Management Dilemma
Samsung has not announced its official group-wide investment plan since last year, which is quite contrary to its announcement of investment and employment plans each year with the only recent exception in 2009. The LG Group, which promised the largest investment in its history last year, has yet to come up with investment and employment plans for this year, too. Things are not much different in the rest of the 10 major business groups, either.
Their conservative and low-profile positions have much to do with the harsh business conditions as of late. In particular, slow domestic demand is becoming permanent, and the appreciation of the won has affected their export competitiveness and profitability, adding to their concerns over the second half of this year. According to FnGuide, the Q1 sales of 119 listed subsidiaries of the 20 major business groups in Korea increased by 0.53 percent between 2013 and 2014, but the quarterly operating and net profits dropped by 3.22 percent and 1.96 percent, respectively.
To compound the matter, the outlook for the second half is getting worse as the strong won is likely to continue during the period. Woori Investment & Securities has recently estimated that the annual net profits of KOSPI-listed companies would be decreased by a couple of trillion won in the event of a 2 percent or higher drop in the won-dollar exchange rate.
An increasing number of corporations are reexamining their existing business plans and trying to recover their profitability through cost reduction amid such high uncertainties. “Not only the ongoing currency appreciation but also the recent signs of slowdown of the growth of emerging economies such as BRIC are driving Korean companies to renew their marketing and production plans,” said senior researcher Ju won at the Korea Economic Research Institute.
POSCO announced on May 19 that it cut its annual investment for this year from 6.7 trillion won (US$6.6 billion) to 5.6 trillion won (US$5.5 billion) on a consolidated basis. The purpose is to focus more on sharpening its competitive edge in steelmaking, the root of the corporation, rather than launching new businesses.
The Hyundai Motor Group is modifying its business plans for foreign exchange rate fluctuations, too. One of the examples is the decision to build a new Kia Motors plant in Mexico. The group is seeking to cut costs by means of more overseas manufacturing facilities in the middle of the weak yen and strong won trend as of late.
Samsung Electronics, in the meantime, discusses how to enhance its profitability and address its high dependency upon the profits earned by the mobile phone business unit during the global strategic consultative meeting scheduled for three days from June 25. In Q1 this year, Samsung Electronics’ operating profits fell 3.31 percent from a year earlier.
The groups’ efforts for higher profitability inevitably entail significant cost reductions and retrenchment. This, in turn, cannot but result in shrinking investment and less employment. In fact, these concerns are becoming the reality nowadays. According to market research firm CEO Score, the top 30 groups’ 174 subsidiaries recorded combined sales of 20.513 trillion won (US$20.179 billion) in Q1 this year to show a 8.8 percent growth from the preceding year, but total investment by the 29, excluding the Samsung Group, decreased 4 percent during the same period.
It also pointed out that the government has to assume a bigger role under the circumstances. “Ongoing foreign exchange risks such as the appreciation of the won and the depreciation of the yuan leave no option for Korean companies but to increase overseas production, as their Japanese counterparts did, for cost reductions,” said senior researcher Lee Ji-sun at the LG Economic Research Institute, continuing, “Since this could lead to a decrease in employment rate and industrial hollowing-out, the government has to step in aggressively for deregulation and exchange rate management.”