are still busy. But without a major uptick in orders by September, which looks unlikely, 20,000 shipbuilding jobs in Geoje will be lost by March, city officials say.

Some 70 percent of Geoje residents rely for a living on shipbuilding, an industry that for four decades was a key engine of South Korea's export-driven growth and still employs about 200,000 across the country.

Now, a global slump in trade and commodities, plus rising competition from China, is forcing Geoje to find ways to ease its dependence on the shipyards.

"Past strong shipbuilding growth made us lax in finding ways for the tourists to spend money here instead of driving through," said Kwon Min-ho, the mayor of Geoje, which is building a 424-room resort as part of a plan to expand its tourist infrastructure.


But the shift is painful.

Subcontractors at the massive Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries Co Ltd yards in Geoje and at Hyundai Heavy Industries Co Ltd in nearby Ulsan are especially hard-hit.

"The number of subcontractors going out of business has exploded this year," said Kim Dong-sung, an official with a lobby group representing them. "Unpaid wages and bonuses plus 20-30 percent pay cuts are now seen as the norm."

In the first quarter of this year, South Korea's total shipbuilding industry landed just eight orders totalling 171,188 CGT (compensated gross tonnage).

That compares with 68 ships totalling 2,886,589 CGT in the same period last year and roughly 100 per quarter during a 2003-2008 industry boom that saw massive capacity expansion.

The legacy of those boom days is still apparent, even as activity slows.

Geoje's gross regional domestic product exceeded $50,000 (£34,504) per person in 2013, nearly double the $27,214 national average in 2015, according to the Bank of Korea.

A short drive from traditional fishing villages and the massive shipyards stand smart apartment blocks resembling those of Seoul's well-to-do suburbs. The island's 270,000 residents include 14,800 foreigners mainly working in the shipyards as shipowner representatives or workers, giving Geoje's city centre a cosmopolitan feel.

"Business is alright near tourist spots, but it has slowed down in downtown stores," said Lee Mi-eun, owner of a large beef rib soup restaurant near one of Samsung's shipyards. "People ask for lower-priced menus, come in smaller groups."

Shipbuilding here was largely spared the state-driven restructuring many other South Korean industries went through during the 1997-98 Asian financial crisis as it earned valuable dollars and had years of orders in place.

While in the aftermath, some shipbuilders were bankrupted or sold, and Daewoo Shipbuilding was bailed out by a state-run bank, industry heavyweights built a dominant position against European and Japanese rivals.

More recently, as orders for traditional ships dried up or moved to China, Daewoo, Samsung and Hyundai - the world's three largest shipbuilders - bid aggressively to build complex, expensive offshore oil and gas facilities.

That kept the yards humming but cost overruns and delays led to combined net losses of $4.9 billion for the three giants in 2015.

Under prodding by Seoul, shipbuilders have been shedding assets and cutting staff and wages in hopes of riding out the downturn.

Clarksons Research previously said it expects global commercial ship orders to begin resuming some time around late 2017, with a full recovery only emerging in 2020.

Seen as "too-big-to-fail", the government is looking for ways to shore up the solvency of state-run creditor banks in the event that they need to step in to save one of the giant shipbuilders before then.

Cho Hyun-woo, planning manager at the Daewoo Shipbuilding workers' union, said restructuring should not cut so deeply that the industry loses expertise it has developed for high-end structures, which it should bid on once demand returns.

"If you kill the technology that can make these ships when they are ordered en masse starting 2018, it's painfully obvious the technology will go to China or Japan," he said.

By Joyce Lee

(Editing by Tony Munroe and Lincoln Feast)

Ship Building South Korea
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