Report No. 1495-KO Korea: Appraisal of the Heavy Machinery Project (In Two Volumes) Volume II: Annexes May 31, 1977 Industrial Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Except where otherwise noted all figures are quoted in Korean Won (Won) US$ 1 Won 485 Won 1 US$ 0.00206 WEIGHTS AND MEASURES All weights and measures are in metric units. 1 metric ton (ton) = 1,000 kilograms (kg) 1 metric ton (ton) = 2,205 pounds (lb) 1 kilometer (km) = 0.621 miles 1 meter (m) 3 39.37 inches 1 cubic meter (m ) = 35.31 cubic feet (cu ft) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ADB - Asian Development Bank EPB - Economic Planning Board GE - General Electric of the U.S. HCC - Hyundai Construction Co., Ltd. HII, the Company - Hyundai International Inc. IMC - Ingersoll Manufacturing Consultants of the U.S. KDI - Korea Development Institute KECO - Korea Electric Company KIST - Korean Institute of Science and Technology MW - Megawatt POSCO - Pohang Iron and Steel Company TPY - Tons per year (metric) HII FISCAL YEAR January 1 - December 31 Industrial Projects Department May 1977 FOR OFFICIAL USE ONLY KOREA HEAVY MACHINERY PROJECT ANNEXES Annex 1 Project Evolution 2-1 Hyundai Group 2-2 Present Organization 2-3 Proposed Organization 2-4 Existing Facilities of HII 2-5 Existing Licensing Agreements and Progress 2-6 Historical Income Statements 2-7 Historical Balance Sheets 2-8 Market for Existing Operations 2-9 Financial Projections 3-1 Sector 3-2 Market for the Project 3-3 Marketing Organization and Strategy 4-1 Project Description 4-2 Plant Layout 4-3 Technology 4-4 Process Flow 4-5 Raw Materials and Components 4-6 Ecology 4-7 Manpower and Training 4-8 Infrastructure 5-1 Capital Cost Estimates 5-2 Working Capital 6-1 Project Organization and Management 6-2 Project Implementation 6-3 Items to be Financed by the Bank 6-4 Estimated Disbursement Schedule 7-1 Basis for Financial Projections 7-2 Projected Sales 7-3 Projected Operating Costs 7-4 Projected Income Statements 7-5 Projected Source and Application of Funds 7-6 Projected Balance Sheets 7-7 Break-Even Analysis 7-8 Financial Rate of Return 8-1 Economic Rate of Return 8-2 Foreign Exchange Savings 8-3 Cash Flow to the Government This document hu a retricted distribution and may be usd by recipients only in the performance of their ofikcial duties. It contents may not otherwise be disclosed without World Bank authorization. ANNEX 1 KOREA HEAVY MACHINERY PROJECT PROJECT EVOLUTION Event Timing Remarks Evolution Loan Application submitted by EPB April 1976 Accompanied by preliminary Project Study Visit to the Bank by HII June 1976 Preliminary Discussions Reconnaissance Mission in Korea July 1976 Requested Feasibility Study Appointment of consultants by HII Sept. 1976 Aopointed IMC Submission of Feasibility Report Nov. 1976 Jointly prepared by HII and InC Appraisal Mission in Korea Nov.-Dec. 1976 White Cover Appraisal Report Feb. 1977 Distribution of Yellow Cover March 1977 Appraisal Report Mission to update information March 1977 Distribution of documents to April 1977 Loan Committee Invitation to negotiate and May 1977 negotiation Final agreement on documents by May 1977 Government Consideration by Executive June 1977 Directors Industrial Projects Department May 1977 ANNEX 2-1 Page 1 KOREA HEAVY MIACHINERY PROJECT HYUNDAI GROUP A. Introduction 1. The Hyundai Group is made up of eight affiliated companies which are loosely held together by the fact that controlling interest in each is vested with the Chung family. The Group's origin can be traced back to the Hyundai Construction Company which was founded in 1945 by Mr. Ju Yung Chung, eldest of the four Chung brothers, all of whom are actively involved in running the family's business. The Construction Company subsequently branched into various other operations, directly or indirectly related to construction. Several of these were later reorganized into independent operating companies, while other companies were formed as the Group diversified its operations. A description of each of the companies in the Group, all with headquarters in Korea, is provided in the following paragraphs. Summary financial data for Group companies and details on their ownership structure are provided in Tables 1 and 2 at the end of this annex. B. Hyundai Construction Co., Ltd 2. Hyundai Construction commenced operations in 1945 and was incor- porated in 1950. It is presently the largest construction company in Korea with extensive activities in both domestic and overseas markets. Present facilities include: 8,000 units of heavy construction equipment, a heavy equipment maintenance shop, rock crusher and asphalt plant, and a concrete block plant. The company has a reputation for low cost, high quality, and efficient execution of construction projects. In Korea these have included: highways, bridges, dams, power plants, industrial plants (including steel and petrochemical plants), housing complexes and hotels. Abroad, Hyundai Construc- tion has built highways in Thailand and Indonesia, bridges in the U.S., power plants in Papua, New Guinea and harbor facilities in Australia. The company also has significant and expanding operations in the Middle East where it is engaged in the construction of major shipyards in Bahrain and Iran and port facilities in Saudi Arabia. 3. As of year-end 1976, the company held assets of US$406 million, and earned before taxes US$30.6 million on sales of US$278 million. C. Hyundai International Inc. 4. This company, the sponsor of the proposed project, was incorporated in 1962 to conduct international trading operations for the Hyundai Group. While this activity ceased in 1973, its operations now include the manufacture of heavy construction equipment, auto parts, and iron and steel castings and forgings, as well as the operation of four ocean-going freighters for world-wide tramping services. ANNEX 2-1 Page 2 5. Hyundai International employs some 3,500 staff, and in 1976 earned US$1.5 million on sales of US$47 million, and assets of US$92 million. Details on the company's operations are given in Annex 2-4 and 2-5 and in the main text of this report. D. Hyundai Shipbuilding and Heavy Industries Co., Ltd. 6. Hyundai Shipbuilding was formed for the purpose of building a variety of cargo vessels and supertankers. Construction of the shipyard, financed by a US$70 million loan from a European consortium and guaranteed by the Government of Korea, began in lMarch 1972. By November 1974, the shipyard had delivered its first two tankers of 259,000 DWT each. The shipyard consists of three large dry docks, hull shop, steel fabrication shop, assembly shop, paint shop and out-fitting shop. Altogether, the facility is capble of producing ten 300,000 DWT vessels every year. 7. The company employs a total of over 18,000 people, and in 1976 incurred losses of US$27 million (against 1975 profits of US$21 millon) on sales of US$380 million and assets of US$397 million. E. Hyundai Motor Company 8. The Hyundai Motor Company was incorporated in 1967 to assemble passenger cars, buses and trucks under license from the Ford Motor Company of the U.S. In 1975, the company completed construction of an integrated automobile plant with an annual capacity of 80,000 units of cars and com- mercial vehicles (including the popular Hyundai Pony - the first original Korean car). The new plant includes an engine assembly shop, foundry and forge, die and tooling shop, stamping plant, parts manufacturing plant, and an assembly plant. As a result, the company has increased the local content of its products to about 65% of total value. Overall, Hyundai Motor is the largest auto manufacturer in Korea with about 55% of the local passenger car and bus markets. 9. In 1974, the company went public, with an issue of just under 50% of its capital stock to the general public. The company employs about 1,600 people, and in 1976 earned US$7.3 million before taxes on sales of US$109 million and assets of US$159 million. F. Hyundai Cement Co., Ltd. 10. This company developed from a division of the Hyundai Construction Company which established a 400,000 metric ton portland cement plant in 1964, with USAID financial assistance. In 1970, the Hyundai Cement Company was incorporated to take over the operations of the plant with a view to improving its manufacturing and sales efficiency. In 1974, the company completed an expansion project, raising plant capacity to 1.2 million metric tons per annum. The expansion was financed by the US Exim Bank and a US commercial bank. ANNEX 2-1 Page 3 11. Hyundai Cement became a publicly-owned corporation in 1975. As of year-end 1976, the company's total assets amounted to US$37 million, with sales of US$30 million on which it earned profits of US$0.5 million. G. Keum Kang Asbestos Cement Industries Co., Ltd. 12. This company was established in 1958 to manufacture various types of construction materials for the domestic and foreign markets. Major pro- ducts include corrugated and ribbed asbestos/cement sheets, and interior walls and partitions for office and institutional use. 13. Keum Kang went public in 1973, the first of the Group companies to do so. Total earnings in 1976 amounted to US$0.7 million on sales of US$30 million and assets of US$21 million. H. Hyundai America Corporation 14. Hyundai America was established as an integrated construction contractor in the U.S. territory of Guam, in 1968. Since then, the company has successfully built a number of public and private projects including: schools, generating plants, offices, condominiums and housing units. The company held assets of US$15 million and reported a loss of US$1.5 million on sales of US$5 million in 1976. I. Hyundai Mipo Dockyard Co., Ltd. 15. This company was established as a joint venture between Hyundai Shipbuilding and Heavy Industry Co., Ltd. and Kawasaki Heavy Industries of Japan in 1975. Facilities include repair docks and a quay with the capacity for repairing 200 large scale ships per year, up to an individual size of 700,000 DWT. The company is based alongside the Hyundai Shipyard in Ulsan and employs 2,500 persons. In 1976, the company held assets of US$21 million and incurred losses of US$0.1 million on sales of US$11 million. Industrial Projects Department May 1977 KOREA HEAVY MACHINERY PROJECT HYUNDAI GROUP FINANCIAL DATA (Won Millions) Yu8r Long Return Return Debt/ Number Ending Total Term Net Net Pre-Tax on on Net Current Equity of December 31 Assets Debt Worth Sales Profit Sales Worth Ratio Ratio Employees (%) (%) Hyundai International Inc. 1975 21,706 5,147 6,407 11,512 340 3.0 5.3 0.8 45:55 2,400 1976 44,520 18,297 6,767 23,062 744 3.2 11.0 1.0 73:27 3,500 Hyundai Construction Co., Ltd. 1975 46,144 2,477 15,189 54,540 6,585 12.1 43,3 1.0 14:86 2,400 1976 196,704 2,170 32,029 135,048 14,825 11.0 46.3 0.9 6:94 n.a. Hyundai Shipbuilding and Heavy 1975 195,996 62,859 17,034 113,063 10,175 9.0 59.7 1.3 79:21 18,000 Industries Co., Ltd. 1976 192,558 66,154 3,216 184,152 (13,172) (7.1) - 1.3 95:5 n.a. Hyundai Motor Company 1/ 1975 60,875 30,500 10,810 30,377 2,545 8.4 23.5 1.3 74:26 1,600 1976 77,305 37,276 15,217 52,789 3,558 6.7 23.4 1.5 71:29 n.a. Hyundai Cement Co., Ltd. 1/ 1975 17,751 8,428 3,575 14,425 261 1.8 7.3 1.1 70:30 650 1976 15,796 7,867 3,924 15,946 543 3.4 13.8 1.5 67:33 n.a. Keum Kang Asbestos Cement 1/ 1975 8,475 1,529 1,775 10,650 268 2.5 15.0 1.1 46:54 1,100 Industrial Co., Ltd. 1976 10,124 1,335 3,024 14,548 377 2.6 12.5 1.2 31:69 n.a. Hyundai America Corporation 1976 7,130 905 475 2,271 (722) (31.8) _ 1.2 66:34 n.a. Hyundai Mipo Dockyard Co., Ltd. 1976 10,603 6,427 1,860 5,422 (62) (1.1) - 1.2 78:22 n.a. Total Group 2/ 1975 350,947 110,940 54,790 234,567 20,174 8.6 36.0 n.a. 67:33 29,920 1976 554,740 140,431 66,512 433,238 6,091 1.4 9.2 n.a. 68:32 n.a, 1/ Publicly owned companies 2/ Total group figures are for information purposes only. They do not represent a consolidation since intercompany transactions have not been eliminated in the totals. Industrial Prolects Department c May 1977 ,- , ANN= 22-1 Table 2 KOREA 9EAV IMACHINiRY PROJECT HYNPA U GR -P WFERSHIP STPUCTURE No. of Shares % (000 s) Hyundai International Inc. Chung, In l-ung 3o5,3 ,9 1.undai Construction Co., Ltd. 265.5 .3 ther Chung Family Members 29.2 3.3 )tLLer Shareholders 9.0 1.5 600.0 100.0 .Yyundai Construction Co.. Ltd. Chung, Ju Yung 306.8 59.0 Chong, In Yung 130.0 25.0 'ther Shareholders 83.2 16.0 520.0 100.0 Hyundai Shipbuildina and Heavy Industries Co., Ltd. Hywudai Construction Co., Ltd. 3,530.0 88.3 Chune Family Members 450.0 11.2 ther Shareholders 20.0 0.5 4,000.0 100.0 ?i1undai Notor Company H;yundai Construction Co., Ltd. 3,667.2 30.6 Chlng, Se Yung 1,024.1 8.5 Dther Chung Family Members 295.7 2.5 ,ther Shareholders 7,013.0 58.1 12,000.0 100.0 Hyundai Cemenr.. Co., Ltd. 1/ .. udai Construction Co., Ltd. 1,194.1 39.8 Chung Family Members 290.0 9.7 .ther Shareholders 1,51i.9 50.5 3,000.0 100.0 Keum Kang Asbestos Cement Industrial Cc., Ltd. 1/ Churg, Sang Yung 2L3.8 22.4 Dtler Shareholders 8Li. 77.6 1,088.3 100.0 1/ P'lbiclCy owned comparies Industrial Projects Department April 1977 KOREA HEAVY MACHINERY PROJECT Existing O,9onizat.onal Structure of Hyundai International CONTRO, COSTING & PLANNING RUDGETIN.GI_ SENIOR DIRECTOR SENIOR DIRECTOR jSENIOR IRECTOT SENIOR DIRECTOR SENIOR DIRECTOR SENIOR DIRECTOR TECHNICAL OPERATIONS MAREETING PROJEC1 SLES STIPPING CRAN WON PROJECT D OER- SEAS D UALITY CONTROL R RANCAES |AYN = UNO DIRECTI R DIREORECTR D O IREC ORGANIZATION MANUFACTIRING DIR ENCTOR C G NANCE I RPANT RIppNC MARINEC T O NPO SC NS TIA N| ENGINEERING NA P T ACCOUNTING C I OPERATION ENGINEERING GRADE OFA- SAN AIR IN Y & SUTOMOTIAC GENERAL AFFAIRSI POCASING DESIGN N CONT CODNDITITO-NINGE COMPOEN tP M FINANCIN CEMENT PLANTAE | PRODUCTS N PARTS T NIANION FOREIGN ELECTRCAL CASTNGSN TETNL PROIDOCTIP~AR LODO FEEORGING MACRINERT EOUIPMENTtP PN STONET ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~COMPNENTSG I LNNI FPAPEAIR IOIR CHEMICAL Indf ~ ~ ~ ~ INUTRA POWE PLN REPAIR Dea& JanuI.V 97 Wo1td eank rEZOE 4ll ~ ~ ~ ~ POUTPAE UL AAN _ Rb. >< E H - ~ 5 -, F _ I -3 Ip I E= [ _ _ u = I 11 { 11 i X s r t f L i3-~~~~~~~~~~~~~~I~ t-2 ~~~~~~~~~~~~~~~~~ ANNEX 2-4 Page 1 KOREA HEAVY MACHINERY PROJECT EXISTING FACILITIES OF HII A. Background and Development 1. HII was established in 1962 as a joint stock company under the Commercial Code of the Republic of Korea, to carry out trading activities for the Hyundai Group. It first concentrated on exporting products of the Hyundai Group and importing industrial and construction materials and equipment. HII entered the field of manufacturing in 1965 by establishing a machine shop at Anyang (26 km. from Seoul), for producing stainless steel tableware. Further, in 1968 the Company supplemented its trading operation by international shipping operations on a small-scale. In 1969, the table-wares plant was expanded and modified for the production of various automobile parts such as shock absorbers, engine radiators and side-frames. The Company expanded its manufacturing operations in 1970 when it initiated the construction of a machinery manufacturing plant at Gunpo (30 km. from Seoul) by setting up a foundry for the production of iron and steel castings. This was followed by the additin of a machine- shop in 1972 and a forging facility in 1973 and subsequently HII began to manufacture heavy construction machinery. The shipping operation was strengthened and by 1973, HII was operating four ocean-going vessels with a total tonnage of 70,000 DWT. As other operations gained in importance, the trading activity was curtailed and discontinued in 1973. The Company added a range of electrical auto-parts to its Anyang product-line through further expansion in 1974. 2. In mid-1975, the Company received a US$17.5 million loan from the Asian Development Bank (ADB) for expanding the Gunpo facility into an integrated machinery manufacturing plant at an estimated total cost of US$30 million. The Company is in the process of completing the expansion, which would place HII in a position to manufacture a variety of heavy construction equipment; water chillers; machine-tools; textile- spinning, cement and paper machinery; and a range of forgings, castings and fabricated products. Recently, the Company negotiated another loan for US$7.6 million from the U.S. Exim Bank for a further increase in the capacity of the Gunpo plant. 3. The Gunpo facility contributed 54% of HII revenue in 1976, Anyang 31% and shipping 15%. With the completion of the current expansion, Gunpo would become significantly more important than HII's other existing operations. By 1979, when Gunpo is expected to reach full operational status, it alone is projected to generate around US$200 million in annual sales revenues, as compared to about US$48 million of HII's entire turn- over at present. ANITEX 2-4 Page 2 B. Present Facilities 1. The Gunpo Plant 4. The Gunpo facility, begun in 1970 with a Foundry shop, has since been expanded into a large facility with the flexibility of manufacturing a diverse range of light and medium machinery and related products. For current products, manufactured under international licenses, see Annex 2-5. Upon completion of the current ADB-fin2nced expansion, scheduled for early 1977, the plant wi;l comprise 99,000 m of building area spread over a site covering 264,000 m . The space-allocation to the primary facilities and their estimated capacities are summarized in Table 1. 5. The Foundry and Forge shops: The melting shop comprises a 1-ton induction furnace, a 3.5 ton cupola and a 10-ton arc furnace all of which are already in place. Another 10-ton arc furnace has been provided for in the current expansion plans. The shop incorporates modern sand pre- paration, sand slinging and sand conveying and return systems for use in conjunction with the automatic and manual moulding lines. The casting operation is supported by suitable pattern-making equipment, shot-blasting machines and annealing and hardening furnaces of various sizes. The estimated annual capacity of the shop is about 15,000 tons of steel castings and 6,000 tons of iron castings. The forge shop, located adjacent to the foundry, is equipped with a 2 ton free-forging press capable of handling ingots up to 5 tons in weight. For small forgings, the plant utilizes three air-operated drop hammers with a maximum weight capability of 15 kg, 30 kg and 50 kg, and suitable upsetting and trimming presses. 6. A large heat-treatment facility is housed separately and includes a broad range of heat-treating and hardening furnaces. It also includes specialized induction-hardeners for components of heavy construction equip- ment such as bulldozer track links and a rotating hardener for sprockets, wheels and gears. 7. The Heavy IMachinery and Fabrication Shop: The machining capability at Gunpo is divided into two areas: light macpining and heavy machining. The heavy machine shop is housed in a 32,000 m structure along with the fabrication shop, 2 bays being used for machining and 3 bays being used for fabrication and assembly. The heavy machinery is being provided under the ADB and U.S. Exim Bank loans and includes a large number of lathes, verticle and horizontal boring mills, planers and plano-millers, drilling and grinding machines, gear-making machinery, a dynamic balancing machine and numerically controlled machining centers. The heavy machining capacity of the shop is estimated at over 182,400 machine-hours, assuming 3-shift operation. 8. The fabrication shop provides significant capability with a 800 ton dishing press, a 600 ton press brake, two sets of plate-bending rolls and a range of other presses, shears, angle-bending tube-bending and turning rolls. The shop also provides six sets of gas-cutting equipment including ANNEX 2-4 Page 3 a plasma-arc cutting machine. In the welding area sixteen sets of different types of welding machines are available and include MIIG and TIG arc welders and self-propelled submerged-arc welding machinery. 9. The2Light Machine Shop: The light machine shop is housed in a 14 bay, 27,000 mn structure. Eight bays within the shop are utilized for crane and under-carriage assembly and a repair and maintenance facility. At the machine-end, the heavy machinery is adequately supplemented at the light-end through the provision of a number of lathes (84), milling and drilling machines, shapers and slotters and grinding machines. Within the light machine-shop there is a provision for a tool-room and other support areas. The capacity of the light machine shop is estimated at over 1,186,000 machine hours on the basis of 3-shift operation. 10. Manpower Resources: The Gunpo plant employed at year-end 1976 a total labor force of around 700. Of these, 650 are employed in administrative and engineering functions. In order to manage the technology transfer under the range of existing foreign licenses (see Annex 2-5), the Company is in the process of strengthening in-house engineering capability. Gunpo currently employs around 170 manufacturing engineers and an additional 200 people working in design, drafting and related functions. By 1979, when Gunpo is expected to attain full capacity, the engineering and labor resource is expected to double. 11. Gunpo project-completion experience: The ADB financed expansion project was estimated to be completed in August 1977. In view of progress to-date, the project-implementation is proceeding three months ahead of schedule and is expected to be completed in June. The project cost experience is shown below. The increase is almost entirely related to a change in pro- ject scope, to accomodate additional machinery financed by the U.S. Exim Bank. HII: ADB Financed Expansion Project Experience (US$000) Initial Estimate Current Estimate (Appraisal March '75) (December '76) Local FX Total Local FX Total Building Works 1,600 - 1,600 5,391 - 5,391 Machinery: Under ADB Loan - 14,100 14,100 - 16,813 16,813 Local Funds 390 - 390 1,028 - 1,028 Utility & Auxiliary Equipment 1,040 - 1,040 4,080 181 4,261 Others 548 400 948 548 - 548 Contingencies 827 3,000 3,827 - - - Total 4,405 17,500 21,905 11,047 16,995 28,042 ANNEX 2-4 Page 4 The unit cost experience at Gunpo adjusted for inflation has been used as the basis for estimating construction costs for the Heavy N4achinery Project. 