Maritime Management: Hanjin Shipping's Financial Crisis Analysis

This report meticulously examines the financial collapse of Hanjin Shipping Co., Ltd., providing a detailed analysis of the factors that led to its insolvency in 2017. It assesses the significance of the event within the context of international shipping and containerization, highlighting the disruption to global supply chains. The report identifies strategic shortcomings within Hanjin, including ineffective management decisions related to structure, strategy (operational, investment, and financial), skills, systems, and style, using the McKinsey 7-S framework. It explores potential steps the owners could have taken to avert bankruptcy and evaluates the adverse effects on customers, employees, and related stakeholders. The analysis draws upon relevant academic literature and provides a comprehensive understanding of the crisis, offering valuable insights into maritime management and leadership practices.

Running head: THE REASONS OF HANJIN’S INSOLVENCY
THE REASONS OF HANJIN’S INSOLVENCY
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1THE REASONS OF HANJIN’S INSOLVENCY
Executive Summary
This paper aims to evaluate, analyse and identify the fundamental causes of financial demise
of Hanji Shipping Co., Ltd, which declared as the insolvent in 17th February 2017, which
affected detrimentally, affected the supply chain as well as the transport system in worldwide.
In conclusion, it can be stated that the organization is destined to its present consequence
because of its internal weaknesses means the inefficient management of the organization,
which it can avoid through taking the proper initiatives in proper time.

2THE REASONS OF HANJIN’S INSOLVENCY
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Significance of the Event.......................................................................................................3
The Reasons of Hanjin’s Fall.................................................................................................4
The ineffective strategies of Hanjin.......................................................................................4
The Owner’s Required Effective Steps to Avoid the Consequence......................................6
The Effect of Hanjin’s Financial Crisis on Customers, Employees and Others....................6
Conclusion..................................................................................................................................8
References..................................................................................................................................9

3THE REASONS OF HANJIN’S INSOLVENCY
Introduction
In this paper, an analytical study is conducted to find out the fundamental reasons of
Hanjin Shipping Co., Ltd, the world’s seventh largest shipping company being insolvent. On
17th February 2017, South Korean Courts declared it as insolvent (Franks, Sussman and Vig
2017). In the next section of this paper the reasons of this fate of the company is observed as
well as evaluated in detail. In following portion of the paper, the significance of this
particular event is discussed with respect to the present situation of international shipping in
general and containerization in particular. Then the ineffective strategies are analysed to
identify which are generally responsible for this fall. After this, the possible strategies or
steps that the owners of the company could have taken to avoid the present consequence are
analysed. In the final section, the detrimental effect that it left on the customers as well as the
employees of the company is discussed.
Discussion
Significance of the Event
The Shipping industry became complex because of its competitive market condition.
Hanjin is a South Korean company, which is the world’s seventh largest container shipper.
The world has observed its greatest historical container shipping insolvency through this
Korean shipping giant Hanjin. On 31st August 2016, Hanjin sought for rehabilitation or the
bankruptcy protection after restless struggle to raise liquidity and restructure its debt (Hyeon
Kim 2017). Freight rates have been pressurised due to both the slow growth in trade and the
overcapacity in the mega ships (Bharadwaj and Prasad). Container ships with huge amount of
carrier are got rejected from accessing the ports and multiple vessels were seized by creditors,
port authorities (Wiener and Walters 2017). Thousands of goods as well as containers are
abandoned in ports across the ocean. The suppliers, creditors charters are refused to work

