Korean concluded 1997 by requesting credit from the International Monetary Fund (IMF). A bubble economy on which so much of the nation relied is now threatened with extinction. Companies of all sizes are experiencing shortages of credit and shrinkages in consumption. The domestic Korean market throughout 1998 will face tough times. Gross Domestic Production (GDP) will grow between 2.0 and 2.9 percent, while the consumer price index will increase between 5.0 and 5.9 percent. Furthermore, interest rates will rise to the 20 percent level, putting further pressure on business. The Korean government will also practise a tight fiscal policy, so in consequence it will be unavoidable to curtail or postpone large-scale national, Social Overhead Capital (SOC) projects, which are in progress or planned.

With government spending slated to slack, private capital spending will also ease off. All in all, total investment in 1998 will be decrease by 10.5 percent compared with that of 1997, and unemployment will rise to around five percent.

As Korean industry is essentially export driven, its vitality is determined in large part by the prospects for world trade. The expected growth rate of world economy in 1998 is forecasted to be 2.7 percent, lower than 1997's three percent rate. The implications for Korean industry are it could be hit by weakness in overseas as well as in domestic markets. By specific market, Europe appears to be recovering a little, while the US seems lacklustre; Japan meanwhile shows no signs of recovery. The Southeast Asian economies especially have worsened following a wave of financial crises, and China's growth rate has become blunted. As a result, Korean-made products will have a hard time making in inroads into these markets.

Blue Christmas

Those companies which depend little on exports but great on the local market are also experiencing difficulties. In addition to restructuring and monetary stringency, rising unemployment and high prices are quashing consumption. Observers worry about the psychological effect of bad cumulative economic news on consumption. For example, retailers report 20 to 30 percent fewer customers over the Christmas season as compared with last year, a time normally of booming sales. Koreans have been in no mood to celebrate this year.

Imports have experienced the same fate as Korean-made products. Expensive imported goods especially have been shunned by consumers, and import agents are faced with severe financial problems. Operating their businesses on the basis of deferred payment, the exchange rate of the dollar to the Korean won has skyrocketed and their sales have decreased.

The shift in the exchange rate, however, not only has a negative effect but also a positive effect. The fall of the won against international currencies is expected to enhance the price competitiveness of Korean-made goods, serving to boost exports. In world markets it seems that consumers are shifting their priorities in deciding what to purchase from the high-tech to the reasonably-priced and easy-to-use. In this regard, Korean products would seem to have the competitive edge. In addition, Korean companies are expected to focus on manufacturing simpler, cheaper goods instead of expensive and more complex items.

The Restructuring Imperative

However, it is also conceivable Korean products have lost a certain quality competitiveness because of manufacturers' failure to invest sufficiently in R&D. The price competitiveness of products using a lot of imported parts can be expected to worsen because of high exchange rate costs.

The need for restructuring Korean corporations has touted for several years. The government, however, has failed to stage a "soft landing" for bloated, debt-ridden corporations by leading companies to downsize and restructure. It is now inevitable that anything other than a "hard landing" as a result of the IMF agreement is in store for them. The following is an overview of the prospects for the major sectors of an economy controlled by the IMF.

The Korean auto industry seems to be on the verge of a restructuring "big bang" during which local sales would shrink and exports increase. A foretaste of the restructuring wave likely to come was the Daewoo group's blitz acquisition of the ailing Ssangyong Motor Company. This acquisition is expected to solve much of the over-capacity problem in the Korean automobile industry, dogged by inefficiency and low competitiveness in international markets. The takeover will certainly prompt others in the industry to restructure in order to maintain their competitiveness and viability.

The Asia Motor Company and the Kia Motor Company, both under court bankruptcy protection, the Samsung Motor Company, which has recently launched a new model of car, and Hyundai Precision, are all facing direct or indirect pressures to restructure. Many foreign and international automobile industry observers have repeatedly indicated that a restructuring of the Korean industry into two or three companies would secure the competiveness the industry needs to survive in the world market. No company, however, has been willing to consider the M&A option; downsizing was only considered a necessity following a business fall-off.

The situation has changed drastically under the terms of the IMF assistance package. Due to a new stringency in the economy, corporations are being forced to shift their emphasis from expanding their market share to making profits. Such exigencies encourage the mindset that quick restructuring in the industry is urgent. Today, the total annual manufacturing capacity of the Korean industry is 4.25 million cars. Under relatively good business conditions with production at 3.4 million cars per year, the industry will operate at its optimum capacity of 80 percent. However, private research institutes run by Hyundai, Kia, and Daewoo have forecasted that next year's demand will be just 2.8 million cars, impling an over-supply of 600,000. Such a situation points to the rationale of restructuring.