12. The Gunpo facility with its significant light and medium engineer- ing capability will be of considerable assistance to the Project in both the construction and operational phases. It has already served a useful function in providing qualified and experienced manpower for the early design and planning stages of the project. It will provide a great deal of assistance in the early Project fabrication work, through the availability of its facilities and trained labour. In the early operational phase it will supplement training facilities included in the Project and serve as a productive training ground itself. Finally, in the operational phase, it will complement the Project's heavy engineering capability by providing medium-sized forgings and castings and machined components. The Project design takes these factors into account in establishing equipment requirements. 2. The Anyang Plant 13. The Anyang plant was HII's first venture into manufacturing activity beginning with the production of stainless steel wares and expanded to manu- facture a line of automotive components under different international licenses (see Annex 2-5). In relation to Gunpo, it is a small facility, catering to mass-production of light automotive products. 14. The Facilities: The plant is structured along product-lines in accordance with its mass-production orientation, with some common facilities such as the press-working and painting shops, a die-making shop and a labora- tory. The product-oriented lines are: the brake and steering system line, the shock-absorber line, the radiator shop and lines for different automotive electrical equipment such as starter motors and ignition coils. Six heat- treating furnaces are provided in the plant to meet annealing, tempering and hardening requirements. A continuous sinter furnace was installed recently to extend the Company's capability into the production of sintered metal products. The primary production facilities are housed under two structures: The press-working, welding, painting and radiator shops in one and the remainder, along with maintenance area in another. 15. The Anyang plant was initially designed for a capacity of 30,000 sets of automotive components. With some rearrangement of the assembly lines and investment in automation of functions such as coil winding, the capacity at the beginning of 1977 is 40,000 sets with flexibility to increase the production of a specific item at the expense of another. The major facilities have the capacity to produce up to 60,000 sets and with minimum investment in specific items of machinery and additional manpower, the overall capacity can be in- creased to 60,000 sets. HII's present programs include plans to achieve this increase by 1979 and the necessary investment funds have been provided for in the financial projections. ANNEX 2-4 Page 5 3. Marine Equipment and Operations 16. HII has been engaged in the operation of a shipping line in the past and recently added a small builidng and repair facility to its operations. HII's shipping line is named in Korea Atlas. 17. The Korea Atlas Line comprises four ocean going vessels described below: HII: Atlas Line Vessels Name Description Tonnage Premier General Cargo/Car Carrier 10,300 DWT (5 holds) Challenger Pure Bulk Carrier 19,680 DWT (7 holds) Carrier Car/Bulk Carrier 18,110 DWT (7 holds) Counsellor Car/Bulk Carrier 20,330 DWT (6 holds) The four ships, currently operating year-round, are valued at around US$11 million. The ships generally ply the trans-pacific route between Korea/ Japan and the U.S. West Coast. C. Conclusion 18. HII has made substantial progress, since its inception in 1962. Total revenues increased from around US$2 million in 1971 to US$48 million in 1976 as the Company grew from a small trading operation into a significant manufacturing enterprise. In its Gunpo and Anyang operations, the Company has shown the ability to manage a number of diverse though comparatively simple technologies obtained through overseas licenses. The Gunpo plant incorporates some of the elements of a heavy manufacturing facility so that the Company has some experience that relates to the Heavy Machinery Project. The Gunpo construction experience is transferable to the Project and in addition, as indicated earlier, Gunpo will serve as complement to the Heavy Machinery Project. Industrial Projects Department April 1977 KOREA ANNEX 2-4 HEAVY MACHINERY PROJECT Table 1 PFRIMAREY FACILITIES AND PROJECTED CAPACITY BUILD-UP AT GUNPO Facility Area He'ght Capacity Measure ti72( Foundry 13,000 10.7 Steel Castings: 20,000 tons Iron Castings: 10,000 tons Forge 3,000 9.0 Forged Steels: 10,000 tons Light Machine Shop) 1/ 27.000 6.o Machine Hours: 1,186,000 Crane and Under-. ) carriage Shop 1/ Heavy Machine Shop 12,000 23.5 Machine Hours: 182,400 Fabrication Shop 20,000 23.5 Fabrication: 60,000 tons Laboratory 1,000 6.o Warehouse 2,000 10.9 office 12,000 - _ 1/ Bsed on 3-shift 5,700 hour operation Capacity Build-up by Key Products Product 1976 1977 1978 1979 (Actual) -- Castings and Forgings (000 tons) 10.0 15.0 20.0 30.0 Chiller (000 Refrigeration tons) 10.0 20.0 25.0 30.0 Crane (Units) 20 40 50 60 Other Construction Machinery (Units) 360 500 700 900 Textile-spinning Machinery - 70 120 150 (000 ton capacity) Cement Machinery (000 ton capacity) - 300 500 1,000 Paper Machinery (000 ton capacity) - 40 50 50 Machine Tools (Units) _ 400 800 1,050 It should be noted that capacity noted against each product is not an absolute constraint on its production as the capacity is fairly general purpose and can be reallocated as necessary. Industrial Projects Department April 1977 ANNEX 2-4 . - _e c KOREA HEAVY MACHINERY PROJECT 1 . CAPACITY OF ANYANG PLANT Year Product 76 77 78 79 7000 Units) Heater 4o 40 50 60 Shock Absorber 160 200 240 21h0 Alternator 30 40 60 60 Fuel Tank 40 40 50 60 Ignition Coil 30 40 60 60 Horn 30 40 50 60 Wiper Motor 30 ho 60 60 Regulator 30 4O 50 60 Starter Motor 30 40 60 60 Side Frame 30 40 50 60 Generator 30 40 50 60 Brake 10 30 45 60 Steering 10 30 45 60 Radiator 40 55 60 60 Car Cooler 1.5 2.0 3.0 3.5 Bus Cooler 0.2 (.4 o.6 o.6 1/ Capacity stated against each product is not an absolute constraint on its production as the facility-balance can be adjusted to make more of one product and less of another. Industrial Projects Department February 1977 ANNEX 2-5 Page 1 KOREA HEAVY MACHINERY PROJECT EXISTING LICENSING AGREEMENTS AND PROGRESS 1. HII's manufacturing operations are based upon the transfer of technology under license agreements with international manufacturers in the U.S.A., France, Germany, Italy and the United Kingdom. Thus far, for its existing plants at Gunpo and Anyang, the Company has negotiated 15 licenses, one of which has expired and another is pending Korean Govern- ment approval. A. The Products 2. The licensing agreements cover the full range of HII's products, currently being manufactured and scheduled for manufacture in 1977 (see Table 1). The products can be categorized into five groups: automotive components; heating and cooling equipment; construction machinery; machine tools; and industrial machinery. For most of these products, the Company has selected licensors from amongst the leading manufacturers in the world. In most cases the technology transferred was new in the Korean context enabling thle Company to establish itself as the sole domestic producer. B. The Nature of the Agreements 3. The agreements are generally licenses that extend for 5 years after the Korean Government has approved them. Thereafter, they can be extended for another 3-5 years subject to Government reapproval. The initial down payment in most cases was quite low based on each model or each set of drawings ranging from US$1,000 for the shock-absorber to US$25,000 for the largest crawler tractor. The royalty paid ranges be- tween 2.5 - 5% averaging around 3% of the sales value. All agreements provide for dispatch of the licensor's engineers at HII's request and expense and in most cases for training of limited HII staff at the licensor's facility. The Company has fully utilized the latter provision as the most effective means of ensuring a smooth transfer of technology. C. Progress in Production 4. As may be expected, production in the early years was heavily reliant on imported parts and sub-assemblies. HII only contributed 30 - 35% of the total value added, which is still the case for recently intro- duced construction machinery. However the Company has pursued a rapid localization program and has succeeded in fully localizing the manufacture of some of the automotive components. The manufacture of cranes has been localized to the extent of 60% and along with other construction machinery ANNEX 2-5 Page 2 is scheduled for around 70% localization by 1979. Some items that are not to be localized because of their specialized nature have been clearly identified. These include components such as master cylinders and other hydraulic systems, engines, special transmission and bearings. D. Conclusion 5. The Company has gained substantial experience in working with a number of foreign technologies at the same time and has been quite successful at it. Though the technologies involved in the Heavy Machinery Project are much more complex, HII's past experience has been and would continue to be of some value in negotiating licenses for the Project and in setting up the organization necessary to absorb the licensed technologies efficiently. In view of the success of the approach followed in the existing operations, a similar approach, modified for added complexity to include a higher degree of training, a comprehensive program for technology transfer and a more elaborate manufacturing information system, is considered appropriate for the Project. Industrial Projects Department April 1977 K())(A HI AVY MACIIN EltY PI(OJ r CT ii LNICI' iOX EiXISTING OPlriATIONS Govt. Appr.val Expirotllili Mit iul tool (-.:u.j ¢ ........ lae . . it , h.*,ilator Ititi oU i, St , t l Mo, 3 yea.:, trom tite diate ut C ivvrTUeit 1uaj. '(( 1.20./i Wiper MuotLIr, Distributor Hurn apprival. (carl be extended for 2 years ) IVi.ie * (Jajan) LDa-ck Abt,lrbe awid 6usprension itruts 3 years Irujm toie date, uf Government 1j.23.70 22.16 Appruos.i. btainen government ap- proval ro.r the extensiun of 3 yearb tLIrIi,i,' (U.S.A.) Braking System & lLydraulic Clutch Actuation &quipreeit 5 years frmis the- date of Korean Gov- 1?-.30.T74 12.29.79 ernamernt Approval. Lxtend'tle for another 5 yearb Bunuon & Sons (U.K.) bteeri,4, Unlits for Autu Vehlicles 5 years from the date of Korean Gov- 12.30.714 12.29.79 ersiment Approval. Extendible fur J,,I,i iE.. Mitcilell arnother 5 years (U.S.A.) CI coler; Expired; nl niow nufacturig unider, own Brand. Yr-Aucts:t. Moinfact.ored a Cip., iEATING & CoolING F1l I runey if centrifugal and reciprocatinig central Extended for 3 years beyornd iniitiul 6.22./0 8.25.78 Ail t.mlp (U.S.A.) arI-c wditionji,go quiJmr,t. years. T.hkyo Sanyo Elec- Abaorption type Water ciLiller 5 years from the date of Gov't ap- 9.01.75 8.31.il0 t ri Cu. (Japan) proval. Extendable for 5 years C t,&;TIJu'ri J;T. MACHINERY A '-ric,un Hoist & Trick, Cranea, back Hoes, Derrick & RevoLver 5 years from the date of Government 3.13.73 3.12.78 li-,rick Co. (U.S.A.) approval, extendible Fi:Lt.-AIIls ConstruC- ?r:awIcr Traotor, WhIeel l. ,ad,cr 5 years from the date of Kurean Gov- 8.16.Yli 8.15.79 t i,a,i (U.S.A.) errunent Approval. Extendible for 5 years f ,elti l S.A. ($tar'e) Hydraulic excavator 5 years from the date of Korean Gov- 5.13.7L 5.12,79 e rninent Approval. Extendible for ariother 5 years Allis-Chalmers C;,. Fs'rklift Iriduo t.rial Tricks 5 years from the date of Guv't ap- 5.30.75 5.29.80 (b.S.A.) provil . Extendible for 5 years MAiACI NE T,I,LS osaka Kik. Co,., Itu. 1i,ti's aid !illiIj Mc1iC , ', ra fr,m the diot .f Guovernm-l 4.02.76 4.02.81 (Jap-n) aitendblu. IxtrJiI Sc il 5 years. E ,rz;:i)i (It aly) Spininirlg lachir,-r; S years from the dlate f Kwreain 14.16.75 I t, l i at, Ajiovald1 fa iler C.;. (U . .A.) Cament Mbehirtorry ll) ycars from the dite of Korean 9.26.714 Glivernmriet ApProval and cat, be ex- tended another 5 years Vi i GMltH (iiri.,ai,y) pap, r Machio n- ., f,11 ro, o If produlot: 'j yo,;rs frs,m the date of Koreaw Lxj,ected befo,re o'.05 rtonr t sapproval. U:brua ly 71 '. 1: . L !: [ I) s X ; r Ag ed lAr 10.05.76 KOlEA HEAVY MtACIlINERY PROJECT 1TI: HISTORICAL INCOME STATEMENrS (Won Miliolls) 1971 1972 1973 1974 1975 1976 Amount 7 Amount % Amount % Amount % Amount L Amount /. Sa les 5/ Manufacturing 673 57 1,230 61 3,188 62 6,051 63 8,124 71 19.525 85 Marine 506 43 791 39 1.907 38 3.585 37 3.388 29 3,537 15 Sales 1,179 100 2,021 100 4,995 100 9,636 100 11,512 100 23,062 100 Cost of Sales Manufacturing 1/ 516 44 777 39 2,305 46 4,750 49 6,577 57 14,951 65 Marine 362 31 553 27 762 15 1.576 16 1.468 13 2,074 9 Cost of Sales 878 75 1.330 66 3.067 61 6.326 66 8.045 70 17,025 74 Gross Profit 301 25 691 34 1,928 39 3,310 34 3,467 30 6,037 26 Indirect Expenses Selling and Administrative 118 10 214 10 416 8 676 7 973 8 2.026 9 Depreciation 148 12 317 16 768 15 836 9 1,428 12 2,251 10 Interest Expense 81 7 238 12 534 11 830 8 1,007 9 1,957 8 Income from other Sources 2/ (61) (5) (159) (8) (56) (1) (114) (1) -(i) (2) (941) (4) Indirect Expense 286 24 610 30 1.662 33 2.228 23 3.127 27 5.293 23 Profit before Taxes 15 1 81 4 266 6 1,082 11 340 3 744 3 Income Taxes 3/ - - - - - 106 1 494 (4) 143 - Net Profit 15 1 81 4 266 6 976 10 (154) (1) 601 3 fl, , = , _ R SC = RATIO ANALYSIS Debt Service Coverage 4/ 1.2 1.5 2.5 2.5 1.2 1.3 Pre-Tax Return On: Average Total Assets 6.97 9.0% 12.7% 21.6% 8.3% 8.21. Average Equity 3.4% 14.2% 33.0% 76.0% 7.7% 11.37. 1/ I)etails given in )age 2 of this annex. 2/ Income from other sources is chiefly interest income on bank deposits together with sales commissions on a small volume of sales whereHII acts as a sales agent. 3/ Income taxes represent taxes actually paid on manufacturing operations, marine operations are exempt from income taxes. In 1975, HII paid taxes of Won 494 million, of which Won 366 million represent income taxes assessed on prior years. No income tax is payable in 1976 since HII is allowed a Won 1490 million investment tax credit on the expansion of its Cunpo plant. The tax credit amounts to 8% of the cost of the new facilities. 4/ Net profit before interest expense and depreciation, divided by: interest expense plus repayment of long term debt. 5/ Of total mantufacturing sales in 1976, 44% or Won 8,605 million were to Hyundai Grouip Companies as follows: llyundai Motor (22%), Hyundai Construction (15%), a Hlyundai Ship Bui Iding (6%) and ilyundai Cement (1%). A Indiostrial ProJects Department May 1977 KOREA HEAVY MACHINERY PROJECT HII: IIISTORICAl MANUFACTIJRINC COST OF SALES (lWn Millions) 1971 1972 1973 1974 1975 1976 Amoif X % A&wunt X Amount Z Amount Z Amount x Amount Z Sales 673 100 1,230 100 3,088 100 6,051 100 8,124 100 19,525 100 Cost of Sales labor 1/ 119 18 164 13 314 10 1 651 11 1,143 14 1,964 15 MAteials 2/ 301 45 462 37 1,635 53 I 3,467 57 4,444 55 10,019 51 Direct overheads 77 11 120 10 296 10 482 8 712 9 1,472 7 Moyaltties and Taxes _/ 19 3 31 3 60 2 150 2 278 3 496 3 (C-st of Sales 516 77 777 63 2,305 75 4,750 78 6,577 81 14,951 76 Gr,-s Protit 157 23 453 37 783 25 1,301 22 1,547 19 4,574 24 I/ labor costs are an abnormally high percentage of sales, 1975-76, due to the build-up in workers required for the start-up of the company's eanded Gunpo facility which will imt be fully on strearm until aid-1977. ' Material costs are an abnormally high percentage of sales, 1973-75 due to the adding of new product lines over this period particularly in auto parts and construction equipment. By 1976, witit a higher sales voliume, HII was able to localize production of parts fors,erly purchased from foreign sources, as well as to realize savings through higher volume purchases of raw materials. 1/ lnc)udes royalties paid to licensors and business tax (1.57) on sales. Indusrrial Projects llepartmeuit May 1977 ANliEX 2-7 KOREA REAvy mkCmI=EY PROJECT HII: HISTORICAL LAANC SHIRTS (won MilliPn) 1971 1972 1973 1974 1975 1976 ASSErS Current Assets t 15.h 136 390 1,167 1.512 2,564 5,821 Accounts Receivable 124 33S 460 1l189 1,627 3,699 I .....C ? . 2,4 Raw te ials *nd S.pplies S1 178 964 1,484 !,148 Z,442 Goods in proneso 37 43 122 260 627 1,882 Finished Goods 60 178 79 300 69 1,155 274 2,018 557 2,332 1I080 5.404 Prepeid Rpnes... nd Other 111 132 440 616 1.296 4152 Totel Current Aecets 549 1,160 3,222 5,335 7,819 19,076 Fixed Assets L.nd 212 162 206 332 864 1,654 B3ilding 128 234 403 954 2,370 - - 6,399 Huhi ery and Eqipment 350 757 1.060 2,012 4,756 13,145 Ship. q 3.324 3.410 410 .3912/ 5/ Total pled ASsets 1,333 4,477 5,061 6,708 16,381 28,542 Accu ul.tsd DepnecCition 21,j 515 1.260 2.037 3,433 3.643 Net Fixted Assets 1,115 3,962 3,821 4,671 12,948 24,899 Inves.,ents sd Long Ten. Receiv.bl.s 28 61 66 79 736 310 Deferred Ch-ages 100 139 195 305 203 235 T1t0I Assets 1.792 5,322 7,304 10,390 21,706 44,520 LBLLITlES A'.O EOUrIY Correnc LiabilitieS Accounts payable 82 199 401 1,430 1,548 5.927 Short Ten. Bank Losts 140 361 1.118 1,735 4,652 7.193 Accrued- Expenses 477 547 748 1,218 2,104 1,936 Current Portion of Long Tens Debt 18L 102 233 928 1.758 3,733 Total Current Liabilities 880 1,209 2,500 5,311 10,062 18,789 Retirement neserve 12 17 36 83 90 667 Long Ten. Debt 609 3,527 4,D49 4,142 6,905 22.030 L-es Cutrent Portion 1al 102 233 928 1-758 3,733 428 3,425 3,816 3,214 5,147 10297 EU. ity C.pitl Stook 361 461 461 461 6.000 2/ 6,000 Re-eluation Surplus 175 175 4/ 175 Reteined EaroingS 111 210 491 1.468 232 592 Total Equity 472 671 952 1.929 6.407 6,767 TItal Liabilities and Equity 1,792 5,322 7,304 10,390 21,706 44,520 RATIO ANSALYSIS Qu ick Ratio 0.3 0.6 0.6 0.5 0.4 0.5 Corrent Ratio 0.6 1.0 1.3 1.0 5.8 1.0 Anerage Turnover Accounts Receivable 16.4 8.7 12.5 11.7 8.2 0.7 Accounts Fayable 9,0 8.4 9.5 6.4 4.8 4.0 Inventories 3.0 3.3 3.2 3.0 3.0 3.9 Debt/Equity Ratio 48:52 84:16 80:20 62:38 45,55 73:27 11 -ont of the cash ctarried by HTI represents deposits mad. *gsinet short and long-tern loens from Korean bnks. Each month HII is required to ,nake pay.mnts aainst such loans. The pay=nts are deposited in a bank *ccount o. which the conpeny rsneives interest. / Flixed assets were revalued it 1975 in aocordenoe with the Asset Revaloutio; Law. The asesnt of the revaluation, as determined by the Korean Appraisal Board (Ministry of Finmace),was W5,620 million, of which a4,785 million represented revaluation of ships which had been potchased in 1972 uoder depressed nrket conditions. Of ths total revaluation mount, 44,409 million was transferred to share capital, W175 nillion to revaluation surplus, W167 million was used to pay revaluation tales, nd the balance, W869 milliom, used to revalue foreign long ten. debt. Lnder the Asset Revaluation La. aessets Pay be rsvalued only wham the rslevnt wholesale price index has increased by 25% from the date of the prev-o.s reveluation. Also,depreci.tion for t- pgpurposes is taken on the revelued enpunt 3/ InuIodie foreign debt of W17,234 nillion valued rt echange rates as of December 31, 1976 4/ Cupiti1 ntock we. inoneosed in 1975 000 a stock dividend of W5,539 nillion, representing: (a) reoluation surplus of W4,409 -l1ion end (b) transfers fron ret-Ined .arning- W1,130 million. 5 Fi.od assets nod long ten. debt i.ore.se sharply Ln 1976 due to the opa nsion of the Companyu Guops plant. Lnduoriai P-j..tn Depart-ten 30y L977 ANNEX 2-8 Page 1 KOREA HEAVY MACHINERY PROJECT MARKET FOR EXISTING HII OPERATIONS 1. HII's operations can be grouped into the following categories: automotive parts; forging and casting products; space heating and cooling equipment; construction equipment; machine tools; cement, textile and paper machinery; and marine operations. The manufacturing operations are carried out in the Gunpo and Anyang plants under license from reputable international manufacturers (see Annexes 2-4 and 2-5). The marine operations comprise contract and charter voyages on the trans-pacific route. The market prospects and sales plan through 1979 for each of the categories are briefly discussed below. No forecasts are made beyond 1979 since, by that time HII will have reached full capacity operations at both plants. A. Automobile Parts 2. The demand for motor vehicles in Korea has increased at rates averaging around 27% since 1972 as shown below. For the future the Govern- mnent projections suggest a rate of 10% and 30% for buses and trucks respec- tively. The forecasts for passenger cars range from growth rates of 15% to 40% depending upon the cost of ownership and the system of car taxes in effect. The lower figure of 15% would imply a total of 6 to 7 cars per 1,000 persons in 1981, whereas in other countries, at a similar stage of development, registration amounted to 100-150 cars per 1,000 persons. Korea: Unit Vehicle Demand (000 units) Projected Projected Growth Rate Growth Rate Demand 1972 1974 1976 1972-1976 1976-1981 1979 Truck 6.5 17.3 18.3 30% 30% 40.2 Bus 2.6 3.9 3.6 8% 10% 4.8 Passenger Car 9.5 9.1 25.9 30% Low: 10% 34.5 High: 40% 71.1 18.6 30.3 47.8 27% Low: 18% 79.5 High: 34% 116.1 Source: Ministry of Commerce and Industry ANNEX 2-8 Page 2 In line with these forecasts, the original equipment manufacturers' (OEM) market for vehicle parts can be expected to range between 80,000 and 120,000 sets in 1979. In light of past performance, a figure between the two extremes of around 100,000 units, implying an aggregate growth rate of 28% is considered reasonable. 3. At the supply end the market for vehicles is serviced by three major manufacturers, Hyundai Motor Company (HMC), Kia Industrial Company, and General Motors Korea (GMK). These began as assembly operations and have subsequently begun integrated manufacture. Under the Government's localization plan, most parts are purchased in the local market. The Government approves domestic manufacturers as suppliers of specific parts and thereafter import of these parts is strictly regulated. HII is the largest approved manufacturer of a wide range of parts under license from overseas manufacturers. For most of these parts HII's only competition is from small manufacturers primarily servicing the replacement market. HIT also has the advantage of a captive buyer in its affiliate HMC, the market leader in cars and buses (1976 market share of 57% and 56% respectively.) Consequently HII dominates the original equipment manufacturers market in its range of products, supplying 100% of HMC's requirements, upto 70% of Kia's requirements of specific parts and 90% of KMK's shock absorber requirements. In addition, 10% of HII's sales are directed towards the replacement market for HMC vehicles where it competes against less expensive, lower quality products. 