Samsung Heavy Industries Violates Pre-Contract Document Issuance and Unfair Price Determination... 3.6 Billion KRW Fine and Corporate Prosecution

[Asia Economy Reporter Moon Chaeseok] The Fair Trade Commission announced that it has detected that Samsung Heavy Industries failed to issue contract documents in advance when subcontracting ship and offshore plant manufacturing to subcontractors and unfairly determined subcontract payments, and decided to impose a fine of 3.6 billion KRW. In addition to issuing corrective orders, it will also file a criminal complaint against the corporation.

On the 23rd, the Fair Trade Commission stated that it handled the case through an ex officio investigation under the "Measures to streamline and expedite case handling for businesses with multiple reports." Implemented since April 2018, this measure focuses on strictly correcting businesses with multiple reports of habitual unfair practices. The Fair Trade Commission expects that similar transactional practices will improve as a result of this action.

According to the Fair Trade Commission, Samsung Heavy Industries subcontracted 38,451 ship and offshore plant manufacturing tasks to 206 in-house subcontractors from 2013 to 2018. During this process, contract documents detailing key matters such as work content and subcontract payments were issued only after the work had started. There were 36,646 cases where work performance occurred before electronic signatures were completed, 684 cases where contracts were concluded after work completion, and 1,121 cases where delayed-issued contracts were discarded and re-contracted.

The problem was that Samsung Heavy Industries set the contract date as the date it prepared the contract document, not the date when the electronic signature with the subcontractor was completed. Since subcontracting regulations require issuing written contracts containing the contract details and signatures of the parties, the contract date should be the electronic signature completion date. Furthermore, if work had already started at the time of contract preparation, the work start date was set to be after the contract preparation date.

Samsung Heavy Industries arbitrarily decided subcontract payments by uniformly lowering unit prices. Around July 2017, it unfairly determined subcontract payments by lowering the hull painting unit price by a uniform rate (3.22%, 4.80%) compared to the previous year without justifiable reasons. From July 2017 to May 2018, it subcontracted 409 jobs to 10 hull painting companies, reducing subcontract payments by 500 million KRW. The Fair Trade Commission judged that since the difficulty of hull painting work varies by dock (large dry dock for shipbuilding) or ship type, there was no reason to lower unit prices by a uniform rate.

It also set subcontract payments at rates lower than manufacturing costs unilaterally. The difference between manufacturing costs and subcontract payments is estimated at about 1.3 billion KRW. From 2015 to 2018, Samsung Heavy Industries subcontracted 2,912 modification and additional works to 95 in-house subcontractors without determining subcontract payments. After the work was carried out, subcontract payments were set at levels lower than the manufacturing costs of the in-house subcontractors.

When modification and additional work occurred, the production department calculated the additional work hours based on actual labor hours and requested review by the cause and budget departments. The production department estimated the additional work hours lower than the actual labor hours by reflecting efficiency for non-quantity work. During the review process by the cause and budget departments, further reductions were made without reasonable or objective grounds.

Subcontract payments are determined by multiplying labor hours by the unit price per job category. Samsung Heavy Industries arbitrarily underestimated labor hours, lowering subcontract payments to in-house subcontractors. For the 2,912 modification and additional works, actual labor hours were 281,057, but only 81,757 labor hours were recognized. Labor hours refer to the conversion of work volume into labor time units, determined by applying a fixed formula to the volume. The unit price per job category is the rate per labor hour set by Samsung Heavy Industries for each job category. There was no consultation with in-house subcontractors during the payment determination process. Contracts were concluded at the amount set by Samsung Heavy Industries after the work was completed.

Unfair cancellation and modification of subcontracting were also detected. From 2015 to 2018, Samsung Heavy Industries arbitrarily canceled or modified 6,161 ship parts subcontracted to 142 external partners without reasons attributable to the partners. When items subcontracted due to design changes or shipowner requests became unnecessary or their quantities decreased, orders for those items were canceled or modified.

Samsung Heavy Industries only allowed partners to select whether to agree to cancellation or modification through the subcontract change system (PCR system) and did not negotiate losses that partners might incur. The PCR system did not have a field to specify reasons for cancellation or modification, so partners could only choose whether to agree without knowing the reasons.

The Fair Trade Commission decided to issue corrective orders (including recurrence prevention and public announcement orders) and impose a fine of 3.6 billion KRW for Samsung Heavy Industries' violations such as failure to issue written contracts, unfair determination of subcontract payments, and unfair cancellation of subcontracting. The corporation was also referred to the prosecution.

Jang Hyerim, head of the Manufacturing Subcontract Improvement Division at the Fair Trade Commission, said, "It is significant that we detected and sanctioned violations stemming from problems in Samsung Heavy Industries' contract procedures, putting a brake on habitual unfair practices," and added, "It is also meaningful that we conducted a detailed investigation of three years of subcontract transactions, including multiple reports, under the 'Measures to streamline and expedite case handling for businesses with multiple reports.'"

This content was produced with the assistance of AI translation services.