As economic uncertainties dim the global economy, the world's largest shipbuilder is finding itself in trouble.
Although the number of new orders has dropped significantly, Korean ships are still the most preferred among the buyers, with Korea accounting for over a third of new shipbuilding orders worldwide so far this year.
But there's an even bigger problem on the horizon.
Many of the orders are being cancelled AFTER the ships have been built, as the buyers find they can't pay for the product amid worsening economic conditions.
Samsung Heavy Industries, one of the four leading shipbuilders in Korea, has asked a client in Italy to change its mind about cancelling a contract for a medium-sized oil tanker, which was scheduled to be delivered by the end of the year.
Many of Korea's shipbuilders are struggling with the same problem and the losses are even greater under a new payment method adopted in 2008 during the global financial crisis.
The previous top-heavy method called for five equal payments until delivery, guaranteeing the shipbuilder at least 60 percent of the fee even if the buyer changed his mind.
However, under the new payment system, known as the heavy-tail method, 70 percent of the money is paid AFTER the contract cancellation deadline.
When the first orders under the new system were placed three years ago, the shipbuilders had hopes that conditions would pick up.
"The current shock stems from the global financial crisis back in 2008 and 2009. As the global economy was slowly recovering, it was hit by another crisis from Europe, which was a blow to the shipbuilding industry."
Now. predictions of worsening global economic conditions are leaving the shipbuilders in fear of more contract cancellations ahead.