4. HII's past sales record and projections for the future are shown in Table 1. For most products, growth rates ranging up to 70% are evident between 1975 and the annualized sales of 1976. Sales in 1976 were constrained by capacity considerations and, following recent expansion of capacity, are expected to increase sharply in 1977 and 1978, especially for recently intro- duced items such as brake and steering systems. Thereafter, a more gradual increase of upto around 30% is projected for 1979 corresponding to the increase in vehicle demand. The sales projections for 1979, approximately amounting to 60,000 sets, include sales of around 6,000 to 10,000 sets to the replacement market. Based on these sales forecasts, HII is expected to have a market share of around 50% of the OEM market, which is considered attainable in view of its unique market position. B. Castings and Forging Products 5. Korea's total requirements for foundry products, primarily cast- iron, amounted to around 230,000 tons in 1974 showing over a 30% annual increase from 1970 figures of 70,000 tons. Demand growth for forgings has been relatively flat, fluctuating around a level of 40,000 tons be- tween 1970-74. Aggregate estimates for 1975-76 indicate a total require- ment of castings and forging of 299,000 tons in 1975 and 343,000 tons in 1976. Under the Fourth Plan projections, the requirements for castings are expected to increase markedly in cast-iron products and at a slower rate in cast-steel products. The requirement for forgings is expected to increase above 100,000 tons from its current levels of around 40,000 tons. ANNEX 2-8 Page 3 These increases are based on projections for the rapid growth of the manu- facturing and especially the machinery industry sector in Korea. The projections through 1979, along with planned HII sales are shown in Table 2. 6. Through 1974, HII primarily sold casting and forging products to its affiliates, Hyundai Construction Company, HMC and Hyundai Ship- building and Heavy Industry Company. Recently the Company has expanded its market to include custom jobs for outside the Group such as special ingots, motor castings, tire manufacturing molds, parts for cement kilns and pulp machinery. In this field HII faces substantial competition but is helped by its access to low cost, high quality scrap from its affiliated shipyard. HII's sales are expected to grow with the overall demand for forgings and castings. HII sales were 5,800 tons in 1975 and on an annualized basis over 7,600 tons in 1976. In light of this past performance the projected sales increases implying a constant market share are considered reasonable, espec- ially in view of the added capacity at Gunpo. C. Space Heating and Cooling Equipment 7. HII also manufactures space-heating radiators, car and bus coolers, residential air conditioners and waterchiller-type cooling equipment, under license from international manufacturers. In these products, HII has been successful in localizing the manufacture of a large proportion of the compo- nents including the compressors thereby gaining an advantage over other competitors that have to pay import duties on such components. HII's sales plan for these products is presented in Table 3, along with their sales performance for the past two years. The sales of these products are expected to grow quickly due to the expansion of both the Gunpo and Anyang facilities. The sharp increase in the sales of waterchillers is related to the projected increase in demand of such equipment and HII's introduction of the less expensive 100% localized absorption-type water chillers after 1977. HTI sales are further supported by strict regulation of the import of such equipment since late 1976 following the demonstration of domestic manufacturing capability. D. Construction Machinery and Forklift Trucks 8. The Korean construction industry has shown sharp increases in activity in the period between 1965 and 1975. Correspondingly the demand for heavy construction machinery also grew in this period and was met primarily through imports. The levels of construction activity in the past five years and the import status of major items of equipment are shown below. ANNEX 2-8 Page 4 Korea: Construction Activity and Machinery Imports Average 1971 1972 1973 1974 1975 Annual Growth Construction Activity 229 224 282 446 794 37% (Won Billions - Current Terms) Machinery Imports (Units) Bulldozer 193 126 120 205 287 29% Wheel Loader 84 114 97 126 172 20% Crane (Mobile) 171 98 103 163 185 Excavator 8 14 29 35 42 51% Motor Grader 10 18 26 46 63 58% Fork Lifts 220 233 295 441 617 30% Source: Ministry of Construction. The demand for cranes has been constrained by the fact that they are classified as heavy transportation equipment and the financing of their imports is con- trolled by the Government. The sales situation is expected to improve espe- cially as cranes become available domestically. 9. The increase in construction activity is expected to continue into the future at a real rate of around 9% and the demand for construction machinery is projected to grow accordingly. The demand for such machinery is expected to be further spurred by two additional factors, namely, the Govern- ment's plan to pave all "national road" surfaces in the country by 1981 and the rapid expansion of overseas activity undertaken by Korean construction companies for which they purchase equipment through Korea. HII's affiliate Hyundai Construction Company is the most active contractor in this area. The projections for sales of construction and other mobile machinery in Korea are presented in Table 4. Growth rates for specific items are assumed to be different in view of the different types of construction activity anticipated and the number of machinery units currently in use in Korea. The table also shows HII's estimates for its own sales of these items which are manufactured under license from internationally known manufacturers. Except for cranes, of which HII only manufactures relatively light units, its products span a wide range and in these product ranges it is the sole domestic manufac- turer except for forklifts, where it has one competitor. In addition, the Korean Government recently levied an import restriction on most items of construction machinery, manufactured locally. In view of these circumstances, the implied market shares ranging between 25% and 50% by 1979 are considered attainable. ANNEX 2-8 Page 5 The only real constraint to these forecasts is capacity and with the expansion at HII's Gunpo facility, this constraint will be removed by early 1977. E. Machine Tools 10. Concomitant with the development of the mechanical industries in Korea, the requirements for machine tools have risen rapidly. About 70% of domestic requirements primarily comprising precision machinery have historically been imported, the import level rising to about US$60 million in 1975 as shown in the table below. In accordance with the Government's localization policy, domestic production has increased primarily in the low-grade general purpose tools such as low precision lathes and milling machines, keeping pace with the overall growth in the manufcturing index. Korea: Demand for Machine Tools (Current US$ Millions) Average 1971 1972 1973 1974 1975 Annual Growth Production 2.8 2.3 5.5 9.0 10.0 38% Import 9.1 13.4 18.0 34.2 59.5 60% Export 0.1 0.3 0.7 0.5 0.2 - Domestic Demand 11.8 15.4 22.8 42.7 69.3 56% Manufacturing 1/ 100.0 132.0 188.0 276.0 370.0 38% Source: Korea Society for the Advancement of Machine Industry. 1/ Derived from contribution of Manufacturing to GNP in current terms. 11. HII plans to begin the manufacture of lathes and milling machines in 1977 in its expanded Gunpo facility. Its projected sales in relation to the total demand are shown in Table 5. The demand projections are based on machine tools existing in Korea in 1974 and comparison with other nations. HII plans to establish selling prices at levels equivalent to current c.i.f. prices for imports. As low-grade machine tools which can be manufactured domestically are subject to duties this should provide a significant compe- titive advantage to HII, making it possible for the Company to contribute significantly to the localization of machine tool production which is expected to reach around 50% of total Korean requirements by 1981. F. Industrial Machinery 12. Korea has relied on imports for its requirements for industrial plant machinery in the past, though domestic production began to pick up in 1970. According to data obtained from the Ministry of Construction and ANNEX 2-8 Page 6 Industry, total demand rose from US$.3 billion in 1970 to US$3.3 billion in 1974 showing an average annual increase of over 25% in current dollar terms. Of the total requirement, domestic production accounted for US$0.7 billion in 1970 and US$1.3 billion in 1974. The Government is encouraging domestic production of industrial machinery and HII plans to manufacture equipment for the textile, cement and paper industries under license from Marzoli (Italy), Fuller (U.S.A.) and Voith (Germany) respec- tively. 1. Textile Machinery 13. Korea is currently one of the world's largest exporters of textiles and garments. These exports have been supported by significant imports of textile machinery. Spinning machinery alone accounted for US$138 million in imports in 1974, up 42% from 1973. There are currently 2.1 million cotton spinning spindles in Korea and under the Government supported expansion plan, licenses have been issued for the installation of one million more in 1977 and 1978. In addition the demand for replace- ment spindles in this period is projected at 500,000. The demand there- after is projected to drop. HII, manufacturing under license from Marzoli plans to supply cotton spinning spindles beginning in 1977. Its sales forecasts are reasonable in relation to the estimated demand considering its position as sole domestic manufcturer (see table below). I/ Korea: Demanc- Projections and HII Spindle Sales 1975 1976 1977 1978 1979 Production of Cotton Yarn (000 tons) 185 248 286 299 316 Demand for Spindles (0OOs) New Installation - - 500 500 250 Replacement - - 250 250 300 Total - - 750 750 550 HII Sales (000 Spindle) - - 50 100 150 Unit Price (Won 000 Spindle) - - 90 97 105 Sales Amount (Won millions) - - 4,500 9,700 15,750 1/ Source: Economic Planning Board ANNEX 2-8 Page 7 2. Cement Machinery 14. The cement manufacturing industry in Korea has progressed signifi- cantly through modernization and expansion of capacity. Korea achieved self- sufficiency in cement in 1970 and has been exporting cement since. The demand for cement in line with the rapid increases in construction activity had grown from 2.4 million tons in 1967 to 8.8 million tons in 1974 at an average annual rate of 21%. In line with further expected increases in domestic demand and exports, the Government is planning for a 5.6 million ton increase in capacity in the Fourth Five-Year Plan between 1977 and 1981. HII plans to supply a part of the machinery required for such an expansion. According to current Korean estimates the machinery cost per annual ton of capacity would amount to US$50, of which HII is capable of supplying 70% (US$35/ton of capacity) the remainder being imported. In addition to the domestic market, since signing of its license agreement with Fuller, HII has been aggressively marketing cement plants in a number of other countries. In view of these factors, the sales forecasts presented below are reasonable. I/ Korea: Cement Machinery Demand- and HII Sales 1972 1973 1974 1975 1976 1977 1978 1979 Cement Production 6.5 8.1 8.8 10.9 12.5 14.0 14.5 16.8 (million tons) Installation of Capacity (000 tons) - - 1,200 2,200 2,200 -------2,800------- (up to 1981) HII Sales (000 tons) - - - - - 220 490 650 Unit Price (Won 000/ton - 18 19.5 21 capacity, HII supplies machinery HII Sales Amount - - - - - 3,960 9,500 13,580 (Won millions) 1/ Source: Economic Planning Board 3. Paper Machinery 15. The paper-making industry in Korea, spurred by domestic demand and the Government's localization policy attained self-sufficiency in 1975, pro- duction increasing from 410,000 tons in 1972 to 665,000 tons in 1975. The demand for paper is projected to continue to increase at an average annual rate of 10-12% and it is planned that domestic production capacity increase correspondingly (see Table below). HII plans to manufacture the complete ANNEX 2-8 Page 8 range of paper-making machinery under license from Voith (German). In the past year HII's domestic project sales staff has been actively negotiating the sale of two plants to local companies totalling 155,000 metric ton capacity, to be installed over the period 1977-79. In this field HII has little competition, the only other manufacturer in Korea being smaller companies catering to plant size in the range of 6,000-10,000 metric ton capacity. Accordingly HII's sales plan presented below should prove to be realistic. Korea: Paper Demand- and HII Sales Projection 1972 1973 1974 1975 1976 1977 1978 1979 Paper Demand 1/ - (000 tons) 446 558 642 665 757 852 951 1,061 Paper Import 35 35 25 - - - - - Demand for New Capacity (000 tons) - - - - - 133 120 135 HII Sales (000 tons) - - - - - 30 40 50 Unit Price 2/ (Won 000/ton) - - - - - 150 162 175 Sales Amount (Won millions) - - - - - 4,500 6,580 8,750 1/ Source: Economic Planning Board; includes domestic and export requirements. 2/ Represents c.i.f. prices in 1976 (US$290 - 320/ton including stock- preparation equipment) escalated by the Bank's suggested escalation factors. G. Marine Operations 16. HII operates the Korea Atlas Shipping line which currently comprises four vessels acquired in 1972, with a total available tonnage of 68,420 dead- weight tons. Except for one pure bulk carrier, the vessels are combination caVgo/bulk cariers and generally run the trans-pacific route between the U.S. West Coast and Japan/Korea. The vessels are operated on a contract basis for cargo transport to the U.S. and rely on the spot market for grain transport from the U.S. Currently one vessel is on time charter to the affiliate, Hyundai Construction Company and two have one year contracts for car transport. HII's marine revenues rose steadily between 1971 and 1974 and dropped in 1975 due to a collapse in the market in that year (see table below). ANNEX 2-8 Page 9 HII Marine Revenues 1971 1972 1973 1974 1975 1976 Up to 10/31 Revenues 506 791 1,907 3,585 3,388 2,908 (Won millions) Time Charter Rate 1.4-2.8 2.8-6.1 6.1-3.6 3.6-1.5 1.5-2.1 Index 1/ (Bulk Carriers 10-20,000 DWT) 1/ Source: Shipping Research Publications 17. The Atlas Line's operations are supported by four overseas offices and cargo brokers and it has been nominated by the Government as one of the six major shipping lines in Korea and is being encouraged to actively parti- cipate in the expansion of Korea's shipping activity. An uptrend in the market was expected to generate 1976 revenues of Won 3,600 million. However the projection of its operations into the future can be expected to remain around that level but for changes in charter and other rates. The revenues, assuming only inflationary rises in charter rates are shown below. Projected Shipping Revenues 1976 1977 1978 1979 Revenues (Won millions) 3,600 3,890 4,200 4,530 H. Jobbing and Other Sales 18. In addition to the above activities, HII undertakes custom manu- facturing and outfitting for local and overseas companies and the Korean Government. This category includes sales of small batches of sintered metal parts, special fabrications for some HII licensors, vehicle-outfitting for the Korean Government and other products not manufactured on a continuous basis. I. Conclusion 19. A summary of HII's forecast sales is presented in Table 6. The market prospects in all manufacturing areas are excellent spurred by Korea's rapid development in all related sectors. HII withi its Gunpo facility in place and its numerous licensing agreements is in a very good position to benefit from the Government's localization policy and thereby contribute significantly to import substitution in most areas. In most of the areas ANNEX 2-8 Page 10 HII is expected to be for the time being the sole supplier competing only with imports, which are strictly regulated and subject to import duties. In addition it has captive markets in its affiliates. The forecast sales are therefore justifiable, and in instances conservative from the market perspective, being constrained by capacity considerations. Industrial Projects Department April 1977 KOREA HEAVY MACHIN1RY PROJECT HII's PROJECED SAIES FCIR AUTO-PARTS *in Units) 1975 1976 Unit Prices 12i& 1 1976 (Won OOOs) Heater l4,Oo 19,500 27.2 30,000 50,000 60,000 Shock Absorber 74,000 125,200 4.5 200,000 240,000 240,000 Fuael Tank 26,000 20,100 9.1 36,000 50,000 60,000 Radiator 47,000 29,000 19.2 469000 60,000 60,000 Side Frame 6,000 3,700 63.8 15,000 20,000 30,000 Brake --- 4,400 91.4 15,000 30,000 60,000 Steering 3,500 46.0 15,30,000 60,000 Altirnator 26,000 31,300 26.Z 40,000 60,000 60,000 Horn 1,000 20,600 2.3 25,000 50,000 60,000 Starter Motor 22,000 30s700 33.4 44000 60,000 60,000 Regulator 27,000 28,400 7.9 35,oO 50,00 60,000 Ignition Coil 18,000 27,700 2.1 30,000 50,000 60,000 Wiper Motor 20,000 30,000 47.3 42p000 50,000 60,000 Generator 5,000 5,800 4733 35000 50 60,oo0 Others (sales value Won millions) 245.2 934.2 1,860 2,0w0 2,000 21 Total Sales Value (Won millions) 4035 62331.2 13,300 22,460 31.090 1/ Total sales value beyond 1976 was determined by adjusting 1976 prices according to international price escalation factors. Industrial Projects Department April 1977 Iv CD KOREA HEAVY MACHINERY PROJECT PROJECTED DEMAND AND HII SAIES OF FORGINGS & CASTINGS ReqLuirement 1/ HII Market Share 2/ HII Sales 2/ Unit Price 3/ Sales Amount ro-n-s~~~~~~ (000 tons (Won 000/tonY (Won millions) Iron Casting 1977 283 2.5 7 260 1,820 1978 355 2.5 8.9 275 2,1450 1979 448 2.5 11.0 290 3,190 Steel Casting 1977 95 3.5 3.14 1460 1,550 1978 125 3.9 4.9 495 2,430 1979 170 3.6 6.1 535 3,280 Steel Forging & Other 1977 53 563 310 930 1978 62 5.6 3.5 328 1,150 1979 73 6.2 4.5 345 1,550 Total 1975 4/ 299 2.0 5.8 302 1,750 1976 JT/ 343 2.2 7.6 375 2,860 1977 431 3.2 13.4 320 4,300 1978 542 3.2 17.2 345 5,930 1979 691 3.2 21.6 372 8,o20 I/ Source: Korea Development Institute. Requirement = Production + Import - Export 2/ HII estimates. Prices are derived by applying international escalation factors and local considerations to 1976 prices. L/ Figures- for 1975 and 1976 demand are aggregate estimates; HII sales figures are e;ctual data. Industrial Projects Department April 1977 ANNEX 2-8 Table 3 KOREA HEAVY MACHINERY PROJECT PAST AND PROJECTED HII SALES OF SPACE CONDITIONERS Demand " HII Sales Unit Price 21 Sales Value (units) (Won 000/unit) (on millions) Radiators 1 4 1975 18,175 13 225 1976 70..740 4.4 314 1977 NoAo 40,000 5.0 200 1978 60,000 5.0 300 1979 75,000 5.0 375 Car Coolers 1975 213 348 74 1976 400 35 13 1977 N.A. 1,000 337 337 1978 1,500 363 544 1979 3,000 393 1,179 Bus Coolers 1975 48 3,790 181 1976 75 3,>906 292 1977 N.A. 300 4,100 1,230 1978 500 4h430 2,215 1979 600 4,780 2,868 Water Chillers 1975- 20,000 2,400 140 336 1976 30,000 2,490 80 198 1977 40,000 17,600 45 900 1978 50,000 25,000 50 1 ,250 1979 80,000 30O000 55 1,650 1/ Demand and HII sales are in units except for water chillers, where they are in refrigeration-tons. 2/ Unit prices shown are per unit for radiators and coolers and per refrigeration- ton for chillers and have been derived by applying the international price escalation factors and allowing for real price decreases in the early years for some products. Industrial Projects Department April 1977 KOREA HEAVY MACHINERY PROJECT DEMAND FJRECAST & HII SALES OF CONSTRUCTION MACHINERY (Units) Actual HII Sales Forecast 1975 1976 1977 1978 1979 Demand HII Sales Unit Price 2/ Demand HII Sales Unit Price 2/ Demand HII Sales Unit Price 2/ Bull Dozer 3 -04 360 10 S9 40-0 150 70 0 200 20075 Wheel Loader 10 66 290 120 34 310 140 39 340 160 42 Excavator 6 15 130 30 51 180 65 54 200 100 58 Crane 3 8 320 25 73 350 50 79 380 60 86 Fork Lift 13 11 580 200 13 630 300 1-4 600 350 15 Motor Grader -- 11 150 30 36 180 40 43 200 50 46 Dozer Tracks -- 160 900 300 3.1 1,100 400 3.9 1,500 600 4.1 Total Sales 1,290 7,510 17,810 29,640 42,690 (Won millions) 1/Demand forecast source: Ministry of Construction; and Construction Association of Korea. 2AJnit Prices expressed in Won millions are generally derived by applying international price escalation factors to 1976 prices and adjusting for product-mix changes. Industrial Projects Department April 1977 CD KOREA HEAVY MACHINERY PROJECT MACHINE TOOLS FORECAST Estin ated Demand 1/ Projected HII Unit Price Sales Amount Ite.,. Year in Korea Sales of HII Market Simre (Won million) (Won million) (Un1its) (Units) _________ 19'l7 5,700 100 1.75% 6 600 s 1978 7,100 200 2.8% 6.5 1,300 tA 1979 8,900 300 3.4% 7.0 2,100 ' 1977 -4,000 70 1.8% 10 700 1978 5,000 200 14.0% 10.8 2,160 o 1979 7,000 300 4.3% 11.7 3,510 / Source: Korea Institute of Science & Technology. CD Industrial Projects Departinorei, I April 1977 m ANNEX 2-8 Table 6 KOREA HEAVY MACHINERY PROJECT HII SALES FORECAST FOR EXISTING OPERATIONS (Won Millions) Item 1975 1976 1977 1978 1979 Auto Parts 4,090 6,330 13,300 22,460 31,090 Forgings and Castings 1,750 2,860 4,300 5,930 8,020 Space Conditioners 850 940 2,670 4,310 6,070 Construction Machinery 1,290 7,510 17,810 29,640 42,690 Machine Tools - - 1,300 3,460 5,610 Industrial Machinery - 1,020 17,630 25,680 38,080 of which: Textile - - (4,500) (9,700) (15,750) Cement - (195) (3,960) (9,500) (13,580) Paper - - (4,500) (6,480) (8,750) Other 1/ - (825) (4,670) - - Jobbing and Other 140 860 1,300 2,500 3,000 Sales Total Sales 8,120 19,520 .58,310 93,980 134,560 Manufacturing Total Sales Marine 3,390 3,540 3,890 4,200 4,530 Operations - - Total Sales 1i5O1 23X.L060 .62200 98X180 139i29O _/ Parts for a combined cycle power plant Industrial Projects Department May 1977 ANNEX 2-9 Page 1 KOREA HEAVY MACHINERY PROJECT HII: FINANCIAL PROJECTIONS (WITHOUT PROJECT) Financial projections for HII's existing operation, 1977-1986 are detailed in pages 2 through 5 of this annex. Sales forecasts are based on the assessment of market demand given in Annex 2-8. Assumptions for the projected income statements and balance sheets are detailed in the foot- notes to these statements. KOREA A10TEX 2-9 Page 2 HEAVY MACHINERY PROJECT ttRp-_- nTlZNT _QWMW;AT 7SOJ'S O(on Billions) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 SALES I/ mANUFACTURING 19.50 58.30 94.00 134.60 144.00 154.10 164.80 176.40 188.70 201.90 216.10 MARINE 3.60 3.90 4.20 4.50 4.90 5.20 5.60 5.90 6.40 6.S0 7.30 …______ ------- ----- -- ----- -- ------- ------- ------- ------- ------- -- --- -- -- ----- SUB-TOTAL 23.10 62.20 98.20 139.10 14B.90 159.30 170.40 182.30 195.10 208.70 223.40 COST OF SALES 21 LABOR 3.00 5.48 8.74 11.44 13.10 14.95 17.30 19.93 22.93 26.25 30.2S mATERIALS 10.00 31.77 48.22 65.28 69.84 74.74 79.93 85.55 91.52 97.92 104.81 DIRECT OVERHEAD 1.50 4.66 7.52 10.77 11.52 12.33 13.18 14.11 15.10 16.15 17.29 ROYALTIES AND TAXES .50 1.75 2.82 4.04 4.32 4.62 4.94 5.29 5.66 6.06 6.48 TOTAL MFG COST OF SALES 15.00 43.67 67.30 91.53 98.78 106.64 115.36 124.89 135.11 146.38 158,P3 MARINE COST OF SALES 2.10 2.34 2.52 2.70 2.94 3.12 3.36 3.54 3.84 4.06 4.78 TOTAL COST OF SALES 17.10 46.01 69.82 94.23 101.72 109.76 118.72 128.43 138.95 150.46 163.21 GROSS PROFIT GROSS PROFIT 6.00 16.19 28.38 44.87 47.16 49.54 51.68 53.87 56.15 58.24 60.19 INDIRECT EXPENSES SELLING AND ADMIN.!