4THE REASONS OF HANJIN’S INSOLVENCY
with Hanjin out fear that they will remain unpaid. Numerous Hanjin trading partners will get
affected as the consequence. A serious disruption in case of both international transportation
system and the global supply chains is observed. LG, the world’s 2nd largest T.V
manufacturer is looking for the new carriers for the shipment of its goods.
The Reasons of Hanjin’s Fall
From the very beginning of the 20th century, the shipping industries faced complexity
because of its rising competition in the market. The multiple factors like, the excessive
number of vessels in the market, the decreasing demand of maritime shipping service in the
east Asia-Europe trade route, an economic disruption in China and financial crisis in 2007
has caused the overcapacity and the lower freight rates (Yin, Chen and Xiao 2019). Due to
all these factors, the industry loses one of its worthy service provider with worst demise in
history. Apart from these, there are some other factors or reasons caused the historical
destruction of Hanjin, which are discussed in the following section (Jeon 2016).
The ineffective strategies of Hanjin
Hanjin, the Korean shipping organization got itself affected by several internal factors
for its financial fall. The 7s framework of Mckinsey is used here to analyse the faults of
internal strategies practiced by Hanjin which led it towards the insolvency (Lee 2016).
1. Structure: Hanjin financial collapse took place because of not only the external
factors but also the internal inefficient and unprofessional management decision
making and strategizing. Becoming a part of conglomerate could have been the best
contributing fact for it. Hanjin handed its operational control to one of its largest
creditor that is the Korean Development Bank indicating its weakness and situation ().
2. Strategy: Hanjin’s managerial decisions can be analysed further with respect to three
kinds of strategies.

5THE REASONS OF HANJIN’S INSOLVENCY
a. Operational Strategy: Hanjin changed its pricing structure through
implementation of general rate increment, Bunker Adjustment Factor (BAF)
and peak season surtax that led towards the increased freight rates in
comparison to others. In respect to the lower income rate consequence the
Hanjin gone for further fleet and passage to the ports in Northern Europe
which became unfruitful. Additionally some passageways were declined. This
imbalanced trade between Asia and Europe created problem, as there was a
decline in volume shipped to China with its economic recession.
b. Investment Strategy: Hanjin invested hugely on the vessels from the 2006 and
therefore increased its vessel fleet in 2009 to 2013 (Teepen 2017). This fleet
expansion left detrimental impact on financial strategy. Hanjin also invested
in terminal infrastructure, equipment, facilities, logistics as well as IT.
c. Financial Strategy: The organization’s constant dependency on the
government ruled KDB (Korean Development Bank) as a significant creditor
for funding the as well as operating the asset was an example of inefficient
financial risk management and unconscious decision making of management
(Song, Seo and Kwak 2018).
3. Skill: The management appointed a CEO having insufficient knowledge about
shipping industry. The position awarded on basis of family ties than the merit.
4. System: Transformational leadership relies on the ability to adopt with the change but
Hanjin’s management did not have that ability. Without letting the organization
survive, they chose to hold the brand name.
5. Style: The management was not proactive they thought that they were too big to lose
and their misconception about that the government must come to rescue them led
them towards their fate (Joc.com, 2019).

6THE REASONS OF HANJIN’S INSOLVENCY
The Owner’s Required Effective Steps to Avoid the Consequence
 The most effective step that the owners of Hanjin could take to avoid the fall
is to go for merger with the other organization within the industry like
Hyundai Merchant Marine
 Without relying or focusing on KDB as the one significant creditor for fund,
they should go for other options. They could go for acquisition with the
Hyundai.
 The management could ensure more effective operational, investment as well
as financial strategy through implementing efficient, skilled people in the top-
level management of organization.
 The owners could avoid the consequence through adopting the more
sustainable as well as flexible strategies with the trend.
 Management could mitigate the risk with concentrating on risk management.
 The management could avoid the collapse through investing more on
education and development of the staff rather on expanding the fleet.
The Effect of Hanjin’s Financial Crisis on Customers, Employees and Others
The Hanjin being the 7th largest container shipper its bankruptcy has negatively
affected the total supply chain as well as the transportation sector. These are widely discussed
below
1. The workers and businesses along with the trucking, railroad organizations as well as
terminal operators engaged in agreement with Hanjin for delivering and transporting
cargo containers are afraid of not getting paid.