In contrast to local sales which are expected to decrease under the IMF-imposed regimen, exports have extremely strong potential because of the depreciation of the won and consequent lower prices in export markets. Since exports have catered more to the lower end of the market, Korean-made cars are expected to have an even greater appeal on world markets.

The quest for higher profitability in the Korean steel industry is prompting a switch in focus from quantity to quality. As corporate efforts have been exerted in the main toward expanding local market shares, they have been caught in a vicious circle resulting from the triple ills of over-investment, surplus supply, and weak demand. The prevailing business philosophy within the industry, is, however, changing. The new emphasis on profitability shows that the Korean steel industry, now passed a stage of simple expansion and approaching maturity, is focusing its abilities on strengthening its position in the era of global competition. In addition, there a crisis-consciousness abroad, an awareness of the brutal fact that any company is liable to be weeded out under an economy operating under IMF strictures.

The Profit rinciple

Pohang Iron & Steel Co., Ltd. (POSCO) has emerged as pioneer in this new school of practical management. POSCO has introduced a new benchmark to evaluate management, the concept of economic value-added (EVA), an admittedly new concept to many local companies. The purpose of EVA, stated simply, is to concentrate corporate energy on maximizing profits at every level. POSCO's EVA management concept comprises even the potential earning rate of investors in items of their cost of doing business. The company is pursuing this stringent accounting regime to operate much more profitably than before.

To this end, POSCO has been resolute in restructuring its organization since 1994. In the process the company has reduced the number of affiliated companies from 27 to16. In 1998, POSCO will apply the EVA management concept to every affiliated company, and will introduce an evaluation system into all its 44 factories in Pohang, plus the 33 in Kwangyang to compete each other so as to enhance efficiency.

Investment Deferred

Inchon Iron & Steel Co. and Dongbu Steel Co., Ltd., two other major steel producers, are planning and implementing restructuring programs and practicing management on the profit principle. The Korean semiconductor industry, a world-leader in its field, is an exception in the trend toward restructuring. Even though there is little M&A activity in the industry, all member companies are replanning the scale and nature of their overall investment in 1998. According to industry executives, major companies such as Samsung, LG, and Hyundai are certain to drastically reduce their investment in 1998 compared with that of 1997. For example, Samsung's investment in 1998 will decrease to between 40 or 50 percent of this year's levels, and LG and Hyundai will make similar reductions.

Moreover, the increased exchange rate has reduced the corporations' purchasing power for equipment, which must be bought with dollars, and it seems actual facility investment will shrink. Dongbu Group's investment plans to manufacture memory chips and the Anam Group's project to manufacture non-memory chips are curtailed or postponed.

The 64-M D-RAM chip manufacturing system represents the state-of-the-art, and its usage worldwide will likely peak around 1999. Directly after Samsung Electronics Co., Ltd, Hyundai Electronics Co., Ltd. installed such a production system with a capability of five million units a month, only the second of its kind in the world. However, it is expected that corporate investment in 256-M D-RAM and 300mm wafers will be reduced next year. Nevertheless, it is essential for the corporations to invest in producing these items. If not, Korea will lose the initiative it has held for three generations of 4-M D-RAM, 16-M D-RAM, and 64-M D-RAM chips in the world market.

The U.S.A and Japan, being in competitive positions, have insisted that the over-supply in the world market was caused by Korea's over-investment in semiconductors manufacturing. Hence these countries are casting critical eyes on Korean plans for new 256-M D-RAM and 300 mm wafer investment.

A US company, Micron Technology Inc., recently opposed the IMF extending any emergency credit to Korea, issuing a statement to the effect that "Korea's excessive expansion in the business has caused over-supply, and letting Korea have IMF assistance could prompt them to dump goods on the market."

Getting Out of the Red

The Korean shipbuilding industry is expected to take over the world number one position in order receipts, recovering the position it lost to Japan in 1993. Korean shipbuilders have secured a certain number of jobs due to the depreciation of the won. Thus it seems likely builders will enjoy full order books for the next two to three years, providing an excellent opportunity for the industry to get out of the red. While affluence abounds in Korea, huge layoffs and retrenchment schemes are in the planning stage. Excessive loans to extend facilities are burdening management. For example,Samsung Heavy Industries is laboring under debts it incurred to enlarge its dock; Daewoo Heavy Industries is also experiencing difficulties meeting loan obligations it has been accumulating. Halla Heavy Industries became insolvent because of the costs of expanding its dock facility. This company is one of the four major Korean shipbuilders, and is now anticipating a takeover, but its financial situation will not easily be solved.