/ 2.00 5.60 8.84 12.52 13.40 14.34 1S.34 16.41 17.56 18.78 20.11 DEPRECIATION AND AMqRT.4/ 2.20 3.40 4.00 3.70 3.30 2.90 2.60 2.30 2. L0 1.80 1.60 INTEREST EXFENSES 5 1 2.00 2.90 2.60 2.20 1.90 1.20 1.00 .80 ..'SO .50 .40 INCOME FROM OTHER SOURCES (.90) (.62) (.98) (1.39) (1.49) (1.59) (1.70) (1.82) (1.951 (2.09) (2.23) TOTAL INDIRECT EXPENSES 5.30 11.28 14.46 17.03 17.11 16.84 17.23 17.68 18.31 19.00 9.S7 F'ROF I T PFOF;T REFORE TAXES .70 4.92 13.92 27.84 30.06 32.70 34.45 36.18 37.64 39.2S 40.31 INCOME T4AES e' .10 1.18 6.75 13.50 14,58 '15.86 16.71 17.55 18.35 19.t3 1 I.55 INVESTMENT TAX CREDIT - - - - - - - - - - NET PROFIT .60 3.73 7.17 14.34 15.48 16.84 17.74 J'3.e4 19.49 20.21 20. e, 1/ Details of sales forcasta are given in A== 2-8. V MaOufacturing cost of S*laS dat.I ar given Mn ps 3 of this Anx. Karine cost of a*&" a torecat at 60% of marine revenues. V/ Forecast at 9% of sales, in line with past expertence. HII depreciates fixed assets cn a declining balance basis at the sass rates allwed for tx purposes. g o depreciation is toi2n o. fixed asset additions daring the yer. The snnua depreciation crgp is thus baed mn nt fixed asetS at the end of tha prevics year. Depreciation rates wud ar as follows Buildings (5.6%), bmahinery sad equipnt (18.9%), ships (17.5%), Amortization of defarred charges is al.ao on a declin.tng balance bsis (33% tech year) in accordance with Ksa.n tax law. It is ts atd that no rovalsation of asset. stich are periodically allowed under Korean tax law, will occur during the Forecat period. n ?Drecast at 1% of sales. 6J Korea )zncc t=xs are 50% of profit before taxes. Isari operations are *exept from incc tax. Thus, overall HI us taxes will average about 148.5% of prs-tax ince. in 1976 ead 1977, twos are further redand by the 8% invstment Stx credit on tko cost of fixd assets for the Gunpo expansion. The total tax saving in these two Yer mnmcta to Won 1.5 billon. If 81U wer to go public, as pl-and, after 196P, its tax 7ate would be reduced to the 34% preferential rate for public ocpanies. Industrial. Projects Departant Ma. i977 KOREA HEAVY MACHINERY PROJECT HII: PROJECTED COST OF SALES FOR MANIIFACTURING (WTTHOIlT PROJECT) (Won Billions) 1976 1977 1978 1979 1980 1981 Atotint % Amouint % Amount X Amouwit Z Amount 7 Amount 7% Sales 19.5 100 58.3 100 94.0 100 134.6 100 144.0 100 154.1 100 Cost ot Sales l.abor/KI 2,9 15 5.5 9 8.7 9 11.4 8 13.1 9 15.0 9 Materials3/ 10.0 51 31.8 55 48.2 51 65.3 49 69.8 149 74.7 49 D)irect Overhead_/ 1.5 7 4.7 8 7.5 8 10.8 8 11.5 8 12.3 8 Royalties and TaxesS/ 0.5 3 1.7 3 2.8 3 4.0 3 4.3 3 4.6 3 Cost of Sales 14.9 76 43.7 75 67.2 71 91.5 68 98.7 69 106.6 69 Gross Profit 4_6 24 14.6 25 26.8 29 43.1 32 45.3 31 47.5 31 1982 1983 1984 1985 1986 Amrount % Am'ount % Amount % Amount % Amount % Salesl/ 164.8 100 176.4 100 188.7 100 201.9 100 216.1 100 Cost of Sales LaboriF 17.3 10 19.9 11 22.9 12 26.3 13 30.3 14 Naterials- 79.9 49 85.6 49 91.5 49 97.9 49 104.8 49 Direct Overhead 13.2 8 14.1 8 15.1 8 16.2 8 17.3 8 Royalties and Taxesl/ 4.9 3 5.3 3 5.7 3 6.1 3 6.5 3 Cost of Sales 115.3 70 124.9 71 135.2 72 146.5 73 158.9 74 Cross Profit 49.5 30 51.5 29 53.5 28 55.4 27 57.2 26 1/ Salesi forecast, 1977-79, is dt,tailed in Annex 2-8, Table 7. For 1980-86, sales are assumed to grow at 7% ainually to reflect inflation beyond the 1979 stea(Iy btate. Inilation rat,!s used are estimated internatinoiil inflation rates for machinery and eqliipment. 2/ Labor co!its are based on 1I1l's manpower plani for the 1977-79 period. Labor costs drop as a % of sales in 1977 reflectir.g -- ,, of 1-b3r bhi It up in advance, 1975-76, to support the Cunpo expansioni. Laibor costs are assumed to inflate 207 annually, 1977-79, and 15% annually, 1980-86, to reflect the expected real t ains in Korean wage rates as development proceeds. 3/ Forecast material costs for exiistinig product lines are based on actial 1976 costs as per IIII's cost accounting records. For new products (chiefly nmaclinle tools and industrial mnachinery) material costs are basedl on material lists and produiction drawings obtained from licensors. In 1977 and 1978, in order to reflect inefficiencie:s in raw material uisage and a greater reliance on bought-out parts, unit material costs for new products have beeni increased above those used for tlhe 1979 steady state. For this reason, anid because of an increase in sales mix towards items with a high bought-out parts conitent (constructioti machinery and induistrial machiinery) versus items with low bougit-out parts (auto parts), material costs as a percentage of sales are significantly higlier in L977 than in 1976. Material costs as a percentage of sales decrease in 1978 and 1979, however, increasing efficiencies in material uisages for new prodiucts is partially offset by a continued sales trend towards items with hiigher levels of bought-out parts. Inflation of material costs is assumed to be at the saiau rate as sales inflation. 4/ Forecast at 87. of sales, in line with historical results. 5/ Forecast at 37. of sales, in line with historical results. Xt0 '.3 Industrial Projects Department May 1977 KOREA hANIhX 2-9 HEAVY MACHINERY PROJECT Fage 4 BALANCE SHEET (WITHOUT PROJECT) ----------(Won Billions) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 …__ _ _ _ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ASSETS CURRENT ASSETS 1 MINIMUM CASH 5.80 1.24 1.96 2.78 2.98 3.19 3.41 3.65 3.90 4.17 4.47 ACCOUNTS RECEIVABLES 3.70 9.33 13.26 16.69 17.87 19.12 20.45 21.88 23.41 25.04 26.81 ADVANCES TO SUPPLIERS - 1.59 1.93 1.96 2.10 2.24 2.40 2.57 2.75 2.94 3.14 INVENTORIES MATERIALS AND SUPPLIES 2.40 6.99 9.64 10.90 11.66 12.48 13.35 14.29 15.28 16.35 17.50 WORK IN PROGRESS 3.00 10.49 16.92 21.54 23.04 24.66 26.37 28.22 30.19 32.30 34,58 TOTAL INVENTORIES 5.40 17.48 26.56 32.44 34.70 37.14 39.72 42.51 45.48 48.66 52.08 FPREPAID EXPENSES AND OTHER 4.20 3.00 4.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 TOTAL CURRENT ASSETS 19.10 32.65 47.71 58.87 62.64 66.68 70.97 75.60 80.54 85.81 91.50 SURFLUS CASH - (2.36) (.69) 7.30 18.04 32.99 48.61 65.32 83.39 102.22 121.11 FIXED ASSETS 2_ GROSS FIXED ASSETS 28.50 34.30 35.50 36.60 37.60 38.50 39.50 40.40 41.20 42.10 42.90 ACCUM. DEFRECIATION 3.60 6.90 10.60 13.90 16.80 1-930 21.50 23.50 25.20 26.90 28,30 NET FIXED ASSETS 24.90 27.40 24.90 22.70 20.80 19.20 18.00 16.90 16.00 15.20 14.60 :NVESTMENTS L-T RECEIVABLES .30 .30 .30 .30 .30 .30 .30 .30 .30 .30 .30 DEFERRED CHARGES GROSS DEFERRED CHARGES .40 .70 1.20 1.80 2.30 2.70 3.00 3.20 3.40 3.50 3.70 ACCUM. AMORTIZATION .20 .40 .oO 1.00 1.40 1.80 2.20 2.50 2.80 3.10 3.30 NET DEFERRED CHARGES .20 .30 .50 .80 .90 .90 .80 .70 .60 .40 .40 TOTAL ASSETS 44.50 58.29 72.82 89.97 102.68 120.07 138.68 158.82 l8O.83 203.93 227.°0 LIABILITIES AND EQUITY CURRENT LIABILITIES ' ACCOUNTS P-AYABLE 5.90 10.33 14-5 1 '.2 13.42 :2.86 21,45 23.17 25.04 27.08 29.33 ADVANCES FROM CUSTOMERS - .00 :2.:. 14.Pi 15.84 I.9?5 18.13 19.40 20.76 22.21 23.7? N-T hANK LOAN 7.2) .54 24 2-24 - - - - - - - ACCRUED EXPENSES 2.00 4.90 S.90 oo 6. o52 .o 6,00 6.00 6.00 6.00 6.30 CURR. FORTION OF LT DEBT 3. 70 3. 00 4,10 25 0 2.30 2.20 1 80 .90 70 .90 .80 TorAL CURR. LIABILITIES 18.80 26.96 38.02 43.32 42.56 45.01 47 38 49.48 52,70 56.19 59.90 RETIREMENT RESERVE 3' .60 .90 1.20 1.60 1.90 2.20 2.50 2.80 3.00 3.30 3.60 LONG-TERM DEBT TOTAL LONG-TERM DEBT 22.00 27.00 20.20 IS.90 13.00 10.72 8.50 6.'O 5. 80 4.90 4.00 CURRENT FORTION 3.220 3.00 4.10 2.Q0 2.30 2.20 1.80 .90 .90 .90 .80 NET LONG-TERM DEBT 1g.30 20.00 15.87 1 3.0 10. '0 8.5O 6.70 5.80 4.90 4.00 3.20 cIOU ITY -AFITAL STOCN 6.00 s.00 6.00 6.00 6.00 6.0J 6.00 6.00 c.00 o6.0 6.00 REVALuATION SURPLUS .20 .20 .20 .20 .20 .20 .20 .20 .20 .20 .20 RETAINED EARNINGS .60 4.33 I, C -J 25 .4 41.32 58.16 75.90 94.54 114.03 134.24 150.0V TOTAL EOUIT) -.8O 10.53 17.70 32.04 47.52 o4. 3.s 8.t10 120.74 120.23 140.44 161.20 TOTAL LIABILITIES AND EQUITY 44. 7 58.2 2. 82 49. _;..,S 20. 136,s8 :58.82 1.0.83 203.-93 227.90 1/ Working capital assumptios are adetsled on page S of tl.is Annex. 2f Incr eaes. in find "asets represent the completion of the CTanpo expansion in 1977, ann normal capital expenditures thereafter. I Under Korean tax law, companies are requirea to set up a reserve for severance pay upon retirement cf staff. Total mount af the reserve is limited to 10% of annual salaries. Industrial Projects Ieportnent 'Ia .7 .S - KOREA ANNAE 2-9 Page 5 HEAVY MACHINERY PROJECT HII: PROJECTED NGIN L CAPITAL REQUIRENENTS (WITHOUT PROJECT) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1936 Current Assets M1inimum Cash-1/ 5.eo 1.24 1.96 2.78 2.98 3.19 3.41 3.65 3.90 4.17 4.47 Accounts ReceivatblIeZ/ 3.70 9.33 13.26 16.69 17.87 19.12 20.45 21.88 23.41 25.04 26.8 Advances to Suppliers_' - 1.59 1.93 1.96 2.10 2.24 2.40 2.57 2.75 2.94 3.14 Inventorv Materials and Supplies4/ 2.40 6.99 9.6l4 10.90 11.66 12.48 13.35 14.29 15.28 16.35 17.50 Goods in Process and Finished Goods5/ 3.00 10.49 16.92 21.54 23.04 24.66 26.37 28.22 30.19 32.30 34.58 5.40 17.48 26.56 32.44 34.70 37.14 39.72 42.51 45.48 48.66 52.08 Prepaid Expenses and Other [4.20 3.00 4.00 5.00 5.00 5.00 5.oo 5.00 5.OO 5.00 5.00 Total Current Assets 19.10 32.65 47.71 58.87 62.64 66.68 70.97 75.60 80.54 85.81 91.50 ._st..............................................................,_ Current Liabilities Accounts Payablek'6 5.90 10.32 14.16 17.08 18.42 19.86 21.45 23.17 25.04 27.08 29.33 Advances from Customers7/ - 7.00 12.22 14.81 15.84 16.95 18.13 19.40 20.76 22.21 23.77 Short Term Bank Loans 8/ 7.20 2.54 2.54 2.54 - - - - - - - Accrued Expenses 2.00 4.00 5.00 6.o0 6.oo 6.o0 6.oo 6.00 6.0o 6.00 6.00 Total Current Liabilities 15.10 23.86 33.92 40.43 40.26 42.81 45.58 48.58 51.80 55.29 59.10 .................. .................... ,.- .orking Capital 4.00 8.79 13.79 16.44 22.38 23.87 25.49 27.02 28.14 30.52 32.40 ';iE: For the purpose of calculating working capital requirements, HII's existing operations have been divided into two areas: the manufacture of long lead time products (industrial machinery, representing about 30% of sales) and the manufacture of short lead time products (all other items). The working capital requirements on both types of products are quite different. More details on the assumptions for working capital requirements for long-lead time products are given in Annex 5-2. Also, it should be noted that turnovers of accounts receivable, inventories, and accounts payable will be lower than normal in the early years of the Gunpo expansion when sales and related costs are increasing throughout the year. Normal turnovers will be achieved in 1979 and later years when revenues and expenses have reached steady-state levels. 1/ Forecast at 27 of sales. 2/ Short lead-time products- Assumed turnovers as follows: 7.0 times (1977),8.O times (1978), 9.0 times thereafter. Average turnover on HIl's accounts receivable in 1976 was 3.7 times. Long lead-tiTe products lunover of accounts recaivable for proeress billings (80% of sales value): same as for short-lead time products. Turnover of accounts receivable representing holdbacks (20%, of sales value): 2.0 times on the first 10%, 1.0 times on the second 107. 3/ Long lead-time products only: 20% of following year s bought-out parts. 4/ Short and long lead-time Products: Assumed turnovers are as follows: 4.5 times (1977), 5.0 times (1978), 6.0 times thereafter. Average turnover oii HII's materials inventory in 1976 was 5.6 times. 5/ Short lead-time products: Assumed turnovers are as follows: 6.0 times (1977), 6.5 times (1978), 7.0 times thereafter. Average turnover on ill's goods in process in 1976 was 7.2 times. Lone lead-time products Assuming an average manufacturing period of 6 months, turnovers are forecast as follows: 2.5 times (1977), 2.5 times (1978), 3.0 times thereafter. -' Short and long lead-time Produces: Assumed turnovers are as follows: 4.0 times (1977), 4.5 times (1978), 5.0 times tHereafter. Average turnover on EIj s accounts payable in 1976 was 4.0 times. 7/ Lng lead-me products: 80% of the sales value of long-lead tine goods in process, plus 10° of the folloving year's sales of such ite,s. Lhe latter amount represents deposits received on orders placed by customers. le product-oriented programs are aimed at providing in-depth product exmPrience and a broad understanding of the entire spectrum of manufacturing functions within each licensor. These programs will basically be for training engineers in the areas of manufacturing and design engineering, production planning and quality control. The trainee engineers will essentially visit the licensor facility for the allowed period and follow the entire manufacturing cycle each from his professional perspective. 8. The manufacturing and specialized activity programs complement the product programs in a matrix fashion, each covering one major manufacturing activity - machining, fabrication, casting/forging; manufacturing engineering, production control and procurement - across the operations of all licensors. These programs would train managers, shop engineers, supervisors and key operators in the activity across the operations of all licensors. The Company has also identified the need to supplement licensor training in forging/casting operations in view of the process-nature of the technology and the limited experience of some of the licensors. Accordingly, the Company plans to seek a know-how and assistance agreement with an experienced operating company and provide for such training therein. 9. In addition to the above programs, 70 operators of key equipment will also be trained at the facilities of the supplier with the purpose of achieving total familiarity with the item of equipment. The proposed approach to overseas training is expected to provide specialist know-how in products, manufacturing techniques and machine operations, making available a broad mix of experience adequate to deal with production and related problems. 10. Project Training: The starting point of domestic training of supervisors and operators will be the core team of engineers, supervisors and operators who return from overseas training. These trained personnel will develop the basic training programs to be established and operated at the Project. The Training center is planned as the first facility to be completed in the Project, scheduled to begin operations by January 1978. 11. Four training stages are planned for personnel to operate the high value equipment. These will be technical high school graduates with a minimum of three years general machine experience. (i) Induction course comprising basic class-room training in machine and supporting functions and utilization techniques; (ii) Programmed shop training requiring trainers to plan operations for specific components in parallel with actual planning and operations on the shop floor, which would then be observed by the trainees; (iii) Machine operation training with less critical parts or test pieces on the shop floor; and ANNEX 4-7 Page 4 (iv) Apprenticeship or functioning as assistants to the machine operators till they are capable of operating the machine competently themselves. Only the operators of critical machinery would undergo all four steps. It is planned that a broad range of operators and supervisors will undergo the first two steps. The detailed training schedule is yet to be finalized but it is expected to reach upto 300 general trainees and around 100 senior operators per year. 12. Another important form of training programmed into the Project is on-the-job training of Korean staff and management as they serve as counterparts to expatriates. Expatriate technicians and managers will be part of the Project till such time as the local staff have picked up the skills to assume their responsibilities. This approach will supple- ment overseas training for key managers and technicians. 13. The training schedule at the Project will also cater to the needs of interested HII parts suppliers. The Company will train supplier personnel on request in an effort to upgrade existing supply capabilities along with assisting suppliers in seeking overseas licenses (Annex 4-3, Technology). C. Conclusion 14. HII's training program as planned is considered generally adequate. The overseas training program is scheduled to begin in 1977 and would be developed further as additional licenses are signed. On the domestic side training has already begun at Gunpo and the Project training facility is expected to be fully operational by January 1978. This proposed timing for the training programs is considered satisfactory and would facilitate start-up of operations. Industrial Projects Department April 1977 ANNEX 4s-7 Table 1 KOREA HEAVY MACHINERY PROJECT MANPCWER DEVELOPMENT ManPOWer 1978 1979 1980 1981 1982 1983 Direct Direct Labor 1,990 2,520 3,430 3,800 4,390 4,570 Index 1/ 44 55 75 83 96 100 Indirect Labor 420 540 740 870 1,060 1,110 Works Engineers and Trained Staff 650 710 840 870 930 950 Works Managers 120 - 150 150 160 160 Sub-total 1,190 1,380 1,730 1,890 2,150 2,220 Index 1/ 54 62 78 85 97 100 Administration Staff 380 550 640 820 91O 990 Total Manpower 3,560 4,450 5,800 6,510 7,450 7,780 Manpower Index 1/ 46 57 75 84 96 100 Plant Sales Index 1/ 28 37 55 70 91 100 1/ Based on 1983 = 100 Industrial Projects Department April 1977 Ki REA iiEAVY MACHII.ERIL PROJECT MECRUITME;T PLAN F.R 1`78 Labor Require- Gunpo & Group HII's Construc- Techni- Other Area ment Anyang Companies Job tion cal Companies Labor Plant Trainina St!a Schools Direct Center Foundry/Forge 60 25 - - - - 35 Ski lled 6 5-3 Semi-Skilled/Unskilled 60 - - - - 25 - 35 Fabrication Skilled 640 100 200 - 100 - 240 - Semi-Skilled/Unskilled 660 - - 150 150 150 160 50 Light Machine Skilled 75 10 30 - - - 35 - Semi -Skilled/Unskilled 55 - - 20 - 15 - 20 Heavy Machining Skilled 45 30 15 Semi-Skilled/Unskilled 45 - - 20 - 15 - 10 Assembly/Test Skilled 190 30 50 - 30 - 80 - Semi-Skil ed/Unskil ed 160 - - 30 30 50 50 Sub-Total 1,990 195 295 220 310 255 550 165 Indirect Maintenance Skilled 85 30 25 - - - 30 - Semi-Skilled/Unskilled 70 - - - 20 20 - 30 'ther Indirect Skilled 185 30 50 - 50 - 55 - Unskilled 80 - - - 20 20 10 30 Sub-Total 420 60 75 - 90 40 95 60 Total 2,410 255 370 220 400 295 645 225 Ot| Industrial Projects Department I April 1977 ANNEX 4-7 Table 3 KOREA HEAVY MACHINERY PROJECT OVERSEAS TRAINING I/ Product Oriented Programs Trainee Managers and Engineers (Number) Product-Group 1977 1978 Total Turbine-Generators 17 5 22 Pump/Compressors 9 5 114 Rolling Mills 3 4 7 Iron/Steel Making Equipment 4 10 14 Boilers 11 - 11 Chemical/Petro-chemical Equipment 8 ia 52 28 80 Manufacturing Activity Programs Trainees (Number) 1977 1978 Total Machining: Managers 1 2 3 Engineers 5 30 35 Supervisors/Operators 5 20 25 Fabrication: Managers 1 1 2 Engineers 3 12 15 Supervisors/Operators 2 8 10 Casting/ Managers 2 2 4 Forgings Engineers 3 51 54 supervisors/Operators 4 23 27 2/ Specialized Managers 2 11 13 Activity: Senior Engineers 2 60 62 Total 30 20 2!MS 1/ To be developed further beyond 1978 as additional licenses are negotiated. 2/ Includes Manufacturing Engineering (48), Production Control (19) and Procurements (8) Industrial Projects Department April 1977 ANNEX 4-8 Page 1 KOREA HEAVY MACHINERY PROJECT INFRASTRUCTURE A. Introduction 1. In order to ensure a smooth and rapid development of the machine industry in Korea, the Government has established a large-scale integrated machine industry complex at Changwon under the control of the Changwon Industrial Development Corporation (CIDA) -- (see Annex 3-1 for policies and constituent operations). The Heavy Machinery Project is situated on the perimeter of the complex in an area originally set aside as a permanent green-belt. The release of the green-belt for the Project under Presidential signature, signifies the importance attached to the Project by the Government. The Government has undertaken to provide the basic infrastructure needs of the complex including the social requirements such as housing, education and sports facilities. The Project would derive its basic requirements from those available for the complex. B. Changwon Industrial Complex 2. The2complex (Map IBRD 12645) covers a total area of 53.4 km of which 22.4 km has been planned as industrial area and 20.9 dm as residential area. Of the industrial area, plant sites encompass 12.6 km , the remainder being devoted to other uses and being preserved as a green-belt. A total of 49 enterprises are expected to begin operations by the end of 1978 in the machinery and related fields. The complex will eventually house 104 companies and provide for the basic infrastructure requirements of all facilities at full operation: 1. Water Supply 3. Rain water is taken from the Nakdong River and the design rate for abstraction has been set at 200,000 tons/day to account for ultimate require- ments. The rain water transmission system comprises a 1,650 mm diameter buried rising main of mild-steel construction, a booster station at Junam and a 1,350 mm diameter rising main from Junam to the Bansong treatment plant, 7 km away. The treatment process includes: sedimentation with attendant dosing equipment for removal of solids; rapid gravity sand filters; dis- infection by chlorine dosing; and pH control by lime dosing. Plant and machinery is scheduled for complete delivery by June 1977 to be commissioned in August under the responsibility of CIDA. The initial throughput would be 120,000 tons/day. The Project's process and potable water requirements have been taken into consideration in determining this throughput. These will be provided by a 600 mm diameter trunk main which has already been laid upto within 2 km of the Project site. ANNEX 4-8 Page 2 4. The complex includes a grid substation set up by the Korea Electric Company with an existing capacity of 400 MVA and a present loading of only 10%. The substation when fully developed will have a capacity of 800 MVA, adequate to meet the demands of the complex. An overhead 154 kV transmission system has already been installed from the substation to the harbor facility and runs 3 km from the site, and would be tapped for the Project. 