42.1% of Korean CEOs talked about “belt-tightening” when asked about their management plans for 2012 in a survey conducted by Korean Employers Federation (KEF) on CEOs of 252 major Korean companies. This clearly shows the atmosphere of Korean businesses greeting the New Year. That 4 out of 10 CEOs would tighten their belts reveals their anxious views for 2012. In fact, 17.4% of CEOs ad had mentioned belt-tightening in the KEF’s 2011 survey.
While businesses are predicting 2012 will be a year of low growth, some factors, such as the global financial crisis, fluctuating exchange rates, and the China risk, are making CEOs more anxious.
This situation indicates a red light for the 2012 Korean economy, since it could weaken corporate employment and investment, the two main pillars of Korea’s economic growth. “The quantity of orders received for businesses seems to have not changed yet. However, a drop in profit is an urgent issue to be resolved. Against this backdrop, it will be impossible to avoid belt-tightening management in 2012,” said Lee Seung-cheol of the Federation of Korean Industries (FKI) in regards to recent trends in the global market.
Meanwhile, some companies are taking the current crisis as an opportunity, to carry out aggressive management tactics in order to strengthen their market positions. Samsung is a good example, with it enhancing its market dominance in the midst of the global financial crisis by promoting semiconductors and smartphones such as the Galaxy S. Hyundai Motor Group, which has quickly risen as a global automobile company, is also poised to drive forward at a fast speed by targeting premium car markets with its high-quality vehicles.
Some companies are carefully catching their breath and analyzing the situation. POSCO has declared a state of emergency management, deciding to reduce investment from 7.3 trillion won to 6 trillion won in 2012. LG Display, which is experiencing difficulties due to worsening LCD market conditions, has decided to reconsider its plan to make a new investment in China.
Although business responses are different, the overall industry agrees that “crisis is an opportunity.” Korean businesses are strong players. They have enhanced their market positions in Korea as well as overseas by going through fierce domestic competition and pursuing aggressive strategies abroad. There are a few variables in 2012 that are necessary for overcoming low growth. In short, there are some hidden important keys.
Differentiated Management Strategies in Line with Each Group’s Character
Sophisticated strategies are necessary, especially during a low-growth era. A sense of direction and strong charisma are required. Four major groups, all of which are pursuing aggressive management, have differentiated their management colors during the crisis. Chairman Lee Kun-hee of Samsung claimed to driveoffensive management while asserting Samsung’s own way of overcoming the crisis. Its fundamental philosophy is that defense is important when things are difficult, but attack sometimes work well.
Chairman Chung Mong-koo of Hyundai Motor Company is emphasizing to employees to “stay awake” at all times when facing next year’s problems, and not lowering their guard. Chairman Koo Bon-moo of LG has expressed his strong will for active investment, saying, “Even though the current situation is not favorable, our efforts for new businesses, investment in research and development (R&D), looking for talented people, and promoting inclusive growth will not waver.” Chairman Jung Joon-yang of POSCO stressed scenario management in accordance with market conditions, claiming, “As a company, we have to operate a risk management system at all times.”
There is an issue to which we need to pay attention: whether Samsung’s aggressive management can spread to overall industries. Immediately before the “Best Samsung Employee Awards” on December 1 2011, Chairman Lee Kun-hee met with journalists and revealed his determination for aggressive management. He said, “We will remain vigilant since the world economy looks dark. However, we need to invest more actively next year.” It means that Samsung will strengthen its market dominance by making decisive investment during crisis. It also means that Samsung will completely break away from being a “fast follower” that quickly chases after a top-notch company by imitating it and instead strengthen its position as a “first mover” that leads the market.
In fact, it seems Samsung will increase its 2012 investment by 30% more than in 2011. It invested roughly 30 trillion won last year and is expected to invest more than 40 trillion won in 2012. Generally, Samsung focuses its investment in the semiconductor business. However, considering that the company recently added more people to its software business and accelerated the development of next-generation products, the investment may increase more than 40 trillion won.
Specifically, Samsung will invest an all-time high of 15 trillion won in semiconductor facilities. This figure is more than 50% higher than in 2011. In particular, it will focus investment on next-generation OLED TVs. If Samsung’s attack plan succeeds, it will play a pivotal role in encouraging investment by other companies.
Hyundai Motor Company recently changed its direction from business expansion to internal stability improvement, with the company believing that although it was able to “make a big success by itself” in 2011, global automobile brands will enhance their attacks to hinder its growth in 2012. Its strategy is to “sell products at proper prices” by providing premium vehicles with high quality, rather than flooding the market with products. However, the move does not appear to drastically reduce investment. Hyundai Motor Company is also expected to make aggressive investment in 2012 on the grounds that brand awareness and quality improvement need constant investment. The automobile industry anticipates the success of Hyundai Motor Company’s marketing strategy will result in a total of 7.2 million vehicles being sold in the global market in 2012. This number includes 4.38 million Hyundai cars and 2.79 million Kia automobiles.
LG sees 2012 as a time for revival through “choice and concentration.” LG will focus all its energy in the Long Term Evolution (LTE) mobile phone business in order to recover losses and successfully rise from its failure in the area. Although the atmosphere in the company leaned toward crisis management, it is certain that LG will carry out aggressive management to defend its LTE business.
GS Group is focusing on growth engine creation. The company is launching a subsidiary GS Energy in January 2012 in order to promote the energy business related to renewable and alternative energy and secure momentum in growth.
It is uncertain when SK Group, which is suffering from the CEO’s family’s secret fund scandal, can resolve the problem and dedicate itself to business management activities. In addition, POSCO is not sure when it can make a large fire in its furnaces again due to worsening market conditions.
Will the “100-10 Club” for Investment and Employment Be Maintained in 2012?
The task CEOs are facing in 2012 is how to overcome the low-growth era. The Bank of Korea, Korea Development Institute (KDI), and Samsung Economic Research Institute (SERI), anticipated that the domestic economy’s growth rate for 2012 will be in the mid-to-high 3%. Defense management is attractive, especially in an era of low growth. Companies are trying to secure capital in order to respond to unexpected liquidity crises, as well as putting off the creation of new growth engines.
This problem can freeze investment and employment, the two main pillars of the Korean economy. If investment and employment are weakened, a virtuous circle of “active R&D investment → creating a new growth engine → promoting talented individuals → increasing investment and employment” will collapse. Some are worried that “100-10 (investing 100 trillion won and employing 100,000 people),” the symbol of investment and employment, will fall apart in the worst case scenario.
In 2011, the 30 largest groups in Korea invested an estimated 114.8 trillion won and employed an estimated 124,000 people, a 14.3% and 12.7% increase, respectively, from the previous year. They could manage to join the “100-10 Club” for 2011, but it is uncertain in 2012. “We should not allow the collapse of the “100-10 Club,” because that means businesses are in recession. Although the situation is not favorable, companies are well aware of the significance of investment and employment. Therefore, it will be possible to maintain the 2011 level,” said an official from the FKI.