The Korean textile industry, considered as being in decline for some time, is still ailing. The industries which use wool and cotton as raw materials will be disadvantaged by the newly-shifted exchange rate since all such stuff must be imported. However, Korean-made goods have been strongly competitive for quite some time, specially in synthetic fibers. With the continued weakness of the rival Southeast Asian textile industry, and with recovery in price competitiveness due to the low exchange rate of the won, Korean exports are expected to increase by 30 percent.

Industry analysts predict, however, this benefit would be relatively short-lived, and new investments will lag over the long term because of the scope of the refurbishing needed. Never-ending competition based on facility expansion, which has characterized the industry for several years, has stopped totally. Major companies in synthetic fibers such as Hyosung, Kolon, Samyang, and Saehan are postponing or re-examining investment projects to manufacture TPA (Terephthalic Acid), an important raw material in polyester yarn and film production.

Strategic Cooperation

Petrochemicals is another Korean industry where interest to restructure is mounting. Since 1992 with the entry of large companies into the industry, capacity is now more than double demand. The industry now stands at a watershed in the IMF era. Demand has weakened from Southeast Asia, one of Korea's largest markets and still in the throes of a monetary crisis.

Corporations in Europe, Japan and the U.S.A. are posing a challenge to Korean industry by practising economies of scale through intra-industry strategic cooperation. In consequence, Korean petrochemical manufacturers are considering restructuring as an urgent priority. In detail, they plan to reduce output, to cooperate, and reduce competition by specialization. Production of synthetic fibers is being geared down, and there will be cut backs in the output of synthetic resins such PVC (Polyvinyl chloride) and HDPE (High Density Polyethylene).

Furthermore, strategic cooperation is expected to intensify. Witness the cooperation between Samsung and Hyundai. They have signed a contract to connect their pipeline networks and supply raw materials to each other. In addition, other companies are focussing on their most competitive items and investing only selectively. These strategies are now being implemented at a time when the industry is not under undue pressure; if the economic situation worsens, unfriendly M&A could be the order of the day.

The machinery industry is adopting a similar approach. To compensate for slow business, manufacturers are concentrating on exporting machine tools, mining and construction equipment, and transportation and shipping machinery. It is expected, though, that Korean goods with low-recognition levels in the world market will not fare well. The electronic goods industry including personal computers manufacturers is in a somewhat different position. The consumption of household electronics is thought to be decreasing because of the levy of a special consumption tax; meanwhile, the production of small-sized goods such as audio sets, CD players, and VCRs will decrease or be transferred abroad because of shrinking world markets and severe domestic competition caused by imports.

Specialization

However, local companies also seem to be going through a process of specialization, with manufacturing centering on TV sets, refrigerators, micro-wave ovens, and vacuum cleaners. Computer production will likely increase marginally through advances in information systems, office automation, and cuts in the price of notebook PCs. Increasing demand for new PCs and peripheral equipment in the world market and for 'WINDOWS 98', newly introduced to the market, will serve promote exports in this area.

Cooperation has also been a noticeable trend in the telecommunications industry. Korea Telecom and LG Information and Communication have signed a mutual agreement document to jointly operate relay stations to support their PCS (personal communications services) businesses. With the continuous development of technology followed by enormous investment on the field, next year's telecommunication equipment exports are expected to increase. Likely areas are in exports of CDMA (code division multiple access) systems.

Other businesses such as light industry involved in making household products will likely suffer due to the anticipated shrinkage of the local market, forcing businesses to undergo severe restructuring. Service industries such as hotels and restaurants would be hit particularly hard. Korea is currently suffering from a severe shortage of foreign currency. At the time of writing corporate, short-term loans extended by foreign lenders are approaching maturity and a consensus among the world's major bank's to extend their credit to Korea is being reached. A crisis in the money markets will cause crisis in the practical workings of industry, so impacting on restructuring of industry. It is hard to be certain that Korea, one of the 10 largest trading nations in the world, will overcome this crisis and prepare for another economic take-off. One thing is for sure: the outcome is up to the combined efforts of the Korean government, business and people in 1998.

by Yung - Tak Oh