3. Transportation 5. The complex has access to the well connected Korean highway network with a direct 50 m. wide distributor link to the Mlasan-Seoul Highway. The primary distributor is fed by a district distributor system of 30 m wide carriageways. The local distributors from this 30 m wide road are 25 m wide. The local distributor to the Project site would ultimately form a loop from the district distribution system in the form of a coastal road and a direct link to the central area of the complex. The road system has been designed for traffic loading upto 2.5 million tons/year with gradients being limited to 3.3%. The roads embody a conventional drainage system. Harbor facilities, ultimately 7 berths for 20,000 ton vessels lie adjacent to the complex and only 2 km from the site. The first berth is scheduled for completion by the end of 1977. The complex is also linked to Seoul and Pusan by a rail-road network, not planned for use under the Project. 4. Communications 6. The master plan for the Complex provides for a fully automatic telephone exchange facility which will provide a total of 4,000 lines and 50 telex circuits. All major cities are expected to be linked to the system by the end of 1978; 600 lines and subscriber trunk dialing Seoul-Masan is already available. 5. Social Facilities 7. The complex has allocated around 40% of the total area to residential and social purposes. The Korea Housing Corporation is participating actively and 400 apartments were constructed in 1975. A further 960 are under construc- tion of which 616 have already been completed. All homes would be available for rent or purchase against a 60% downgpaymen5, the bal2nce to be paid over 15 years. Accommodation comprises 43 m , 50 m and 60 m apartments with all facilities. The total development program for staff and worker housing on the complex is scheduled for completion in 1981 and would provide complete facilities including shops, recreation facilities, hospital and churches for an estimated population of 300,000. 6. Sewage and Trade Effluent Treatment 8. Legislation recently introduced in Korea dictates that all domestic sewage and trade effluent discharges be treated to comply with specific condi- tions. Originally it was the intention of CIDA to provide treatment facilities within the complex. This service has been withdrawn and it will be incumbent upon the constituent companies to provide treatment facilities at the site ANNEX 4-8 Page 3 for all industrial and other wastes. Present arrangements for disposal of solid waste at Changwon are provided through the private sector. A number of companies, approved by CIDA provide a competitive service in this regard. 7. Fire-fighting 9. A fully equipped Fire Station is scheduled to be commissioned by June 1977 in the complex. The station is located in the center of the main complex adjacent to the main boulevard and would provide services to the residential area and strong back-up facilities for the individual services which must be provided at each individual site. 10. In addition to the above the Government proposes to set up a Machinery Development Institute in the complex at an initial cost of US$5 million. The Institute would serve as a Research and Development base for the constituent industries. Each enterprise in the complex is required to subscribe to the Institute making it a cooperative venture. In view of the scale of the complex when fully operational, the initial outlay is considered too low and it is expected that the Government would provide additional funds. The plans also include a Technical Training Center to be set up under CIDA by April 1977. An investment outlay of US$6.0 million has been provided for this purpose. The center would train craftsmen and supervisory personnel to feed the complex. C. Infrastructure and Inter-plant Services for the Project 11. The facilities provided by CIDA in the complex would, as indicated, have to be extended to the Project site. The cost, implementation schedule and responsibility for extension of the primary services is shown in Table 1. In addition, the Company has to provide other services itself. The Project incorporates generation, storage and inter-plant distribution systems as appropriate for all services. These are discussed below. 1. Water Supply 12. HII plans to receive water for use in the Project through a tee- connection by a 300 mm diameter pipe running for 2 km (refer to Map). The responsibility for the connection and its estimated cost of US$145,000 is under discussion between the Government and HII. The connection is scheduled to be in place by June 1977. The 300 mm diameteS pipe has adequate capacit to service the Project's requirements of 5,000 m /day. This includes A,200 for plant use, 1,850 m for living and working human needs and 1,950 m for steam generation purposes (for details see Table 2). 13. The terminal pressure at the site is expected to be 4 atmospheres which would permit direct feed into two elevated, underground concrete storage tanks of 5,000 m capacity each. The two tanks would be interconnected for flexibility and would provide for requirements of 2 days. ANNEX 4-8 Page 4 2. Electricity Supply 14. Power requirements will be provided by the Korea Electric Company off an existing 154 kV transmission line (refer to Map). The power supply would be at 154 kV, 3 phase and 60 Hz and would feed into the 154 kV incoming circuit breakers (see Chart 1). The dual circuit breakers would be provided by the Korea Electric Company and the responsibility of the remainder of the network would rest with HII. The dual incoming circuit breaker would serve as a standby arrangement together with the necessary maintenance facilities. The circuit breaker will feed into four transformers of 40 MVA each, the ratio of transformation being 154/22.9 kV. The distribution network further comprises seven substations attached to the facilities thus making available three voltage levels of 22.9 kV, 6.6 kV and one low voltage level at 380 V (not shown). 15. The total requirements of the facilities are indicated below and amount to 135,000 kW, around 50% of which is directly attributable to the foundry. The electrical distribution system provides for requirements of upto 150,000 kVa. HII: Power Requirements and Capacity Facility Electric Power Demand Transformer Capacity (kW) (kVA) 1. Assembly Shop 1/ 17,800 20,000 2. Heavy Machine Shop 9,500 10,000 3. Light Machine Shop 7,600 10,000 4. Foundry 67,900 70,000 5. Forging Shop 2,300 5,000 6. Fabrication Shop 20,000 20,000 7. Utilities and Support Facilities 10,700 15,000 Total 135,800 150,000 1/ Includes requirements for administrative and residential areas. 3. Roads 16. Two access roads are planned to the Project site which will together form a loop with the Changwon complex road network (refer to Map). The first road will run along the sea and link the site to the proposed harbor and ANNEX 4-8 Page 5 indirectly to the central area of the complex. A 30 m. wide paved road is planned for completion by early 1978 with the possibility of a single lane by April 1977. The responsibility for its construction at a cost of US$1.5 million rests with the provincial government. The second road (3 km) would link the site to the central complex area and include a 500 m. tunnel through the dividing hill. The road is estimated to cost around US$2.6 million but has not yet been planned in detail. The design for the seaside road does take into account the load requirements for the Project and its design capa- city is around 10 tons/axel with headroom of 4.5 m. It was originally intended to service the site with a rail-link. It was subsequently found to be unecono- mical and excluded. 4. Sewage and Trade Effluent Treatment 17. The Project provides facilities for the treatment of industrial and other wastes and would be in compliance with existing legislation. It incorporates an adequate sewage disposal and drainage system that embodies a number of submersible pumping stations. The effluents from each facility would be treated by a number of methods such as filtering, absorption, thick- ening and neutralizing methods. The composition of the discharge and the required treatment facilities have generally been determined and are detailed in Annex 4-6, Ecology. The plans for the location of the treatment facilities are being finalized. 5. Communications 18. HII will draw a maximum of 30 outside lines from the complex ex- change along the electric poles currently in place for the village along the Project site. The Company will operate a manual switchboard system with an estimated 500 internal lines supplemented by public and portable address systems. 6. Other Utilities 19. The total requirement for all other utilities/services has been estimated and is shown in Table 2. The gas requirements will mostly be met by purchase from Union Gas Company, under construction in the complex and scheduled for completion by 1977. The distribution system from the Gas Company to the end-users has not been finalized. Distribution is expected to be done utilizing tanks and the Project incorporates adequate storage facilities on site. Compressed air requirements will be generated at four large stations attached to the Forge/Foundry shop, Light Machine Shop, Heavy Machine Shop and Fabrication Shops. Smaller compressors will be provided within the facilities to meet special negds. The to5al requirement for compresssd air is estimated at 15,000 Nm /hr (7Kg/cm ) or a maximum of around 50,000 M /day. Receiver tanks at the compressor stations are provided for adequate storage. Distribution of compressed air will be by overhead lines along with Oxygen and Acetylene lines in the plant. Distribution outside the plant will be underground. ANNEX 4-8 Page 6 20. The steam requirements of 1,950 tons maximum per day will also be generated on site. The boiler facilities provided for in the Project include self-contained units with vertical type boilers for the administration and residential units and a centralized boiler station for process steam and plant heating. The centralized station will include 3 boilers with a capacity of 50 tens/hour at 30 kg/cm , and 2 sets with a capacity of 30 tons/hour at 7 kg/cm . 21. Fuel and oil requirements will be procured from existing fuel companies in Korea which will be responsible for delivery on site by trailer and/or ship. The largest requirement will be for Bunker 'C' oil estimated at 300,000 tons/year. The Project includes over-grsund centralized storage facilities in the form of two tanks of 10,000 m capacity. Smaller tanks will be available for storage of gasoline and lubricants and machining oils will be stored in drums. The boiler stations also include underground servic- ing tanks for their requirements of Bunker 'C' oil. 7. Social Facilities 22. The Company plans to build residential facilities for upto 1,200 of its bachelor work-force, the remainder being expected to reside in the housing facilities included in the Changwon complex. The Project includes a dispensary, recreation hall and adequate dining facilities for the work-force in both the living and the plant areas. It also provides accommodation for upto 160 visiting expatriate and local technicians. The Project also includes a Guest House. D. Conclusion 23. The infrastructure provided for in the Changwon complex and supplemented within the Project is considered to be satisfactory. The Project has access to an adequate transportation system, water and electri- city supply system through the complex. The interplant services built into the Project Design at this stage are suitable and will be reviewed again and finalized as the facilities are planned in further detail. Industrial Projects Department February 1977 KOREA HEAVY MACHINERY PROJECT PROJECT PLAIM OF INFRASTRUCTURE Description Content Quantity Investment Completion Responsibility 1. Water Pipe Jyuk-hyun--Plant 300 Dia x 2 Kr. 145,000 June, 1977 Under Discussion 2. Electricity Jyuk-hyun--Plant 154 KV X 3 Km 420,000 End of 1977 Korea Electric Co. 3. Road: Seaside Jyuk-hyun--Plant 30 M x 2 Km 1,502,000 June, 1977 Provincial (Harbor) Gcvernmient Direct Central Area--Plant 30 M x 3 Km 2,585,000 June, 1978 Changwon Authority Industrial Projects Department February 1977 (D . KOREA HEAVY MACHINERY PROJECT WATER REQUIREMENTS Use Specification Unit Calculation Total Roquirement Requirement machine Water a. Arc Furnace 120 ton 5 m3/tonAhr 5 x 120 x 24 hrs x 720 b. Holding Furnace 120 ton 2.5 m3/ton/hr 2.5 x 120 x 24 hrs x 5 % 360 c. Compressor 1,100 HP total 0.4 m3/HP 0.4 x 1,100 x 5% 25 d. Heat Treatment 40 V/T/day 1 m3/M/T 1 x 40 40 e. Paint, Others 1/2 x 7 sets 1.5 m/sec 55 Working Direct Labor 3,500 persons 0.3 m3/person 0.3 x 3,500 1,050 Living a. Direct and 6,345 persons 0.08 m3/person 0.08 x 6,345 510 Indirect Labor b. Dormitory 1,1400 persons 0.2 m3/person 0.2 x 1,400 290 Sub-total 00 Heating 3/hr ~~~~~2/ Boilers 1,950 m3/hr 1,950 TOTAL 5 .000 1/ 5% Replacement Ratio 2/ Steam requirement in m3 water equivalent: Process Steam 1,200 m3 Heating 695 m3 - Working and others 55 m3 Industrial Projects Department srA Februar-y 1977l KOREA HE,AVY MACHINERY PROJECT UTILITY/SERVICES REQUIRE24ENT UtilitService Requirement Storage Storage/Generation Source Method Capacity Day Year Oxygen 2,250 M3 675,000 M3 Liquid Oxygen and 10 x 2 sets Union Gas Co. (Changwon evaporator Complex) Acetylene 195 Y13 58,500 M3 Cylinders 225 fl; .3 outside Other sources in Korea c,,linders Argon 110 M3 33,000 M3 Cylinders 6 M3 cylinders Union Gas Co. (10 Kg/cm2) Co2 220 M3 66,000 M3 Cylinders 6 M3 cylinders Other sources in Korea (10 Kg/cm2) Hydrogen 4 M3 1,200 M3 Hydrogen bottles 6 M3 x 30 Other sources in Korea Air 50,000 M3 max. - Receiver tanks at 50 M3 x 1 sets On-site local compressor 300 M3 x 3 sets station 200 M3 x 2 sets 100 M3 x 2 sets Steam 1,950 tons max. - 50 tons/hr - 3 sets On-site 30 tons/hr - 2 sets 8 tons/hr - 1 set 3 tons/hr - 1 set Burner 'IC" Oil 1,336 tons 300,700 tons Storage tank 10,000 M3 x 2 sets Oil companies in Korea max. Industrial Projects Department February 1977 cnr OD 6.6 KV X - CDI X FORGE 6.6KV > ~~~~~~~~~10 MVA o J C ~ \ 9 7 X- - --- FOUNDRY -___X___X_________ 20TON HOLDING FURNACE X-uG]D--x -x (1,500 KVA) _________________x lOOTON HOLDING FURNACE x x (5,000 KVA) - x 20TON ELECTRIC ARC FURNACE x - x~~~~~~~~~~~~~~ (12,000 EVA) -x | | I X X X X lOOTON ELECTRIC ARC FURNACE X --Q D -X ~ ~~~~~~~~~~~~~~(40,000 KVA) 0~~~~ X1 0 @ ( X 6.6 KV rn g ffi a g X X -- --- UTILITIES 6.6 KV FABRICATION SHOP -- a ~~~~~ ~ ~~~~~~~~6.6 KVLGH X X 1 - LIGHT MACHINE SHOP X tz 6.6 KV 0, ~~-~z)-J~~-~~X - HEAVY MACHINE SHOP t X-(X)-X~~~~~X--~~~~~ > > ~~~~~~~ ~~~6.6 KV t ASSEMBLY SHIOP t -E X ----- GD,--~~~~~~~~~~~~~~~~~~~~X --- 43~~~~~~~ 0-- ANNEX 5-1 Page 1 KOREA HEAVY MACHINERY PROJECT CAPITAL COST ESTIMATES A. Summary 1. The capital cost estimates based on the technical studies carried out by HII and IMC are summarized below. The cost estimate for each major facility is shown in Table 1. An estimate of indirect foreign exchange cost included in the local cost estimates is also shown below: Cost Estimate Summary (US$ million) Local Foreign Total x Purely Indirect Sub- Local Foreign Total 1. Civil Works 15.8 2.0 17.8 - 17.8 9.1 2. Buildings 14.0 1.5 15.5 7.0 22.5 11.6 3. Equipment (CIF Plant) 29.4 7.2 36.6 /1 94.2 130.8 67.2 4. Installation 9.8 2.1 11.9 - 11.9 6.1 5. Pre-operating expenses 5.2 - 5.2 6.4 11.6 6.0 Base Cost 74.2 12.8 87.0 107.6 194.6 100.0 6. Physical Contingency 7.4 1.3 8.7 10.8 19.5 10.0 7. Price Contingency 17.4 2.9 20.3 20.7 41.0 21.1 Total Fixed Assets 99.0 17.0 116.0 139.1 255.1 131.1 /1 Includes 2% duty (after 90% exemption) and 2.5% defense tax. 2. The base cost estimates are based on mid-1976 prices. The Project cost estimates, which are prepared jointly by HII and IMC, are based on quotations received by the Company, enquiries made by IMC and the Company's recent experience in the implenentation of Gunpo Plant. Some preliminary quotations received in March 1976 from potential suppliers were modified to July 1976 price to reflect the price increase between March and July 1976. No further modifications are expected as a result of the final review by the ANNEX 5-1 Page 2 consultants. The details of the cost estimates, which were reviewed by the Bank on an item by item basis and are considered realistic, are elaborated below. B. Civil Work (Item 1) 3. The civil works cost estimates are based on detailed assessment of various items such as land purchase, earth work, site preparation, and water supply and disposal. These cost estimates are summarized below. Cost Estimate (US$ 000) Category Quantity Cost/Unit Local Foreign Total (US$/Unit) (i) Land Purchase 3.24 million m 0.87/mr 2,810 - 2,810 33 (ii) Earth Work 5.9 million m 1.10/m3 6,490 - 6,490 (iii) Rock Blasting 700,000 m 6.50/mr 4,550 - 4,550 (iv) Anti-Penetration 500,000 m3 0.70/m3 370 - 370 (MAT) (v) Culverts 14,000 m 147.0/m 2,060 - 2,060 (vi) Roads 109,300 mr2 8.0/mr2 880 - 880 (vii) Water Supply and Disposal 630 630 Total 17,790 - 17,790 4. The land purchase includes the price of land and the compensation to be paid to about 259 families currently living there. The earth work of about 6.4 million m includes the reclamation of about 0.5 million m sf land presently under water The filling itself will be aboit 5 million m Of the total 6.4 million m earth work, about 0.5 million m will require rock blasting; this will cost about 6 times more than normal earth work. MAT process will be utilized to cover the bottom of the area covered by water at present. This is done primarily to reduce cost of piling. Piling cost is included with the building cost. Various types of culverts are required at the plant site. The cost per meter of hume pipe culverts will vary between US$70.0/m and US$23.0/m for 1,000 mm and 450 mm pipes respectively. ANNEX 5-1 Page 3 Box culverts are estimated to cost around US$500/m. About 10.9 km of paved road with an average width Sf 10 m is required for the project. The cost of pavement of about US$8/m is used to derive the total cost of road work. The water supply system, including two 5,000 m storage tanks and necessary pipe works, is estimated to cost arou2d US$330,000. The waste water disposal, including a treatment plant for 600 m /day, is estimated to cost about US$300,000. The civil works will be carried out by HII and Hyundai Construction Company and these costs are calcualted on the basis of their recent experience in the country. This being the case, the cost estimates given above are considered realistic. C. Building (Item 2) 5. The building cost estimates are based on the floor space and piling requirements of each facility. HII's recent experience in the construction of its Gunpo Plant is used to derive unit cost of construction of these buildings. Detailed estimates of building cost by facility are given below. Category Cost Estimate (US$000) Unit Buildings Flooi Space Cost Local Foreign Total m US$/mr (i) Foundry & Forge shop 65,500 86 3,220 2,420 5,640 (ii) Fabrication shops 55,000 86 3,400 1,430 4,870 (iii) Heavy Machine shop 35,700 123 2,370 2,010 4,380 (iv) Light Machine shop 15,000 55 760 70 830 (v) Assembly shop 17,500 123 1,150 990 2,140 (vi) Support Facilities 27,900 46 1,180 110 1,290 (vii) Other Buildings 41,900 80 3,330 - 3,330 Total 15,450 7,030 22,480 ANNEX 5-1 Page 4 6. The above estimates include the foundation work required for each shop. Since some of the structures required for the heavy building are not available in the country, they will have to 2be imported. The unit price of buildings varies between US$46 and US$123/m because of the difference in build- ing structure and foundation work. The cost of utility work inside the buildings is included under the installation cost category. Based on the actual costs experienced at Gunpo facilities, these cost estimates are con- sidered satisfactory. D. Equipment (Item 3) 7. For most of the equipment and machinery required for the project, HII has received qdotations from various suppliers in Japan, Western Europe and the U.S.A. On an average about 3 to 5 bids were received for most of the items. Some of these price quotations, particularly for critical items, were further verified by IMC. In order to reflect the price increase between March 1976 and mid 1976, the quoted prices of March 1976 of some items were adjusted to mid 1976 to arrive at the base price estimates. The equipment cost estimates also include the cost of necessary spare parts and transport cost to the plant site. The following are the cost estimates for foreign as well as local equipment (c.i.f., Plant), including spare parts: Category Cost Estimates US$000 Local Foreign Total (i) Foundry & Forge 14,200 20,900 35,100 (ii) Fabrication shop 5,000 9,200 14,200 (iii) Heavy Machine shop 3,100 35,400 38,500 (iv) Light Machine shop 1,200 9,300 10,500 (v) Assembly and Test Shop 5,300 9,400 14,700 (vi) Support facilities 3,000 7,800 10,800 (vii) Others 4,800 2,200 7,000 Total 36,600 94,200 130,800 8. Of the total equipment cost, about 38% would be for the machine shops and about 27% for foundry and forge shop. The cost of tooling and spare parts, which are included in the above estimate, are based on a percentage of total equipment cost, which ranges between 2% in certain areas like assembly shop to 7% for heavy machine shop. An allowance of about 3% of equipment cost of imported items has been assumed to compute freight and insurance charges. Of the total of US$130.8 million worth of equipment, about US$47.1 million will account for equipment made in-house using the ANNEX 5-1 Page 5 knocked down kit approach. An average duty of 20% is normally applicable to the machinery and equipment to be imported for the Project. By virtue of the nature of the Project and its location in the Changwon complex it would enjoy 90% exemption from such duties. Accordingly a duty of 2% and the applicable defense tax of 2.5% have been included in the above estimates. E. Installations (Item 4) This item includes cost estimates for