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Management Report

Management reports, briefs and video-clips issued by Samsung Economic Research Institute

Five Anxiety Factors for Korean Companies in 2010 and Responses

Five Anxiety Factors for Korean Companies in 2010 and Responses

KIM Sung-Pyo

Nov. 30, 2009

Transcript

Welcome to our video program. I’m Sung-Pyo Kim from the Management Strategy Department.

Korean companies have posted relatively healthy earnings in the third quarter of 2009 despite the ongoing global economic recession. From an overall perspective, Korea’s listed companies saw their sales and operating profit to sales ratio recover to pre-crisis levels. These positive results exemplify how much the fundamentals of Korean companies have strengthened. However, concerns over being overly optimistic about Korea’s resiliency are growing, noting that recent strong company earnings owed much to environmental factors rather than the companies themselves. Today, we will take a close look at the five anxiety factors facing Korean companies and how to respond to them.

First, Korean companies are facing the “three highs”- a strong won, soaring oil prices and rising interest rates. Having started in March 2009, the three highs are expected to deepen in 2010, with the won/dollar exchange rate reaching 1,100 won, oil prices at US$83.9 per barrel and the yield on corporate bonds at 6.4%.

To overcome difficulties arising from these factors, Korean companies should, above all, establish a comprehensive risk management system and beef up cost-saving efforts through the innovation of the production process. Another breakthrough is to enhance global competitiveness through the development of high value added products. Japan’s auto industry, for example, which lost price competitiveness in the 1980s due to the hike in the yen’s value, placed focus on the development of high-end brands such as Lexus, Infinity, and Acura, aimed at developing expensive yet hot-selling models.

Second, the uncertainty in advanced export markets remains high. The consumption of industrialized markets such as the US and Europe is likely to continue to recover slowly even in 2010. Nouriel Roubini, an economics professor at NYU who made a relatively accurate prediction for recent economic trends, forecasted that the economic slump will continue for the time being, and that the worst is still to come. Sluggish consumption of the US and European markets will deal a blow against Korean companies, considering that these markets account for about 30% of Korea’s exports.

To cope, Korean companies should go all-out to provide new products and services by closely following changes in consumer needs in industrialized markets. They should continue their pursuit of bolstering soft competitiveness (i.e., brand and design), thus further enhancing their “premium” image. Also needed are practical efforts to improve value. Roughly 40 Korean-made products, including 21 by Samsung Electronics and 17 by LG Electronics, will receive innovation awards at the 2010 Consumer Electronics Show.

Third, China is catching up, while Japan is firing back. Chinese companies are rapidly emerging as global powerhouses on the back of a solid domestic market and government support. Japanese companies are accelerating unprecedented restructurings and drastically increasing investments in R&D to regain its past status as a global powerhouse.

As seen in Toyota’s recent rollout of its main sedan Camry in the Korean market, Japanese companies clearly view their Korean counterparts as serious competitors and it is likely that they will not let their guard down in 2010.

In response, Korean companies should quickly establish new growth engines by actively participating in overseas M&A which provide access to new high technology and greater market power. Plus, efforts should be made to secure a competitive edge by connecting IT technologies wherein Korea has strong competitiveness, with promising future industries such as bio and green technologies.

Fourth, corporate burden is growing as industries are under pressure to go green. Under a new global climate change pact, the Korean government recently announced a greenhouse gas reduction target, pledging to cut emissions by 30 percent below expected levels in 2020, the highest level among developing countries.

Corporate costs are bound to increase due to stricter regulations on greenhouse gas emissions. With ever growing demand for greener corporate operations, a passive response will likely be met with serious repercussions amid an increasingly environmentally-conscious global citizenry. Despite not being subject to mandatory reductions, Coca-Cola and Starbucks declared their own voluntary reduction measures, indicating that now is the time for companies to shift the paradigm of corporate management. Wal-Mart also shifted its logistics distribution system from road transportation to rail transportation, while changing diesel auxiliary power generators of trucks to electric power generators.

Korean companies need to reduce carbon emissions on a step-by-step basis throughout the entire spectrum of product manufacturing, distribution, consumption and disposal. Also needed is the exploration of ways to develop environmentally-friendly products or launch into environmentally-friendly businesses.

Last, Korean companies are exposed to an unstable labor-management environment. With the implementation of various survival strategies by Korean companies over the past year, including restructuring and reduction in both salaries and welfare benefits, workers’ anxieties have increased.

As the global financial crisis appears to have somewhat eased, expectations are growing among workers for better compensation. However, companies have little choice but to maintain a conservative view on the future due to the uncertain business environment.

Under this unstable labor-management environment, it is important to establish trust between labor and management via fair and reasonable business operations. Companies, led by top management, need to strengthen communication channels, aimed at the earnest and rapid processing of grievances and greater information sharing.

The ratio of adopting flexible work systems in the US marked more than a 2-fold increase to 74% in 2005 from 31% in 1996. In contrast, the ratio of adopting work-at home systems in Korea remains low at 0.7% that is equivalent to about one twentieth of those of industrialized countries. With this in mind, Korean companies should build a more flexible corporate culture to better harmonize work and life.

The past 10 years could be considered a testing period where Korean companies have learned to cope with various crises, including the Asian currency crisis, the credit card bubble, the IT and real estate bubble and the global economic recession. In this sense, the year 2010 could be said as a real starting point of the 21st century for the Korean companies.

If Korean companies use their accumulated experience and competitiveness to effectively overcome the risk factors facing them, they will be able to make another leap forward in global markets. A comprehensive and effective response to the risk factors could make the year of 2010 a year of new leap forward.

Thank you for watching. I’m Sung-Pyo Kim.

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