[Korea Fucus]Manufacturing’s Earnings Shock and Deregulation

Manufacturing’s Earnings Shock and Deregulation

Kim Yung-bong

Chair Professor
Sejong University

The second-quarter performance of Samsung Electronics, Hyundai Motor and Hyundai Heavy Industries was nothing short of an earnings shock.

 

The operating income of Samsung Electronics, which accounted for half of the corporate earnings at the Korea Exchange last year, dropped 24.5 percent to 7.2 trillion won in the second quarter. Hyundai Motor`s operating income fell 13.3 percent.

 

Even more shocking was the 1.1 trillion won operating loss of Hyundai Heavy Industries. For the first time since its start in 1973, the largest shipbuilder in the world sustained a quarterly operating loss of more than 1 trillion won.

 

Given the sudden surge in the Korean won`s value, a moderate decline in the sales and earnings of the leading Korean corporations has been expected. It is woefully disappointing to see the corporations wobbling already when the business environment for them, including the exchange rate, is likely to worsen in the months ahead.

 

If these leading corporations are as weak as they appear, I wonder what will happen to other companies, large or small, if a crisis erupts. Is the collapse of Korea as a manufacturing powerhouse not far away?

 

Let`s look deeper into their poor performance. The market share of Samsung smartphones, despite a 23 percent increase in the worldwide sales and its release of the Galaxy S5, has dropped by 7.1 percentage points, from 32.3 percent last year to 25.2 percent in the second quarter of this year. on the other hand, Huawei and Lenovo raised their market shares 6.9 percent and 5.4 percent, respectively.

 

The operating loss of Hyundai Heavy Industries resulted largely from Chinese shipbuilders` low bids to secure contracts. No wonder the Korean shipbuilding industry is being edged out by Chinese shipbuilders in new vessel orders, shipbuilding volume and the value of orders.

 

Hyundai cars are fighting an uphill battle against foreign rivals because of the won`s gain against the U.S. dollar. It also is being pushed around by its powerful labor union.

 

The average yearly wage for Hyundai employees reached 94 million won last year, a 40 percent increase in five years. Yet, the union said it will seek members` votes for a strike when they return from a nine-day holiday in August. Understandably, Hyundai Motor has virtually stopped expanding its domestic production since 2000. Instead, it has been building its plants in foreign countries.

 

Samsung Electronics, Hyundai Motor and other globally renowned Korean companies are manufacturers. As is often mentioned, the foundation for all industries is manufacturing and they can hardly have sustainable growth unless manufacturing is deeply rooted.

 

Korea is a manufacturing powerhouse, with manufacturing accounting for 31 percent of its gross domestic product in 2012. Manufacturing creates high-quality jobs and helps boost output in other industries.

 

But Korea is challenged by China and other mid-level countries, which are consolidating their foundations for manufacturing and pushing ahead with technology development. Also challenged are the United States, Germany, Japan and other advanced nations, which are now working on institutional reform and supporting research and development to enhance the viability of their manufacturing sectors and to develop new innovative industries.

 

If no action is taken, Korea`s manufacturing will probably wither away. Korea should listen to such a warning.

 

A new team of economic policymakers, headed by Deputy Prime Minister Choi Kyung-hwan, has drafted a plan to spend more than 40 trillion won on boosting economic recovery by the end of next year. The plan, designed to encourage consumer spending and benefit households in the mid- and lower-income brackets, is being favorably received in the market.

 

It is necessary to make manufacturers and other corporations willing to make investments if the nation wishes to promote sustainable growth and spend more on welfare. Corporations ultimately are the job creators and new sources of income through investments.

 

Corporations should invest and push for innovation if new jobs and new sources of earnings are to be created. Regulatory reform is necessary if the government wishes to see manufacturers and other businesses make investments on their own.

 

The political community, local governments and bureaucrats will have to work together on freeing businesses up from regulatory controls on locations, types and scales of business. But deregulation bills are stuck in the legislation process. If no action is taken on the bills, keeping Korea`s position as a manufacturing powerhouse will prove to be an illusion.

[ Munhwa Ilbo, August 4, 2014 ]