utility installations (with the exception of water distribution), erection, commissioning, and specific foundations. Detailed breakdown of cost items are given below: Category Cost Estimates US$000 Local Foreign Total (i) Utilities 7,300 - 7,300 (ii) Erection & Commissioning 2,900 - 2,900 (iii) Special Foundations 1,700 - 1,700 Total 11,900 - 11,900 10. The cost estimates for utilities are based 2n different unit prices/unit floor space, which varies 2between US$35/m for residential and administrative buildings to US$14.5/m for production facilities. Based on Gunpo experience, the erection and commissioning charges have been assumed at 2.2% of equipment cost. These estimates are considered reasonable. F. Pre-operating Expenses 11. The estimate of this item is based on the Company's past experience and also takes into account the requirements of this project with respect to technical assistance, license fees and training requirements. The technical assistance and engineering category includes around US$1.0 million for 50 man-months of consultancy in the general/machining/assembly and 70 man-months in the foundry/forge areas. The costs are derived on a man-month base cost of US$6,040 and US$5,950 and after including travel expenses, overheads and discounts approximate an average cost of US$8,300 per man-month for the two areas. The following is the estimate of the cost elements included under this item: ANNEX 5-1 Page 6 Category Cost Estimates US$000 Local Foreign Total (i) Training 700 1,400 2,100 (ii) Technical Assistance 1,500 2,500 4,000 & Engineering (iii) Travel 500 500 1,000 (iv) Expediting 200 - 200 (v) Initial License Fee - 2,000 2,000 (vi) Others Pre-operating 2,300 - 2,300 Expenses 1/ Total 5,200 6_,400 11,600 I/ Local staff time, rent, office equipment, etc. G. Physical Contingency 12. To cover minor scope changes and possible omissions of equipment and civil works, a 10% physical contingency has been added to the total base cost estimate, including pre-operating expenses. This contingency provision is considered necessary since the final details of the Project has yet to be developed. H. Price Contingency 13. The base cost estimates are based on mid-1976 prices. Price escalation has been added to both local as well as foreign cost estimates, to provide for future project cost increases. The price escalation is applied to base cost and physical contingencies. The following annual price increases for local and foreign costs were used in calculating price contin- gency. Annual Rate of Increase Year Local Foreign 1976 13% 9% 1977 - 79 12% 8% 1980 onward 10% 7% ANNEX 5-1 Page 7 14. Total price escalation is estimated at US$41.0 million (US$20.7 million on foreign exchange cost and US$20.3 million on domestic costs). This price contingency, which represents about 21% of the base cost estimate, is considered adequate. Industrial Projects Department May 1977 tO}LEA EAVY MACtilNERY l'R(JEC7 CAPITAL COST ESTiMAT`ES BY FACIliTY (US$ Million) iL4 Lo-ry Fotltdry/Torge Sh-p LabrcatLio ISh!E 1eavy 1achine Shop 1Light NIil Shop Assembly/Test Shop Support Facilities Other Facilities Total ( FE' T'otal 1C FE Total IC FE Total It. FE Total LC FE Total LC FE Total LC FE Total LC FE Total 1/ 1. Civil Works 2.1 _ 2.1 5.2 - 5.2 1.5 - 1.5 1.0 - 1.0 2.2 - 2.2 2.9 - 2.9 2.9 _ 2.9 17.8 - 17.8 11, oli Idditgs 3.2 2.4 5.6 3.4 1.4 4.8 2.4 2.0 4.4 0.15 0.1 0.9 1.2 1.0 2.2 1.2 0.1 1.3 3.3 - 3.3 15.5 7.0 22.5 kl) Pir,hasel 0.6 5.6 6.2 0.1 7.4 7.5 - 34.3 34.3 0.5 9.1 9.6 - 2.3 2.3 2.3 7.7 10.0 4.7 2.1 6.8 8.2 68.5 76.7 (2) Made -in-house 12.5 14.9 27.4 4.4 1.6 6.0 1.1 0.5 1.6 0.2 - 0.2 4.8 6.9 11.7 0.2 - 0.2 - - - 23.2 23.9 47.1 (31 Freignt & Insorance (0.2 0.4 0.6 0.1 0.2 0.3 0.4 0.6 1.0 0.1 0.2 0.3 0.1 0.2 0.3 0.1 0.1 0.2 - 0.1 0.1 1.0 1.8 2.8 (4) Duties & Taxes 0.9 _ ().9 ().4 _- 0.4 1.6 - 1.6 0.4 - 0.4 0.4 - 0.4 0.4 _ 0.4 0.1 - 0.1 4.2 - 4.2 -to cav_El)t4 14.2 20.9 35.1 5.0 9.2 14.2 3.1 35.4 38.5 1.2 9.3 10.5 5.3 9.4 14.7 3.0 7.8 10.8 4.8 2.2 7.0 36.6 94.2 130.8 (t'. Lr- itiu .r 3.8 - 3.8 2.S - 2.5 2.1 - 2.1 0.9 - 0.9 1.1 - 1.1 0.9 - 0.9 0.6 - 0.6 11.9 - 11.9 i tallat iou V. Pre-oporating Expenses _1.5 1.3 2.8 ().8 1.1 1.9 0.4 2.3 2.7 _0.5 0.6 1.1 0.9 0.5 1.4 0.4 0.4 0.8 0.7 0.2 0.9 5.2 6.4 11.6 'rotal nase cost 24.8 24.6 49.4 16.9 11.7 28.6 9.5 39.7 49.2 4.4 10.0 14.4 10.7 10.9 21.6 8.4 8.3 16.7 12.3 2.4 14.7 87.0 107.6 194.6 IL. Pl.ysical Continigency 8.7 10.8 19.5 [. Pr i.c Escalation 20.3 20.7 41.0 Totai Fixed Assets 116.0 139.1 255.1 1/ I)stribhted among facilities on tie basis of plant area requirenments 2/ Distributed on a pro-ata basis Inid sstrial Projects Departmsent Apri 1 1977 ANNEX 5-2 Page 1 KOREA HEAVY MACHINERY PROJECT HII: WORKING CAPITAL REQUIREMENTS FOR THE PROJECT 1. Details on working capital requirements for the project are given in Table 1 at the end of this Annex. Principal assumptions used are summarized below. In general, however, it should be noted that turnovers of accounts receivable, inventories, and accounts payable will be lower than normal in the early years of project operations when sales and related costs are in- creasing throughout the year. Normal turnovers will be achieved from 1982 onward when revenues and expenses have reached steady state, or close to steady state levels. 2. Minimum Cash: forecast at 2% of sales. 3. Accounts Receivable: are based on the assumed billing pattern for project sales. That is, 80%,Y of the sales value of work done will be billed before shipment (in the form of progress billings) and 20% will be billed at the time of shipment. One half of this will be received at the time receipt of the equipment by the customer and one-half after completion of acceptance tests. Turnovers on the two types of billings are assumed as follows: Progress billings: 7.5 times 1978-80 8.0 times 1981 9.0 times 1982 and beyond Average turnover on HII's accounts receivable in 1976 was 8.7 times. Billings on shipment: 2.0 times on the first 10% 1.0 times on the second 10% 4. Advances to Suppliers: HII will be required to make progress pay- ments to suppliers on bought-out items with long manufacturing lead times. It is assumed that one-half of bought-out items will be of this nature. It is also assumed that progress payments total 80% of the purchase cost of such items, 40% being paid in the year prior to receipt of the goods and 40% in the year of receipt. Thus, advances to suppliers at the end of any single year will equal 20% of the total of the cost of the following years' bought- out parts. 5. Materials and Supplies: are based on the following assumed turn- overs: 5.0 times 1978-80, 5.5 times, 1981, and 6.0 times thereafter. Average turnover achieved by HII in 1976 was 5.6 times. ANNEX 5-2 Page 2 6. Goods in Process: The average manufacturing period for items to be produced by the project is assumed to be six months. This reflects the fact that while the manufacturing period for completed components in much longer, often one to two years, partial shipments will be made to the customer during this time. Turnovers are forecast as follows: 2.5 times, 1978-81, and 3.0 times thereafter. Finally, goods in process inventories are valued at sales value since LIII is assumed to realize income on work done on a percentage of completion basis. 7. Accounts Payable: are based on total cost of sales plus selling and administrative costs, less labor costs included in these amounts. Costs of bought-out parts with long manufacturing lead times are also excluded since the payment method on these items will differ from other purchases. Turnover on the balances so arrived at are projected as follows: 4.0 times, 1978-79, 4.5 times, 1980-81, 5.0 times thereafter. Average turnover on HII's accounts payable in 1976 was 4.0 times. For bought-out parts with long manufacturing lead times, it is assumed that the 20% not made in progress payments (see para. 4) will be paid in the year following receipt of the goods. Thus, accounts payable for such items (which represent 50% of bought-out parts costs) at the end of any single year will equal 10% of the total. cost of that year's bought-out parts. 8. Advances from Customers: are assumed to amount to 80% of the value of work in progress at year end plus 10% of the following year's sales. The latter amount represents deposits received by HII on orders placed by customers. Industrial Projects Department May 1977 KOREA HEAVY MACHINERY PROJECT WORKING CAPITAL (PROJECT) (Won Dimons) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 ASSETS CURRENT ASSETS ______________ MINIMUM CASH - - .43 1.78 2.87 3.88 5.39 6.35 6.79 7.27 7.77 ACCOUNTS RECEIVABLE - - 5.14 21.41 33.75 45.59 63.33 74.57 79.76 85.38 91.34 ADVANCES TO SUPPLIERS - 2.16 8.02 11.09 11.92 12-79 11.95 12.79 13.68 14.64 15-60 MATERIALS AND SUPPLIES - - 6.65 13.36 20.16 20.84 26.53 28.34 30.32 32.45 34.71 WORK IN PROGRESS - 17.12 35.68 57.44 77.60 89.74 105.66 113.05 120.98 129.44 TOTAL INVENTORIES - 23.77 49.04 77.60 98.44 116.27 134.00 143.37 153.42 164.15 PREPAID EXPENSES AND OTHER - - - - - - - - - TOTAL CURRENT ASSETS - 2.16 37.35 83.32 126.14 160.69 196.94 227.70 243.63 260.70 278.87 LIABILITIES AND EQUITY .______________________ CURRENT LIABILITIES ___________________ ACCOUNTS PAYABLE - - 7-95 18.78 26.60 33.69 39.56 43.29 46.31 49.56 53.03 ADVANCES FROM CUSTOMERS - 2.14 22.62 42.90 65.35 89.03 103.52 118.48 126.77 135.65 145.70 TOTAL CURRENT LIAIBLITIES - 2.14 30.57 61.69 91.95 122.72 143.11 161.76 173.09 185.21 198.73 WORKING CAPITAL .02 6.78 21.64 34.19 37.97 53.84 65.93 70.54 75.49 80.14 INDUSTRIAL PROJECTS DEPARTMENT May 1977 ANNEX 6-1 Page 1 KOREA HEAVY MACHINERY PROJECT PROJECT ORGANIZATION AND MANAGEMENT A. Introduction 1. Three distinct phases of operation can be visualized in relation to the Project, requiring different forms of organization: (i) Project Planning and Implementation Phase requring a Project form of organization directed towards the installation of the fixed facilities. Negotiation of licenses would also proceed in this period. (ii) Operations start-up Phase requiring emphasis on coordination with licensors and involvement of expatriates to ensure technology transfer; and (iii) Steady Operations Phase requiring an organization directed towards the successful achievement of the Project's objectives. In the earliest stages, the effort would be directed from Company headquarters in Seoul with close communication and accountability to the President. B. Project Team Organization 2. The proposed organization for the implementation stage is shown in Chart 1. As indicated, a large proportion of the staff including all key management personnel heave already been appointed. The organization is structured along four construction-related functions and a project planning and coordinating office. HII and the affiliated companies have a vast amount of project experience in implementing large projects such as the Hyundai Motor Plant, the Hyundai Shipyard and the Gunpo Plant and the proposed organization is based on this experience. The responsibilities of the key elements of the organization are discussed below. Consultation Committee 3. The committee is comprised of all senior and other directors in the existing organization and advises the President and the Project leader on policy and other critical matters, bringing to bear the existing senior management experience in HII. Project Leader 4. The Project leader is responsible to the President for all aspects of Project planning and implementation and directs all operations. In consul- tation with the President, he deals directly with existing and potential ANNEX 6-1 Page 2 licensors. The appointee has a proven track record of project implementation, with over 10 years experience in construction supervision and project manage- ment. Most notably, he managed the Hyundai Shipyard Project and was largely responsible for its successful completion. Directors: Design and Engineering; Construction; Supply; and Finance 5. The Director for design and engineering is responsible for construc- tion-related design aspects including site preparation and development, land reclamation process, infrastructure planning, building works and utility installation. The incumbent has been a practising Civil Engineer for over 15 years. He worked as the Engineering Manager for Industrial Plant Construc- tion at Hyundai Construction Company before joining the Project team. The Director of the Construction oversees all construction activity on the site and is responsible for all related activities such as mobilization of manpower and equipment. The appointee to the job has been responsible for the construc- tion of numerous significant projects for the Construction Company for the past 12 years. 6. The Supply Office is responsible for the procurement and delivery of all construction and ancillary supplies. This office would also carry out the function of procuring equipment for the Project, in consultation with the Project Planning and Coordination office. The Director for Finance and Accounting is responsible for all financial and cost-control aspects for the Project. The Directors all report to the Project leader directly. Project Planning and Coordinating Office 7. This office carries out the important function of planning for the Project beyond the Construction phase. It is responsible for facility design, equipment selection, development of required resources and initial development of the market. In addition it serves as the interface between the remainder of the Project team and the Government, other outside agencies and the existing HII organization. The selected commercial manager has 12 years prior experience in Hyundai Group Companies in administrative and supply functions. Since 1968, he has been responsible for HII's license negotiations for existing operations and also served as the Coordinator of the Gunpo Expansion financed by the Asian Development Bank. Licensing 8. The negotiation of licenses has already been undertaken and would continue to proceed through the first phase. This function is planned to be handled at the highest level with close collaboration between the President, the Project leader, the Director Project Planning and Coordinating and other staff with experience relevant to the license under discussion from both the technical and commercial points of view. ANNEX 6-1 Page 3 C. Operations Start-up Phase 9. The organization for this second phase will begin to take the form of the final organization, discussed below. The main difference would be one in emphasis awarded to various functions. The single most important function in this phase would be the successful transfer and implementation of technology. The technical organization and the role of expatriates and the Director of Technology Transfer would be critical at this stage. The technical organization chart is presented and discussed in Annex 4-3, as are the functions of the Director of Technology Transfer, and the involvement of expatriates. D. General Operational Organization 10. The existing organization of HII (Annex 2-2) is structured function- ally with the overall responsibilities for the Gunpo and Anyang plants being combined under one senior Director. The Company plans to set up a divisional structure with parallel organization for the Project, under the President, reflecting the size and importance of the Project in relation to existing operations. The organization would move away from the Project form and be directed towards the large scale of operations planned under the Project. The divisional organization for the Project would be functionally oriented with the greatest emphasis being placed on the critical functions of engineering and production. The proposed organization is shown in Annex 2-3 and discussed below. The Policy Committee 11. The Company proposes to set up a Policy Committee comprising the President, Executive Vice-President and Vice-Presidents of the Project organization, of existing opertions and of corporate functions. The Policy Committee would essentially be a development of the consultation committee discussed earlier and would broadly be responsible for two areas: (i) Basic policy development including development of effective senior management; and (ii) Major pricing and delivery decisions involving market situation and strategy, price and cost strategy and technical delivery decisions. In addition the Committee will serve as a strong link between existing and Project operations, and coordinate matters such as bidding for equipment to be jointly supplied by the Project and Gunpo. Vice-President Changwon 12. The Vice-President would be responsible to the President for the overall execution of the Project. He would also be responsible to the Policy Committee for technology transfer and manpower development. He would be assisted by his team of Senior Directors. ANNEX 6-1 Page 4 Senior Director Operations 13. He would be responsible for overall operations management through Directors of Manufacturing, Engineering and Installation and Service. He would also be assisted by managers (not shown in Chart) in two key areas: (i) Manager of Quality Assurance responsible for all aspects of quality including laboratory services; and (ii) Manager of Contract Coordination responsible for ensuring coordination between engineering, manufacturing and instal- lation and assisting the Senior Director Operations in preparation of technical and delivery recommendations to the Policy Committee. Senior Director Finance 14. The Directors for Cost Control, and Accounting will report to this Senior Director who would be directly responsible to the Vice-President for the Project and the Policy Committee. To ensure integration he would also have an indirect relationship with the corporate Vice-President, Finance. Production cost control is expected to be critical to the success of the Project and accordingly HII proposes to appoint Managers for the functions of Project Cost Control, Product Costing, Variance and Performance analysis. Directors of Administration and Marketing/sales 15. The Director of Administration would be responsible for all administrative and personnel activities in collaboration with the corporate office. The proposed Marketing organization and functions, to be centralized at the corporate level, are discussed in Annex 3-3. E. Conclusion 16. The proposed organization, separate from the existing operations and integrated at the top through the Policy Committee and additional integrated functions such as administration, finance and marketing, is considered satis- factory for the Project. The separation is important in view of the size and multi-product nature of the Project, quite beyond that of the existing opera- tions. The coordination at the top should prove useful in drawing in existing in-house experience and ensuring co-operation between Gunpo and the Project in terms of resource utilization and component and parts supplies. The functional form is considered appropriate for the planned production volume and it is expected that as some product groups gain importance the organization would be restructured along product-group lines. Industrial Projects Department April 1977 ANNEX 6-1 Chart 1 KOREA HEAVY MACHINERY PROJECT Organization Chart of Project Team PRESIDENT CHUNG, IN YUNG CONSULTATION COMMITTEE PARK, CHANG JU, SENIOR DIRECTOR ALL OTHER DIRECTORS PROJECT LEADER HWANG, BYUNG JU SENIOR DIRECTOR I PROJECT PLANNING & COORDINATING OFFICE "I'l KANG, MOON KOOK MANAGER-COMMERCIAL C_ OOFNSCTRIUCTION _ SUPPLY FINANCING YOO, BYUNG CHULL MANAGER-TECHNICAL LEE, CHANG BAE KANG, CHANG SUK KIM, DONG SIK KIM, HA DOOI DIRECTOR DIRECTOR MANAGER DIRECTORI KIM, JIN HOE PARK, EUN OVERSEAS PARK, CHAN SOO P EI N MANAGER ~~~MANAGER SUPPLIES |MANAGER | IDSRA INDUSTRIAL ENGINEERING h ENGINEERING I q WORKING DESIGN QUALFICATION FINANCING PROCESS L r ARCH. I L AT-SITE IG BIDDIN ACCOUNTINGI EII I MARKET & SALES I IINDUSTRIAL I _IPURCHLASI NG I I BUDGET & III r INFRASTRUCTURE I1 RELATION & (LOCAL & FOREIGNI CONTROL RAW MATERIAL ADMIN. ~~~~~~~~~~~~SOURCE DEVELOPMENT 9 UTILITY I | PERSONAL & IHTASOTTO I I ~ LABOR I I I I MANPOWER & L I AFFAIRS I I I TRAINING n ARCHITECTURAL I I I I GOVERNMENT & n WORKS I I BANK AFFAIRS COORDINATION WITH EXISTING ORGANIZATION ERECTION PUBLIC RELATION |EQUIPMENT | I < OPERATION/ I I PRE-OPERATIONAL | MAINTENANCE IVIVWORKS Industrial Projects Department January 1977 World Bank-16804 ANNEX 6-2 Page 1 KOREA HEAVY MACHINERY PROJECT PROJECT IMPLEMENTATION A. Introduction 1. The implementation schedule for the Project is shown in Chart 1. Site development and preparation for commencement of construction is already underway. Two sheds have been constructed to serve as a site-office and as dormitory space for the 22 personnel currently located there. The President has signed an order for release of the green-belt area for the plant, formal approval from the Government was granted at the end of 1976. A great deal of planning work had been completed in anticipation of this approval. Following finalization of details construction activity at a full scale will commence in the second quarter of 1977 and the Project is scheduled to be completed by the end of 1979. The Project is expected to reach the steady state of operation by 1983. B. Implementation Steps 2. As indicated in Chart 1, implementation is planned to proceed in the following stages: 1. Project Development 3. The major parameters of the Project along with equipment require- ments have been developed. These have been reviewed by HII with the assistance of consultants in the machining and assembly area (Ingersoll Manufacturing Consultants, already appointed) and are to be finalized following review by an operating company in the forge and foundry area (assistance agreement to be signed shortly). The review and detailed planning effort is expected to be completed in the second quarter of 1977. 2. Procurement 4. The initial phases of procurement upto the prequalification stage have been substantially completed. Following Bank approval advertisements for prequalification were placed in a number of international periodicals and the results are encouraging. The finalization of equipment specifications is planned to take place in stages in the first two quarters of 1977. As packages of equipment are finalized, tender documents are being prepared and following Bank approval bidding documents will begin to be sent out in tMarch 1977. For further details see Annex 6-3, Procurement. ANNEX 6-2 Page 2 3. Site Development and Civil Works 5. The next step in this area is the mobilization of adequate re- sources, manpower and equipment, substantially completed as scheduled by the end of March 1977. The approach road being built by the provincial government (Annex 4-8, Infrastructure) will be ready for passage of one truck by May. The Korea Electric Company has also agreed to provide temporary construction power at that time. Earth-work including land-filling is scheduled to begin by April and with other construction work would be carried out by HII with the assistance of the Hyundai Construction Company. In view of the Company's recent successful experience at Gunpo, the approach is considered satisfactory. The equipment to be mobilized is shown in Table 1. 