Major Korean enterprises are keeping a low profile in spite of improving economic indices. What they are concerned about is not this year but 5 to ten years from now.
Their perception of an economic crisis is changing in that they are focusing more and more on innovative business strategies rather than trying to squeeze their resources to tide over a crisis. They are far from content with the current conditions, although the national economy is showing an upward economic cycle.
Most of them agree that deflation is the biggest risk factor in this year’s global economy as lately mentioned by IMF Managing Director Christine Lagarde. The organization has recently adjusted its global economic growth forecast downward to 3.6 percent, 0.1 percentage points down from January.
In contrast, the Bank of Korea recently announced that the Korean economy is coming out of a trough now to show an upturn. However, local companies in the financial, construction, IT, and many more sectors are busy slimming themselves down out of concerns over a series of external factors, which include the tapering by the Fed, hard landing of the Chinese economy, and deflation. According to the central bank, overall consumer prices are expected to rise 2.1 percent this year.
The combined annual investments by the 600 largest Korean companies such as Samsung Electronics and Hyundai Motor Company are forecast to stand at 133 trillion won (US$127.9 billion) this year, only 6.1 percent up year on year. The investment growth rate was 9.9 percent on the yearly average between 2004 and last year. “It is uncertainties that make corporations shrink,” said an industry insider, adding, “They have lost their confidence due to fast-changing market conditions and unpredictable policy.”
Two of the more fundamental causes are the market environments taking whole new aspects and corporate restructuring processes that are on an increasingly ongoing basis. Today’s business environments are characterized by mobile technology like SNS and inter-industry convergence and the continuous, market-led restructuring since the financial crisis in 2008.
Experts point out that the third restructuring period has started as of late, in which companies are engaged in voluntary slimming down amid the rapidly-changing industry environments. “In the new environment that follows the first period after the Asian financial crisis between 1997 and 1998 and the second period from 2008, companies are driven to be first movers rather than fast followers,” one of them explained, continuing, “Their chance of survival is very slim, as long as they cling to the growth and employment policy of the government.”
The companies facing such challenges have to deal with their lack of liquidity and profitability without exception. For instance, the reshaping of the construction sector that started in 2010 was stoked by the liquidity crisis in the wake of a business slowdown. Some builders turned their eyes toward overseas markets, but the same difficulties were repeated due to the low margin.
The financial sector is trying to lay off employees nowadays, too, to increase profitability. The number of executives of Kookmin, Shinhan, Woori, Korea Exchange, and Hana Bank has declined from 381 to 254 between September 2012 and the same month of 2013. In addition, Citibank Korea has announced that it will decrease the number of its local branches by 29.5 percent. Samsung Life Insurance is going to de-hire 1,500 or so workers, which is equivalent to 25 percent of its headquarters employees.
In the telecoms sector, KT let go 27 percent of its executive members on a request from the financial authorities after recording the first losses in its history in the last quarter of 2013. The purpose is to ameliorate its financial conditions by reducing its labor costs, which are much higher than those of its competitors.
Under the circumstances, the Park Geun-hye administration’s call for greater investment and employment by major business groups is rarely accepted. The government, since day one, has made the same requests consistently in order to revitalize the national economy. However, local businesses are busy struggling to survive, increasing the possibility of the vicious cycle of less jobs, decreased spending and investment contraction.