7THE REASONS OF HANJIN’S INSOLVENCY
2. This results in highest price of shipments. The cost of shipping a container of around
40 foot from China to US rise by 50 per cent in one day which is resulting from the
gap created by Hanjin.
3. The cost of retailer’s goods might rise in specific and led to the price rise in general in
holiday season as multiple consumer goods, which were fixed for the retailers, will
not be able to store. This is because the truckers, as well as railroaders do not want to
transport without the guarantee of payment. Thus it is causing decreased supply and
increased cost of goods for the customers.
4. Haulers as well as the rail operators engaged for carriage of containers through land
shipped by Hanjin facing the chance of non-payment (World Economic Forum,
2019).
5. Several crews of Hanjin who owns payment from the company can face problem with
consequence of unpaid salary.
6. The port agents who got engaged with Hanjin for coordinating port operations will
confront the uncertainty of availing the unpaid agency fees.
7. The various suppliers engaged with maritime sector might face problems regarding
the payment of unpaid amount owed by Hanjin for service.
8. The banks as well as the parties holding the bonds for the Hanjin in respect to its
restructuring step, which is not proved to be successful. The corporate as well as the
institutional creditors might suffer the extreme loses because of the crisis.
9. There are several ship owners who shown the interest to the work with Hanjin but
with the expectation of keeping or rescuing it but they are now concerned about their
payment of their due. The creditor’s decision of cutting the Hanjin’s credit support
now have left the owners in fear of non-payment of their due (Pauli and Wolf 2017).

8THE REASONS OF HANJIN’S INSOLVENCY
Conclusion
After analysing as well as evaluating the whole factors affecting the organization’s
financial crisis in conclusion it can be stated that the several external factors affected the
collapse are not so important rather they were the common scenario in the industry. Hanjin
faced this consequence or fall because of the internal factors. The inefficient management
practices and policies contributed more to the real situation. If the organization had taken the
proper initiatives, such as merging with the Hyundai, changing the process and ensuring the
risk management criteria as well as ensure for operating smoothly. Then investing and
provide required concentrate on the sustainable management procedure in time they would
have been somehow able to avoid the present fate. This historical collapse caused severe
suffering of multiple agencies, systems, peoples, processes engaged directly as well as
indirectly with the organization. This affected the supply chain and the transporting
procedure detrimentally with worldwide disruption.

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References
Bharadwaj, P.N. and Prasad, S.S., Turmoil in the Shipping Industry: Implications for Today’s
Global Supply Chains.
Franks, J.R., Sussman, O. and Vig, V., 2017. The privatization of bankruptcy: Evidence from
financial distress in the shipping industry. European Corporate Governance Institute (ECGI)-
Finance Working Paper, (505).
Hyeon Kim, I., 2017. Legal Implications of Hanjin Shipping's Rehabilitation
Proceeding. Hong Kong LJ, 47, p.915.
Jeon, J., 2016. A comparison of capital structure between the pre-, during-, and post-Asian
financial crisis: a case study of South Korean and Thai companies (Doctoral dissertation,
Prince of Songkla University).
Joc.com (2019). China News: Hanjin Shipping bankruptcy. [online] Joc.com. Available at:
https://www.joc.com/special-topics/hanjin-shipping-bankruptcy [Accessed 2 Sep. 2019].
Lee, E.S. and Song, D.W., 2015. The effect of shipping knowledge and absorptive capacity
on organizational innovation and logistics value. The International Journal of Logistics
Management, 26(2), pp.218-237.
Lee, M.S., 2016. Save Our Ships: How US National Security Interests Affect the Human
Rights of Stranded Seafarers As A Result of Shipping Bankruptcies. Brook. J. Int'l L., 42,
p.959.
Pauli, J. and Wolf, M., 2017. Hanjin Shipping: Slow-Steaming into Bankruptcy Causes and
Effects.

10THE REASONS OF HANJIN’S INSOLVENCY
Song, D.W., Seo, Y.J. and Kwak, D.W., 2018. Learning from Hanjin Shipping’s failure: A
holistic interpretation on its causes and reasons. Transport Policy.
Teepen, B., 2017. Shipping crisis: combating overcapacity(Doctoral dissertation).
Wiener, T.M. and Walters, A.J., 2017. The Dire Straits of Hanjin Shipping. American
Bankruptcy Institute Journal, 36(1), p.26.
World Economic Forum (2019). d. [online] World Economic Forum. Available at:
https://www.weforum.org/agenda/2016/09/hanjin-shipping-crisis-global-trade/ [Accessed 2
Sep. 2019].
Yin, H., Chen, Z. and Xiao, Y., 2019. Risk perception affecting the performance of shipping
companies: the moderating effect of China and Korea. Maritime Policy &
Management, 46(3), pp.295-308.