4. Building Works: 6. The building works for all facilities will generally proceed simul- taneously, the residential facilities, training center and transformer station being scheduled for completion by the end of 1977. HII would import a part of their requirements of structural steels expected to be on hand by September 1977. HII will do a major portion of the structural work in-house. Piling and heavy foundation work is scheduled to begin in October 1977. A large portion of the building works would be completed by September 1978, the forge and foundry shop by the end of 1978 and the warehouse facilities by mid-1979. The installation of the main utilities would proceed simultaneously with the construction of the buildings. 5. Equipment Ordering and Installation 7. Machinery order placement is expected to commence in July 1977 after loan-aproval by the Bank, packages being sequentially ordered through the end of December. The schedule is consistent with the implementation program, and takes into account the different delivery periods for machinery. This proposed timing would apply to directly purchased equipment. License or manufacturing agreements for the purchase of knock-down kits for equipment to be fabricated and erected in-house would be discussed and negotiated simul- taneously. As the critical items of purchased equipment are installed, they would be put into operation in manufacturing products and in fabricating parts for the knock-down kic equipment. For example, in the Foundry and Forge Shop, the 20-ton electric arc and holding furnace as well as the 100- ton hydraulic press are scheduled to be operational by the end of 1973 and would subsequently be utilized to manufacture heavy structural elements for the 100-ton units and for the 800-ton hydraulic press. Installation of such equipment would proceed through the end of 1979. 6. Operations Start-up 8. Start-up of the various facilities is planned to be phased to maximize the in-house content of the equipment through the knock-down kit ANNEX 6-2 Page 3 approach and for items such as welding tables. The proposed approach has the advantage of lowering investment cost and at the same time providing an opportunity for productive training. As indicated, the training center would be the first facility to be operational beginning January, 1978 but actual training of the work-force will begin even earlier especially in the area of fabrication. Of the plant facilities, the Light Machinery Shop would come on-stream next followed by the Fabrication Shop and the light equipment in the Foundry and Forge shop. These facilities scheduled to be fully com- pleted by the end of 1978 would in fact begin manufacture of products with the assistance of the Gunpo plant by mid-1978. In this period they would also be involved in fabricating the knock-down kit equipment for the heavy portion of the foundry and forge and cranage equipment for the Heavy Machinery and Assembly Shops. These heavy facilities would be the last to become operational, the Heavy Machine Shop, the Assembly Shop and The Foundry and Forge in that sequence. In terms of fixed facilities the Project is scheduled to be fully operational by the end of 1979. C. Conclusions 10. The implementation schedule outlined above is considered achievable in view of the Company's past performance, especially in light of its recent experience at Gunpo where the work is proceeding nearly six months ahead of schedule. However, the review to be undertaken with the assistance of an operating company in the forge/foundry area could lead to some minor revisions. Industrial Projects Department April 1977 ANNEX 6-2 'I'aqble 1 KOREA HEAVY MACHINERY PROJECT EQUIPME,tT TO BE MOBILIZED FOR CONSTRUCTION Equipment Item Quantity (U.nits) Bulldozers 20 Excavators 6 Pay-loaders 9 Dump Trucks 80 Crusher (200 ton capacity) 1 Concrete Mixers 7 Compressors 5 Tug-boat (200 H.P. rating) 1 Barge (500 ton capacity) 1 Mobile Cranes (15-125 ton range) 16 Hydraulic Cranes (25 ton capacity) 4 Fork lift Trucks (5-10 ton range) 4 Trailers (40 ton capacity) 2 Pile Hammer (5 ton capacity) 1 Welders (40 KVA rating) 200 Irdustri.al Pr oJ cts D42Darti-,.fn- Febru;r 19?7 KOREA HEAVY MACHINERY PROJECT Project Implementation Schedule YEAR 1976 1977 1978 1979 1980 MAJOR ACTIVITIES - - _ - - - -- - QUARTER I II III IV I II III IV I It III IV I 11 III IV PROJECT DEVELOPMENT & PROCUREMENT SITE DEVELOPMENT & CIVIL WORKS FOUNDRY & FORGE SHOP BUILDING WORKS _ HEAVY EQUIPMENT MACHINERY ORDER PLACEMENT START UP MACHINERY DELIVERY & ERECTION START UP & COMMISSIONING . HEAVY MACHINERY SHOP SUPPL LIGHTr UP BUILDING WORKS MACHINERY ORDER PLACEMENT MACHINERY DELIVERY, ERECTION & START UP STEEL| LIGHT MACHINERY SHOP SUPPL BUILDING WORKS ll _ MACHINERY ORDER PLACEMENT MACHINERY DELIVERY, ERECTION & START UP ASSEMBLY SHOP SUPPLY BUILDING WORKS MACHINERY ORDER PLACEMENT MACHINERY DELIVERY, ERECTION & START UP STEEL FABRICATION SHOP SUPPLY BUILDING WORKS Ittl _ _II MACHINERY ORDER PLACEMENT MACHINERY DELIVERY, ERECTION & START UP SHARED FACILITIES BUILDING WORKS MACHINERY ORDER PLACEMENT MACHINERY DELIVERY, ERECTION & START UP TRANSFORMER STATION BUILDING WORKS MACHINERY ORDER PLACEMENT MACHINERY DELIVERY, ERECTION & START UP OTHER BUILDINGS TRAINING CENTER LABORATORY WAREHOUSE I RESIDENTIAL FACILITIES I WATER STORAGE Industrnai Projects Department January 1977 World Bank-16806 ANNEX 6-3 KOREA HEAVY MACHINERY PROJECT ITEMS TO BE FINANCED BY THE BANK Category Amount of Loan Allocated'/ (expressed in dollar equivalent) (US$ 000) I. Foundry and Forge shops: 5,00° Steel-making, forging and heat treatment equipment II. Fabrication shops: 6,000 Hydraulic press (8,000 tons), bending and welding equipment III. Machine shops: 48,500 Piano-milling, boring, turning, grinding, shaping, slotting, drilling, and blade-making machines, induction heater, etc. IV. Assembly and Test shop: 6,000 Assembly lathe, balancing equipment V. Iaboratory facilities: 1,500 X-ray equipment, ultrasonic tester, etc. Total equipment and spares 67,000 VI. Structural Steel 5, 500 VII. Technical Assistance 1,000 VIII. Unallocated 6,500 Total 80,000 -/No further revisions are expected following final review. Industrial Projects Department May 1977 ANNEX 6-4 KOREA HEAVY MACHINERY PROJECT ESTIMATED DISBURSEMENT SCHED UE/ Undisbursed Year Quarter Disbursement Cumulative Amount 1977 III 9.1 9.1 70.9 IV 3.7 12.8 67.2 1978 I 11.4 21t.2 55.8 II 16.2 40.4 39.6 III 17.7 58.1 21.9 IV 13.1 71.2 8.8 1979 I 4.8 76.0 4.0 II 3.7 79.7 0.3 III 0.3 80.0 0.0 2/Disbursements are based on the following assumptions on timing of payments: After Down Progress On Performance Payment Payments Shipment Test Structural Steel - 100% - Equipment (Based On Delivery Period) Less than 6 months 1C% - 80% 10% 6 months to 12 months 10% 15% 65% 10% More than 12 months 10% 30% 50% 10% Industrial Projects Department %ay 1977 ANNEX 7-1 KOREA HEAVY MACHINERY PROJECT BASIS FOR FINANCIAL PROJECTIONS 1. Details on sales and operating costs for the project are given in Annexes 7-2 and 7-3. The information contained in these annexes has been used to prepare the projected income statements for the project alone given in Annex 7-4, page 2. 2. Projected income statements for HII as a whole (Annex 7-4, page 1) are based on those for existing operations (Annex 2-9, page 2) plus those for the project (Annex 7-4, page 2). 3. Projected balance sheets for HII as a whole (Annex 7-6) are based on those for existing operations (Annex 2-9, page 4) plus additional needs due to the project as determined in the source and application of funds forecasts contained in Annex 7-5. Industrial Projects Department April 1977 ANNEX 7-2 Page 1 KOREA HEAVY MACHINERY PROJECT HII: PROJECTED SALES A. Steady State Sales 1. The sales plan for the project is based on output capabilities at the 1983 steady state. At that time, the project will have reached fully efficient operations and, based on installed capacity, available man and machine hours, will be capable of producting: (a) Equipment for one 3 million ton steel plant every three years; (b) Equipment for 1,000 MW of power plant each year; (c) A complete mix of chemical and petro-chemical plant equipment; and (d) Small fabricated items, forgings and castings to achieve full capacity utilization. Details of equipment to be produced by the project at the 1983 steady state are given in Table 1 of this annex. B. Selling Price Assumptions 2. Selling prices assumed for project sales are mid-1976 prices for similar types of equipment purchased by Korean enterprises from suppliers in Japan, Western Europe and the U.S. In particular: (a) Steel Plant: Actual purchase prices for POSCO's third expansion which is presently under construction, have been used as the basis of steel plant selling prices. Purchase prices for the first and second expansions (completed in 1973 and 1976 respectively), ad- justed to mid-1976 price levels, were used in a few cases where information on the third expansion was not available. (b) Power Plant: Actual prices at which KECO has purchased equipment for their current power plant projects were used as the basis of selling prices. (c) Chemical Plant: Selling prices are based on prices from Japanese suppliers, which have been the main source of equipment for recent expansion projects in the Korean chemical and petro- chemical industry. ANNEX 7-2 Page 2 3. Selling prices have been inflated from mid-1976 levels using the following inflation rates: 8%, 1977-79, and 7% thereafter. These rates are the same as the international inflation rates used for the calculation of equipment cost contingency allowances. 4. In the calculation of selling prices, no account has been taken of the fact that in the later years of the project HII will be bidding for steel, power and chemical plant on a turn-key basis. Accordingly, actual sales will include equipment not identified in Table 1, to be manufactured by other suppliers subcontracted by HII, as well as revenues for construction, erection and installation of the plants as a whole. The sales forecasts based on the equipment list in Table 1 are thus conservative. C. Sales Build-up to the Steady State 5. Since it is still too early for Hyundai to have received orders for equipment to be produced by the project, sales through to the 1983 steady state are based on the assessment of the domestic market detailed in Annex 3-2. Consideration was also given to the build-up of in-house manufac- turing capability from start-up in 1978 to steady state operations in 1983. For example, in 1978, it is estimated that HII wil produce about 49% of its output in-house, rising to 81% by 1983. Application of in-house manufactur- ing percentages to annual sales gives an indication of the "value-added" by HII each year. Thus, even though total sales are relatively high in the early years of project operations, many of the components will be bought-out from foreign suppliers rather than manufactured by HII. Details on sales projections for the project are shown in Table 2 of this annex. D. Areas of Conservatism in Sales Forecasts 6. The sales forecasts given Table 2 are believed to be conservative, for the following reasons: (a) Sales are forecast for the original equipment market only. No account has been taken of potential sales to the replacement market. (b) No account is taken of possible export sales. In particular, HII alone or in association with its licensors, will be capable of supplying equipment to offshore markets. Industrial Projects Department April 1977 OROEA ~ANNEX 7-2 Table 1 HEAVY MACNINERY PROJECT HIl: PROJECTED SALES Steady State Sales (1983) Sale!,tv Sales Capacity ~~~~ Weight2/ Value Per To t (US$ Millions) (Tons) (U'S$) (1976 terms) A. STEEL PLANT Iron Making Facilities Sintering Plant 11,760 tons/day 31.3 13,500 2,316 Coke Plant 4,250 tons/day 34.3 17,300 1,979 Iron Making Plant 7,540 tons/day 53.7 18,100 2,961 119.3 48,900 2,421 Steel Making Faciltties Steel Making Plant 3 million tons/year 44.4 10,000 4,449 Lime and Calcinating Plant 600 tons/day 4.0 1,700 2,369 Continuous Casting Plant Q.7 million tons/year 10.4 2,500 4.124 58.8 14,200 4,146 Rolling Mill Facilities Blowing and Slabbing Mill 2.8 mil.ion tons/year 42.8 17,400 2,455 Hot Strip Mill 2.0 million tons/year 54.8 19,500 2,807 Cord Strip Mill 0.5 million tons/year 37.0 11,800 3,143 Plate Mill 1.4 million tons/year 59.3 19,30) 2,992 Section Sill 0.3 million tons/year 17.3 6,200 2.800 211.2 74,700 2,806 25% of Rolling Mill Facilities-/ 52.8 2.806 Total Steel Plant to Be Sold Over 3 Years 230.9 81,800 2,823 Steel Plant Annual Sales 76.9 27,300 2,823 B. POWER GE3IERATION PLANT Boiler ) 92.4 10,50) 3,77, rirbksa-Genaratir ) Equipment capacities as 38.+ 2,3:)) 13,714 Condensing Equipment ) defined by 2 sets of 500MW 10.9 1,060 16l,283 Feed Water Equipment ) power plants each year. 17.9 630 28.413 Power Plant Annual Sales 159.6 15,020 10,626 C. CHEMICAL AND PETROCHEMICAL PLANT Reactor 10.2 2,040 5,000 Heat Exchanger 20.4 5,670 3,600 Vessels and Tanks 8.7 2,410 3,600 Columns and Towers 11.7 3,260 3,600 Process Machinery 19.2 6,000 3,200 Pumps and Copressors 9.8 2.510 3,900 Chemical Plant Annual Sales 80.0 21,890 3,655 Total Key Product Annual Sales 316.5 64,210 4,929 Ancillaries Sales;' 47.5 18,480 2,570 Jobbing Sales.5/ 32.0 37,310 1,850 TOTAL ANNUAL SALES 396.0 100,000 3.960 1/ Basis of selling prices given in page 1 of this Annex. 2/ Equipment weights obtained by dII from information supplied by P05CO and KECO on their equipment purchases and from licensors. 3/ Based on existing information on capacities at the steady state, the project would not have sufficient haavy machining capacity to produce a complete line of rolling mill equipment for the steel plant. Thus, assumed sales have been reduced to 25% of the original figure for rolling mills. 4/ Ancillary sales represent peripheral equipment which, while they are part of the Dackages to be sold for steel, power, and chemical plant, have not been specificallv identified under key product sales. They are forecast at 15% of key product sales. 5/ Jobbing sales (fabricated items, forgings, zastings etc not related to key product sales) ara forecast at 10'. of key product sales. industrial Projects Department February 3977 ANNE± 7-2 Table 2 KOREA HEAVY MAOINI4RY PiOJECr HII: PROJECTED SALES SALES BUILD-UP 1978-86 197811 1979 1980 1981 1982 1983-_ 1984 1985 1986 A. Sales in Constant 1976 '2S Dollars fMillions) Market for Steel Plant 3/ 108.0 194.0 252.0 223.0 200.0 200.0 200.0 200.0 200.0 HII !arket Share 57. 157. 16% 222 337. 38% 38% 387 38% Sales-Steel Plant 4/ 5.8 29.0 40.0 48.0 66.0 76.9 76.9 76.9 76.9 Market for Power Plant 3/ 75.0 255.0 350.0 420.0 445.0 445.0 445.0 445.0 445.0 HIl Market Share 37% 297. 34% 29. 397. 367. 36. 36% 367. Sales-Power Plant -/ 28.0 73.0 118.0 123.0 142.0 159.6- 159.6 159.6 159.6 3/140 140 Market for Chemical Plant - 60.0 110.0 140.0 140.0 180.0 180.0 180.0 180.0 180.0 HII Market Share 7n 237. 187 437. 447. 44% 44% 447. 44% Sales-Chemical Plant - 4.0 25.0 25.0 60.0 80.0 80.0 80.0 80.0 80.0 Total Key Product Sales 37.8 127.0 183.0 231.0 288.0 315.5 316.5 316.5 316.5 Ancillary Equipment Sales 5/ - 12.7 22.9 28.9 43.2 47.5 47.5 47.5 47.5 Jobbing Sales 6/ - 6.3 13.7 17.3 28.8 32.0 32.0 32.0 32.0 Total Sales 37.8 146.0 219.6 277.2 360.0 396.0 396.0 396.0 396.0 In-House anufacture 7/ 497. 557. 627. 69% 76% 817. 817. 81% 817. Value Added 18.5 80.3 136.2 191.3 273.6 320.8 320.8 320.8 320.8 B. Sales in Current US Dollars (Millions) Total Sales 44.1 184.0 296.0 400.0 555.8 654.2 700.0 749.0 SOI.4 C. Sales in Current Won (Billions) 9/ 21.4 89.2 143.6 194.0 269.5 317.3 339.5 363.3 388.7 1/ 1978 operations are for 6 months only. 2/ 1983 sales represent the project's normal output capability at the steady state as detailed in Table 1 of this Annex. Sales are assumed to remin constant beyond 1983. 3/ Market available to the Project, by sector, is detailed in Annex 3-2. 4/ Sales forecasts are based on consideration of two factors: (a) maintenance of a reasonable build-up, in line with the project's likely manufacturing capability, through to the steady state in 1983, and (b) sales arrived at in (a) should be attainable in terms of market share. 5/ A.ncillary equipment sales are forecast at the following percentages of key product sales: 07. (1978), 10% (1979), 12.5% (1980-81), 15% (1982 and seyond). 7/ Thbbing sales are forecast at the following percentages of key product sales: 07. (1978), 57. (1979), 7.5% (1980-81), 10% (1982 and beyond). 7' I-House manufacturing percentage is: 100% less the ratio of cost of bought-out parts to sales. !nflation rates .sed: 8% (1977-79), 7% (1980 and beyond). ; ;ls5 = Wor 485. Ind.strial Projects Department A,ril 1977 ANNEX 7-3 Page 1 KOREA HEAVY MACHINERY PROJECT HII: PROJECTED OPERATING COSTS A. Material Costs 1. Material costs are based on analysis of raw material and bought-out parts requirements for 1983 steady state production as obtained by HII from its licensors. Information on quantities (tonnages) required is given in Annex 4-5. Quantities have been priced by HII using mid-1976 prices obtained from local and foreign suppliers/licensors (the latter being the chief source of bought-out parts). On this basis, material costs in the 1983 steady state, in constant 1976 prices, are as follows: Steady State Material Costs (Constant 1976 US$ millions) Local Foreign Raw Bought-out Bought-out Materials Parts Parts Total Steel Plant Equipment 29.8 9.1 6.5 45.4 Power Plant Equipment 52.1 11.5 25.0 88.6 Chemical Plant Equipment 26.1 8.1 8.9 43.1 Key Products Material Costs 108.0 28.7 40.4 177.1 Ancillary Equipment 20.9 - 2.3 23.2 Jobbing Work 10.1 2.5 - 12.6 Total Material Costs 139.0 31.2 42.7 212.9 Percentage Allocation 65% 15% 20% 100% 2. Total material costs amount to 53.8% of sales at the steady state (US$396 million). Based on information gathered by the Bank, this percentage is comparable with that achieved by similar heavy equipment manufacturers in the U.S., Western Europe and Japan. ANNEX 7-3 Page 2 3. Material costs in the years prior to the steady state, 1978-82, were arrived at for each product line in the following manner: (a) Raw materials and bought-out parts requirements, 1978- 82, were costed in the same manner as done for require- ments at the steady state (para. 1). In the early years of project operations, bought-out parts will be a much higher percentage of total material costs than at the steady state. Accordingly, material costs as a percentage of sales will be significantly greater in the early years, reflecting the higher cost of bought-out parts. (b) Inefficiency factors were applied to raw materials costs in the years prior to the steady state in order to reflect higher unit costs as a result of smaller volume purchasing and larger process losses which can be expected in these years. The factors applied to base raw material costs are: 1978 - 150%, 1979 - 140%, 1980 - 120%, 1981 - 120%, 1982 - 110%. 4. Inflation of material costs is projected at the same rate as that for sales. This is believed reasonable in light of the fact a high percent- age of materials will be imported (thereby following international inflation rates) and that HII, as the sole Korean manufacturer of steel, power and chemical plant equipment, should be able to recover any material cost in- creases above those projected through higher prices for its final product. 5. Based on the above, material costs as a percentage of sales for 1978-83, are projected as follows: 1978 1979 1980 1981 1982 1983 Material Costs as % of Sales 77.8% 74.9% 70.2% 64.8% 59.3% 53.8% B. Labor Costs 6. The project will require a total of 7,780 men at steady state operations in 1983. Of these, 6,790 will be involved in manufacturing opera- tions, the remaining 990 representing general and administrative staff. Detailed manpower projections are given in Annex 4-7. Labor costs are based on actual 1976 wage and salary levels which include fringe benefits and annual bonuses of between 2 and 3 month's salary: ANNEX 7-3 Page 3 Average Annual Salaries and Wages (Constant 1976 Won) Laborers 950,000 Shop Engineers 3,400,000 Works Management 3,400,000 Expatriates 19,200,000 7. Annual wages of Korean employees have been increased by a factor of 20% annually, 1977-1978. This is in line with wage inflation in the Korean manufacturing sector 1971-75 (as per Economic Statistics Yearbook, Bank of Korea, 1976). For 1980 and beyond, wages are assumed to inflate by 15% annually. These rates are felt to be reasonable and reflect the expected real gains in Korean wage rates as development proceeds. Inflation of expatriate salaries is forecast at 8% annually, in line with international inflation rates. 8. Labor costs projected for 1978 and 1979 take into account the fact that, in these years, HII will manufacture some equipment for the project in-house, using the knock-down kit approach. A total of Won 0.5 billion in 1978, and Won 1.1 billion in 1979 has been transferred from labor costs to fixed assets in these years to reflect the proper allocation of labor costs to the cost of equipment manufactured in-house. C. Direct Overheads 9. Direct overheads including: operating supplies, maintenance, utilities, and freight are forecast at 7% of sales. This is in line with HII's experience on existing operations. As with labor costs, direct overheads have been reduced by Won 0.6 billion and Won 1.2 billion in 1978 and 1979, and charged to the cost of equipment manufactured in-house. D. Royalties and Taxes 10. Royalties and taxes are forecast at 4% of sales. The royalties signed for project operations average about 3% of gross revenues, less compon- ents purchased from the licensor. A flat 2.5% has thus been assumed as the net royalty fee. By law, a business tax is charged at the rate of 1.5% on all revenues. ANNEX 7-3 Page 4 E. Selling and Administrative Expenses 11. Selling and administrative expenses for the project are forecast at 7a' of sales. This is somewhat lower than the 9% presently experienced in HII's existing operations and reflects the fact that the project will, to some extent, share common management, services and facilities with existing operations, thereby realizing certain economies of scale. F. Depreciation and Amortization 12. HII depreciates fixed assets on a declining balace basis, at the same rates allowed for tax purposes. These are: buildings, 5.6% annually, and machinery and equipment, 18.9% annually. Nlo depreciation is taken on fixed asset additions during the year. The annual depreciation charge is thus based on net fixed assets at the end of the previous year. It is assumed that no revaluations of fixed assets, which are periodically allowed under Korean tax law, will occur over the forecast period. This assumption is conservative in that, although it understates depreciation, taxes are correspondingly overstated thereby understating cash flow and the after-tax financial rate of return on the Project. 