Daewoo Shipbuilding & Marine Engineering (DSME) is facing a loss of about 80 billion won in its submarine construction deal with the government of Indonesia, according to BusinessKorea.
The company purchased parts for the submarine without receiving any down payment from the Indonesian government. For more than three years, the Indonesian government has not put the contract into effect.
Rep. Kang Min-kuk of the People Power Party said on Aug. 18 that DSME hastily ordered core submarine facilities for 80 billion won, even though the contract did not go into effect. Kang backed his remark with data from the Korea Development Bank.
The contract in question is the second submarine construction contract with the Indonesian government. DSME won the second order for a submarine from Indonesia in 2019, following the successful delivery of the first submarine to Indonesia.
But the problem is that the Indonesian side did not even wire a down payment, let alone effectuate the contract. DSME placed the submarine parts order without receiving a down payment.
Normally, main contracts are concluded under such circumstances, so there is no problem for shipbuilders, but this time it was a different story. The Indonesian side delayed the effectuation of the contract, so DSME had to set aside provisions for all the costs related to this project.
Industry watchers have two different opinions on this situation. Some say that it was an unavoidable choice for DSME, while others say that DSME should have been more cautious.
DSME explained that it judged that it had already formed a trusting relationship with the Indonesian government, which already received submarines from DSME twice. The problem was that the down payment had been delayed due to a complicated political and military puzzle inside Indonesia.
The problem began to surface as Prabowo Subianto, a political arch rival of Indonesian President Joko Widodo, was appointed as Indonesian defense minister. Subianto has strongly called for a change in the Indonesian defense industry, which has been dependent on some countries, including Korea.
Indonesia has not paid its share of the cost, which is 800 billion won, for developing a next-generation fighter jet in cooperation with South Korea under an agreement signed in 2015. It even proposed to pay some of the 800 billion won in kind due to a lack of funds.
Under these circumstances, the issue of DSME’s submarine construction should be solved at a negotiation table between the South Korean and Indonesian governments, experts say.