13. Deferred charges, representing pre-operating expenses, are amortized on the same basis as allowed for tax purposes -- 33% each year on a declining balance basis. G. Interest Expense 14. Interest is capitalized during the project construction period 1977-79. For 1980 and following years, interest expense is based on the following assumptions on loan amounts and terms (note that interest on the Bank loan includes a 2% guarantee fee to the Government): Interest Amount Rate Repayment (US$ millions) World Bank 80.0 10.2 14 years including 4 years' grace Bilateral Credits 46.7 8.0 12 years including 3 years' grace Foreign Commercial Banks 11.9 11.0 7 years including 3 years' grace Government Loan 79.4 13.0 8 years including 3 years' grace ANNEX 7-3 Page 5 H. Income Taxes 15. An income tax of 40% and a defense tax of 10% are calculated on pre-tax earnings, resulting in an effective tax rate of 50%. Losses on the project, 1978-81, are offset against earnings from HIT's other operations. Also, HII is entitled to an investment tax credit of 8% of the cost of fixed assets for the Project. This tax credit (Won 9.6 billion) is applied against income taxes on HII's other operations. It may not, however, be used to offset defense taxes. Industrial Projects Department May 1977 ANIO1 7-4 KOREA Page 1 HEAVY MACHINERY PROJECT INCOME STATEMENTS (WITH PROJECT) (Won Billions) 1976 1977 1979 1979 1990 1991 1982 1993 1994 1995 1996 SALES MANUFACTURING 19.50 58.30 115.40 223.80 297.60 348.10 434.30 493.70 528.20 565.20 604.80 M4RINE 3.60 3.90 4.20 4.50 4.90 5.20 5.60 5.90 6.40 6.80 7.30 SUB-TOTAL 23.10 62.20 119.60 228.30 292.50 353.30 439.90 499.60 534.60 572.00 612.10 COST OF SALES _ _ _ _ _ _ _ LABOR 3.00 5.48 10.95 21.25 29.62 36.87 45.60 52.30 59.84 68.75 79.23 MATERIALS 10.00 31.77 64.85 132.09 170.65 200.26 239.74 256.26 274.17 293.38 313.93 rlIRECT OVERHEAD 1.50 4.66 8.42 15.81 21.57 25.91 32.05 36.32 39.86 41.58 44.50 ROYALTIES AND TAXES .50 1.75 3.68 7.61 10.06 12.38 15.72 17.98 19.24 20.59 22.03 TOTAL MFG COST OF SALES 15.00 43.67 87.89 176.76 ?31.90 275.42 333.12 362.87 392.11 424.30 459.69 MARINE COST Of SALES 2.10 2.34 2.52 2.70 2.94 3.12 3.36 3.54 3.84 4.08 4.38 TOTAL COST OF SALES 17.10 46.01 90.41 179.46 234.84 279.54 336.48 366.41 395.95 428.38 464.07 GROSS PROFIT GROSS PROFIT 6.00 16.19 29.19 48.84 57.66 74.76 103.42 133.19 138.65 143.62 148.03 INDIRECT EXF'ENSES SELLING AND ADMIN. 2.00 5.60 10.34 18.76 23.45 27.92 34.20 38.62 41.32 44.21 47.31 DEFRECIATION AND AMORT, 2.20 3.40 9.80 18.90 21.20 17.30 14.30 11.90 10.00 8.10 6.80 INTEREST EXPENSES!/ 2.00 2.90 2.60 2.20 11.65 10.56 9.12 7.50 5.82 4.38 3.26 INCOME FROM OTHER SOURCES (.90) (.62) (.98) (1.39) (1.49) (1.59) (1.70) (1.82) (1.95) (2.09) (2.23) …__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - - - - - - - - - - - - - TOTAL INDIRECT EXPENSES 5.30 11.28 21.75 38.47 54.81 54.19 55.91 56.20 55.19 54.61 55.14 fROFIT fROFIT BEFORE TAXES .70 4.92 7.44 10.37 2.85 20.57 47.51 77.00 83.46 89.01 92.89 INCOME TAXES 2/ 3/ .10 1.18 3.51 4.76 .97 9.80 23.24 37.95 41.16 43.92 45.84 INVESTMENT TAX CREDIT - .95 2.81 3.81 .78 1.26 - - - - - NET PROFIT -/ .60 4.68 6.73 9.41 2.65 12.03 24.27 39.04 42.30 45.09 47.05 R A T I 0 A N A L Y S I S GROSS fROFIT AS X SALES 25.97 26.03 24.41 21.39 19.71 21.16 23.51 26.66 25.94 25.11 24.18 FRE-TAX PROFIT AS X SALES 3.03 7.91 6.22 4.54 .97 5.82 10.80 15.41 15.61 15.56 15.18 DEBT SERVICE COVERAGE 1.26 1.37 1.77 2.05 1.63 1.53 1.82 2.35 2,79 3.59 4.39 PRE-TAX RETURN ON - AVERAGE TOTAL ASSETS 8.17 t0.69 6.57 5.18 4.91 9.60 15.92 21.48 20.44 19.33 17.94 AVERAGE EGUITY 10.61 34.70 24.15 21.07 4.77 30.70 55.78 65.70 52.99 44.24 37.57 I 1/ Interest during construction on the project is capitalized 1977-79. This Occunts for the Junp in interest expense in 1980 end the corresponding reduction in earnings ini that year. 3/ Incoas taxes, but not defense taxes, re eliminated 1976-1980, and reduced in 1981, duLe to the inveetuent tax credits totalling Won 11 .1 billion on the Ounpo expansion and the proposed project. The overall tax ratea 1981-86 is slightly below the norual rate of 50% due to the exemption fr. texs allowed on HII's marine operations. 3/ If HI were to go public, " planned, after 1983, the income tax rate would drop fr!a the private ccapany rate of 50% to the public company rate of Industrial ProJects Deparwment Nov 1977, ANN5X 7-4 KOREA Page 2 HEAVY MACHINERY PROJECT INCOME STATEMENT (PROJECT) __________________________ (Won Billions) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 SALES 2 MANUFACTURING - - 21.40 89.20 143.60 194.00 269.50 317.30 339.50 363.30 388.70 MARINE - - - SUB-TOTAL - - 21.40 89.20 143.60 194.00 269.50 317.30 339.50 363.30 388.70 COST OF SALES 2 LABOR - - 2.20 9.81 16.51 21.92 28.30 32.36 37.01 42.51 48.98 MATERIALS - - 16.63 66.81 100.81 125.52 159.81 170.71 182.65 195.46 209.12 DIRECT OVERHEAD - - .90 5.04 10.05 13.58 18.87 22.21 23.76 25.43 27.21 ROYALTIES AND TAXES - - .86 3.57 5.74 7.76 10,78 12.69 13.58 14.53 15.55 TOT MFG COST OF SALES - - 20.59 85.23 133.12 168.78 217.76 237.98 257.00 277.92 300.85 ,MARINE COST OF SALES - - - - - - - - - - - TOTAL COST OF SALES - - 20.59 85.23 133.12 168.78 217.76 237.98 257.00 277.92 300.85 GROSS F8ROFIT GROSS PROFIT - - .81 3.97 10.48 25.22 51.74 79.32 82.50 85.38 87.85 INDIRECT EXPENSES 3/ SELLING AND ADMIN. - - 1.50 6.24 10.05 13.58 18.87 22.21 23.76 25.43 27.21 DEFR. AND AMORTIZAT ON - - 5.80 15.20 - 17.90 14.40 11.70 9.60 7.90 6.30 5.20 INTEREST EXFENSES Z; - - - - 9.75 9.36 8.12 6.70 5.22 3.88 2.86 INCOME FROM OTHER SOURCES - - - - - - - - TOTAL INDIRECT EXPENSES - - 7.30 21.44 37.70 37.34 38.68 38.51 36.89 35.61 35.27 F'ROF I T PROFIT BEFORE TAXES - - (6.48) (17.48) (27.22) (12.12) 13.06 40.81 45.61 49.76 52.58 INCOME TAXES 5/ - -- (3.24) (8.74) (13.61) (6.06) 6.53 20,41 22.81 24.88 26.29 INVESTHENT TAX CREDIT6/ _ .93 2.81 3.81 .78 1.26 - - - - NET FROFIT - ,95 (.43) (4.93) (12.83) (4.81) 6.53 20.41 22.81 24.88 26.29 I/ 1978 operations Lre for 6 months only. 2/ DeOtais on projected sales are given in Annex 7-2. D/ etalls on coat of sales and indirect expenses are given in Annex 7-3. 4W Intereat during construction, 1977-79, is capitalised. Accordingly, no intereat expense appears on the project iDc .e statemnt until 1980. J/ Incce taxes, including defense taxes, are alculated at 50% of pre-tax earninga. Losses on the project, 1978-81, are offset against earnings frm H11's other operations, resulting in tax savings as indicated, If H11 were to go public, as planned, after 1983, its inacta tax rate would vould drop to the 3h% preferential rate for public coupaniesP. 6/ HII is entitled to an I.nvestent tax credit of 8% of the coat of fixed assets for the project. This tax credit (Won 9.6 billion) is used to reduce income taxes, but not defense taxes which cost alwaya be paid, on HII's other operations in the years 1977-81 as indLcated above. Industrial Projects Departnent a 1977 ANI4X 7-5 KOREA HEAVY MACHINERY PROJECT SOURCES AND APPLICATIONS OF FUNDS (WITH PROJECT) (Wou Billions) 1976 1977 1979 1979 1990 1981 1992 1983 1984 1985 1986 SOURCES FROM OPERATIONS NET PROFIT AFTER TAX .60 4.68 6.73 9.41 2.65 12.03 24.2Z 39.04 42.30 45.09 47.05 DEPR. AND AMORT. 2.20 3.50 9.70 19.00 21.10 17.40 14.20 12.00 9.90 8.30 6.8o INC. IN RETR. RESERV. .60 .30 .70 1.30 1.20 1.10 1.10 .80 .80 1.10 1.10 TOTAL FROM OPERATIONS 3.40 8.48 17.13 29.71 24.95 30.53 39.57 51.84 53.00 54.49 54.95 INCREASE IN LTD DEBT RAISED FOR PROJECT WORLD BANK - 6.20 28.40 4.20 - - BILATERAL CREDITS - 5.70 7.50 9.50 - - - FOREIGN COMMERCIAL BNKS - 1.60 1.90 2.30 - - - - - - - GOVERNMENT LOAN - 16.77 9.47 9.09 3.20 - - - - - - SUB-TOTAL - 30.27 47.27 25.09 3.20 - - - - - - OTHER DEBT 16.80 4.70 - - - - - - - - - TOTAL INCR. IN LTD 16.80 34.97 47.27 25.09 3.20 - - - - - - INCREASE IN EQUITY ISSUE OF SHARES/ SUBORDINATED LOANS - 10.06 11.77 8.90 - - - - - - - TOTAL SOURCES 20.20 53.51 76.17 63.70 28.15_ 30.53 39.57 51.84 53.00 54.49 54.95 APPLICATIONS FIXED ASSETS (INCL. IDC) FROJECT FIXED ASSETS 1.40 35.40 57.10 37.9019- - OTHER FIXED ASSETS 12.80 5.80 1.20 1.10 1.0o .90 1.00 .90 .80 .90 .8O TOTAL FIXED ASSETS 14.20 41.20 58.30 39.00 _.00 .90 1.00 .50 .8H .90 .80 3EFERRED EXPENDITURES FROJECT RELATED .50 3.50 2.60 .50 - - - - - _ _ OTHER (.90) .30 .50 .60 .50 .40 .30 .20 .20 .10 .20 TOTAL DEFERRED EXP (.40) 3.80 3.10 1.10 .S0 .40 .30 .20 .20 .10 .20 REPAYMENTS OF LONG-TERN DEBT ____________________________ DEBT RAISED FOR THE PROJECT WORLD BANK - - - - - 3.90 3.90 3.90 3.90 3.90 3.90 BILATERAL CREDITS - - - - 2.50 2.50 2.50 2.50 2.50 2.50 2.50 FOREIGN COMMERCIAL BNKS - - - - 1.40 1.50 1.40 1.50 - - - GOVERNMENT LOANS - - - - 3.35 5.25 7.07 7.71 7.71 4.35 2.46 …__ _ _ _ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SUB-TOTAL - - - - 7.25 13.15 14.87 15.61 14.11 10.75 8.86 OTHER DEBT 1.80 3.70 3.00 4.10 2.90 2,30 2.20 1.80 .90 .90 .90 TOTAL REPAYMENT OF LTD 1.0 3.70 3.00 4.10 10.15 15-45 17.07 17.41 15.01 11.65 9.76 INC. IN WORKING CAPITAL (EXCLUDING CURRENT PORT OF LTD) PROJECT WORKING CAPITAL - .02 6.76 14.85 12.56 3,78 15.87 12.09 4.61 4.95 4.65 OTHER WORKING CAPITAL 4.60 4.79 5.01 4.65 3.; 1.49 1.512 1.63 1.72 1.79 1.87 …__ _ _ _ _ - - - - - - - - - - - - - - TOTAL INC. IN WORKING CAP. 4.60 4.81 11.77 19.50 16.50 5.27 17.39 13.72 6.32 6.74 6.53 TOTAL APPLICATIONS 20.20 53.51 76.17 63.70 28.15 22.01 35.75 32.23 22.33 19.39 17.28 INC. IN SURP. CASH - - - - - 8.52 3.82 19.61 30.67 35.10 37.67 INDUSTRIAL PROJECTS DEPARTMENT Yay 1977 AM=X 7-6 KOREA HEAVY MACHINERY PROJECT BALANCE SHEET (WITH PROJECT) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1996 ASSETS CURRENT ASSETS j/- CASH 5.80 1.24 2.39 4.57 5.85 7.07 9.80 9.99 10.69 11.44 12.24 ACCOUNTS RECEIVABLES 3.70 9.33 18.39 38.10 51.61 64.71 83.78 96.44 103.19 110.42 118.15 ADVANCES TO SUPPLIERS - 3.75 9.95 13.05 14.02 15.03 14.35 15.35 16.43 17.58 19.74 INVENTORIES RAW MAT. AND SUPPL. 2.40 6.99 16.30 24.26 31.92 33.32 39.88 42.62 45.60 48.80 52.22 GOODS IN PROC/FIN.GDS 3.00 10.49 34.04 57.22 80.48 102.26 116.11 133.88 143.25 153.28 164,01 TOTAL INVENTORIES 5.40 17.48 50.34 81.48 112.30 135.57 155.99 176.51 188.85 202.08 216.23 PRE-PAID EXPENSES/OTHER 4.20 3.00 4.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 TOTAL CURRENT ASSETS 19.10 34.81 95.07 142.19 199.79 227.37 267.91 303.30 324.16 346.52 370.37 SURPLUS CASH - - - - - 8.52 12.34 31.95 62.62 97.72 135.39 FIXED ASSETS GROSS FIXED ASSETS 28.50 69.70 128.00 167.00 168.00 168.90 169.90 170.80 171.60 172.50 173.30 ACCUM. DEPRECIATION 3.60 6.90 14.20 31.10 50.80 67.00 80.40 91.70 101.10 109.00 115.50 NET FIXED ASSETS 24.90 62.80 113.80 135.90 117.20 101.90 89.50 79.10 70.50 63.50 57.80 INVESTMENTS AND LT REC. .30 .30 .30 .30 .30 .30 .30 .30 .30 .30 .30 DEFERRED CHARGES GROSS DEFERRED CHARGES .40 4.20 7.30 8.40 8.90 9.30 9.60 9.80 10.00 10.10 10.30 ACCUM. AMORTIZATION .20 .40 2.80 4.90 6.30 7.50 8.30 9.00 9.50 9.90 10.20 NET DEFERRED CHARGES .20 3.80 4.50 3.50 2.60 1.80 1.30 .80 .50 .20 .10 TOTAL ASSETS 44.50 101.71 203.67 281.89 308.89 339.89 371.35 415.45 458.08 508.24 563.96 LIABILITIES AND EOUITY CURRENT LIABILITIES 1/ ACCOUNTS PAYABLE 5.90 10.32 22.11 35.86 45.02 53.55 61.03 66.46 71.36 76.64 82.36 ADVANCES FROM CUSTOMERS - 9.14 34.94 57.71 81.19 105.98 121.65 137.88 147.53 157.86 169.47 SHORT-TERM BANK LOANS 7.20 2.54 2.54 2.54 - - - - - - - ACCRUED EXFENSES 2.00 4.00 5.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 CURRENT PORT OF LT DEBT 3.70 3.00 4.10 10.15 15.45 17.07 17.41 15.01 11.65 9,76 7,20 TOTAL CURRENT LIABILITIES 18.80 29.00 68.59 112.27 147.66 182.59 206.09 225.35 236.54 250.26 265.03 RETIREMENT RESERVE Z/ .60 .90 1.60 2.90 4.10 5.20 6.30 7.10 7.90 9.00 10,10 LONG-TERN DEBT TOTAL LTD (EXCL. GOVT. LNS) 22.00 36.50 71.30 83.20 76.40 66.20 56.20 46.50 39.20 31.90 24,60 GOVERNMENT LOAN - 16.77 26.24 35.33 35.17 29.93 22.86 15.16 7.45 3.10 .64 LESS CURRENT PORTION 3.70 3.00 4.10 10.15 15.45 17.07 17.41 15.01 11.65 9.76 7.20 NET LONG-TERM DEBT 18.30 50.27 93.44 103.37 96.13 79.06 61.66 46.65 35.00 25.24 18.04 EQUITY CAPITAL STOCK 6.00 16.06 27.83 36.73 36.73 36.73 36.73 36.73 36.73 36.73 36.73 REVALUATION SURPLUS .20 .20 .2c .20 .20 .20 .20 .20 .20 .20 .20 RETAINED EARNINGS .60 5.28 12.01 21.43 24.08 36.11 60.38 99.42 141.72 186.81 233.86 …__ _ _ _ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - _ _ _ _ _ _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - TOTAL EQUITY 6.80 21.54 40.04 58.35 61.01 73.04 97.31 136.35 178.65 223.74 270.79 TOTAL LIABILITIES AND EQUITY 44,50 101.71 203.67 281.89 309.89 339.89 371.35 415.45 458.08 508.24 563.96 R A T I O S DEBT/EQUITY RATIO .73 .70 .70 .65 .61 .52 .39 .25 .16 .10 .06 CURRENT RATIO 1.02 1.20 1.24 1.27 1.28 1.25 1.30 1.35 1.37 1.38 1.40 CURRENT RATIO (WITH SURP. CASH) 1.02 1.20 1.24 1.27 1.28 1.29 1.36 1.49 1.64 1.78 1.91 1t Current asset end current liabilities are the susasticn Of req-irements arrived at for workig capital needs (without the project), xnez 2-9, Ppage, end working capital maes (project alone), Annex 5-2. gAn Undr Korean tax lv, c>-apsi sut set up a reosrve for sevrance pay due on retiremnt Of emploYees. The sxim alicused mount of this reserve is 10% of Annual salaries. Industrial Projects Depertent say :977 ANNEX 7-7 Page 1 KOREA HEAVY MACHINERY PROJECT BREAK-EVEN ANALYSIS The Project is expected to be completed by the end of 1979 and expected to reach the steady state of operations in 1983. Therefore, the year 1983 has been selected as the basis for the break-even point analysis. Cost Items Cost (Won billion) Variable Cost Fixed Cost Total Cost Materials & Components 162.2 8.5 170.7 Labor 3.2 29.2 32.4 Direct overhead 11.1 11.1 22.2 Royalties and Taxes 12.7 - 12.7 Selling and Administration 2.2 20.0 22.2 Depreciation and Amortization - 9.6 9.6 Financial charges - 6.7 6.7 TOTAL 191.4 85.1 276.5 Revenue 317.3 billion Won Profit Break-Even 67.5%of Total Plant Capacity Debt Repayment 15.6 billion Won Cash Break-Even 72.5% of Total Plant Capacity ANNEX 7-7 Page 2 KOREA HEAVY MACHINERY PROJECT BREAK-EVEN CHART The profit break-even point of the Project at steady state of operation in 1983 is estimated to be around 67.5t. 317.3 317.3 A. 276*.5 BREAK-EVEN POINT A 214A.2 . .... 0 Af~4 o AI A , ,,.' -, .H , ~~~~~FIXED COST 85.1 _ j. ms * ss~~l ws~~~A 20 40 60 67.5 80 100 Capacity Utilization of the Entire Plant (%) Industrial Projects Department May 1977 ANNEX 7-8 Page 1 KOREA HEAVY MIACHINERY PROJECT FINANCIAL RATE OF RETURN AND SENSITIVITY ANALYSIS Assumptions 1. The financial rate of return calculations are based on the incremental capital cost, operating cost, and revenue streams shown on page 2 of this annex. All streams have been deflated to 1976 price terms on the basis of international inflation rates: 8%, 1977-79, and 7% thereafter. 2. Other basic assumptions used in the financial rate of return calculation are as follows: Construction Period: 4 years Life of Project: 18 years from the date of mechanical completion (1979) Industrial Projects Department April 1977 A2TALT -- ' OF L77rJr 172'>YTy AJLSTIS Revenue vs. R 2tuarrv 3,7 Capital Cost vs. 15.2% .. . _ Return C.perat7ing Cost ~ 00 ,vs. leturn -20 -10 0 T0 20 Increase Capital Operating Pre-Tax Case cota Coats Revenues Return 1 (Base Case) 100 100 100 15.2 2 110 100 100 14.3 3 120 100 100 13.4 4 100 110 100 6.7 5 100 120 100 (4-8) 6 100 100 90 4.9 7 100 100 80 (12.9) 8 100 90 90 13.9 9 100 80 80 12.6 10 100 110 110 16.4 11 100 120 120 17.5 12 110 110 100 6.1 13 120 120 100 (5.3) 14 100 90 100 23.0 One Year Project Delay 13.9 Industrial Projects Department April 1977 ANNEX 8-1 Page 1 KOREA HEAVY MACHINERY PROJECT ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS Assumptions The economic rate of return for the Project has been calculated on the basis of cost and benefit streams expressed in 1976 constant terms. These streams are based on those used for the financial rate of return calculation (Annex 7-8) adjusted to reflect costs and benefits to the economy as a whole. No shadow pricing of labor or foreign exchange has been used. Adjustments to the financial rate of return calculations are as follows: (a) Capital Costs: Business taxes at 1.5% of the value of local mater- ials have been excluded from local components of capital costs and working capital needs. The Project is 90% exempt from import duties (which would normally average 20%) on fixed assets; a defense tax of 2.5%, however, must still be paid. Total duties and taxes of 4.5% have thus been excluded from foreign fixed assets for the Project. Imported materials for working capital needs will also be largely exempt from duties since such materials will be incorporated into products to be sold to entities such as KECO and POSCO which, like HII, are 90% exempt from duties on their expansion programs. Thus, duties and taxes assumed to average 5%, have been excluded from foreign working capital needs. (b) Operating Costs: Duties and defense taxes, averaging 5%, have been excluded from foreign material costs. Business taxes of 1.5% have been excluded from local material co ts. (c) Revenues: No changes have been made to benefit stream which are already valued at international prices. Industrial Projects Department April 1977 K0iOEA HEAVE M4ACHIEMY PROJEC: EC,ONIMITC RT; 'F E)UF AF1D SENSITIVVTY Ai ALYSS Cost and Benefit 3trean,is (C3orst-'nt 1976 W'on Billions) Fixed Working Tv.al I)erating 'Assets Capital Cepptal Coxsts Revenues Costs 1976 1.3 - 1.3 - 1-77 31.4 - 31.4 - _ 1978 46.9 5.1 52.0 18.1 18.4 1979 29.8 10.5 40.3 69.7 70.8 1Q50 - 8.0 8.0 102.5 1o6.5 1981 - 1.0 1.0 122.2 134 14 1982 - 8.6 8.6 148.6 1 74.5 1983 - 5.0 5.0 153.1 192.1 1 98OL-99 - - - 153.1 192.1 200C0 - 38.2 1/ 38.2 1/ - - 1/ Recovery of working capital Industrial Project8 Departaent April 15977 ANNEX 8-1 Table 2 KOREA HEAVY MACHINERY PROJECT ECONOMIC RATE OF RETURN AND SENSITIVITY ANALYSIS Sensitivity Analysis 40% __ Revenue vs. Return 30% 00, / Capital Cost vs. Return 17.4% __ - / , ~---____ 10% _ 0, I _ 0% O Operating % 00 Cost vs. Return -10% _ 0 -20% -10% 0 +10 +20% Decrease Increase CaDital erating Economic Case Costs Costs Revenues Rate of Return 1 (Base Case) 10O 100 100 17 .4 2 110 100 100 16.4 3 120 100 100 15.4 t4 100 110 100 9.5 5 100 120 100 (0.3) i, 100 100 90 7.7 7 100 100 80 (7.0) 3 100 90 90 16.0 100 80 80 14.5 1'' C0o 110 110 18.8 1 1 100 120 120 20.1 12 110 110 100 8.8 13 120 120 100 (1.0) One Year Project Delay 15.8 Indus trial ProJects Department April 1977 oRl :A nI'AxE trll WGi(lNk P'ROJIIt.~ i HRF 1tN {t;Il(AANC;E SAVINGlS (Conbtiait 1976 Woti BililioI) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1. FOIREIGN EXCHANGE INF'LOW & SAVINGS 1. Loans - 12.5 32.4 12. 7 - - - - - - 2. Foreign Exchange Savings 1_ - 18.4 6$ 7 97.9 123.5 160.4 176.6 176.6 176.6 176.6 TOTAL INFLOW & SAVINGS - 12.5 50.8 77.8 97.9 123.5 160.4 176.6 176.6 176.6 176.6 TI. FOREIGN EXCHANGE OUTFLOW a) Capital Expenditures 1. Fixed Assets for the Project 2/ 0.4 16.7 38.3 15.9 - - - - - - - 2. Working Capital 3 - 2.0 12.9 7.9 2.5 (M.) ( 6) (v) Subtotal 094 18.7 51.2 23.2 (1.5 C6) (L6) 6 _ b) l)peraLing Expenditures 1. Foreign Staff - - 0.3 0.3 0.3 0.3 0.3 0.3 - - - 2. Raw Materials and Components - - 8.8 28.7 32.4 29.7 23.4 15.3 15.3 15.3 15.3 3. Royalties - - 0.5 1.7 2.7 3.4 4.4 4.8 4.8 4.8 4.8 4. Other Overhead Fxpenses - 9 2.9 3.2 3.0 2.3 1.5 j15 1.5 1.5 Subtotal 1(1. 33.6 38.6 36.4 30.4 21.9 21.6 21.6 21.6 c ) Ex ports Forgone 4/ c) Exports Forgon _ 13.0 22.9 31.4 44.1 49.6 49.6 49.6 49.6 d) Debt Service 1. Interest 0.6 2.8 4.8 4.7 4.0 3.2 2.5 2.0 1.5 1.1 2. Debt Repayment - _.9 - 5_1 La L 3.4 3-9 Stjbtotal - 0.6 2.8 4.8 7.6 9.5 8.3 7.3 5.6 4.9 4.3 TOTAL OUTFLOW 0.4 19.3 64.6 74.6 71.6 75.7 76.2 74.8 76.8 76.1 75.5 111. FOREIGN EXCHANGE SURPLUS (Deficit) (0.2) (6.8) (13.8) 3.2 26.3 47.8 84.2 101.8 99.8 100.5 101.1 1/ Equal to total revenues less jobbing sales. 2/ Fixed assets Inctlide indirect foreign exchange in local costs. 3/ Working capital requirements in foreign exchange decline, 1981-83, due to reduced reliance on foreign bought-out parts. 4/ Represents cost of steel and other local materials required for project operations, which might otherwise have been exported. Induistrial Prajectn Lepartment May 19/7 KOREA IEAVY MACHINERY PROJECT CASH FLOW TO THE GOVERNNENT (Won Billions) 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 Cash Inflows 1/ 1. Income Taxes (1.0) (6.0) (12.5) (14-4) (7-3) 6.5 20.4 22.8 24.9 26.3 2. Business Taxes - 0.3 1.3 2.2 2.9 4.0 4.8 5. i 5.5 5.8 3. Duties on Imported Materials - 0.5 2.0 2.5 2.4 2.0 1.4 1.5 1.6 1.7 4. Duties on Imported Fixed Assets 1.2 1.9 1.1 - - - - - - - 5. Guarantee Fee on Bank Loan 0.1 0.4 0.7 0.8 0.7 0.7 0.6 0.5 0.4 0.3 6. Interest on Government Loan 1.1 2.7 4.1 4.1 4.2 3.4 2.4 1.5 0.7 0.2 7. Repayment of Government Loan - - - 3.4 5.3 7.1 7.7 7.7 4.4 2.5 1.4 (0.2) (3.3) 1.4 8.2 23.7 37.3 39.1 37.5 36.8 Cash outflows 1. Infrastructure Costs 0.7 1.3 - - 2. Loan to Project 16.2 9.5 11.2 5.4 16.9 10.8 11.2 5.4 - - - - - - Net Cash Flow (Current Terms) (15-5) (11.0) (14-5) (6.8) 8.2 23.7 37.3 39.1 37.5 36.8 Net Cash Flow (Constant 1976 Terms) (114.4) (9.4) (11.5) (5.0) 5.7 1.5.4 22.5 22.1 19.8 18.2 1/ Does not include indirect cash flows such as income taxes paid by workers on their salaries, or imputed income taxes on sales of materials and components to the Project by local suppliers. 2/ Income taxes are negative, 1977-81, due to the utilization of losses on the Project and the investment tax credit to offset income taxes which would be otherwise payable on HII's existing operations. Industrial Projects Department Miay 1.977 Io3