Rethinking turnaround

STX Offshore and Shipbuilding has narrowly avoided bankruptcy once again. The state-owned Korea Development Bank approved a union-endorsed turnaround plan submitted by the company one day after deadline.

The bank demanded a 40 percent reduction of fixed costs and 75 percent cut on labor costs. The company proposed saving the same amount through wage cuts and rotational unpaid leave instead of layoffs. Under its outline, base salary will be cut by 5 percent over the next five years and bonuses halved. During the next five years, workers will go on unpaid leave for six months each year.

It remains to be seen whether the plan will work. The voluntary compromise on pain sharing between the employer and employees is commendable, but it may turn out to be a vain extension of life. Under the plan, workers will have to live on 40 percent of their current pay for the next five years. It won’t be easy to support a family with a paycheck that’s less than minimum wage. It also does not help the overall competitiveness of a shipyard if skilled workers quit and choose another profession since they are hard to replace.

The troubles are not restricted to shipbuilders. Restructuring Korea Inc. has been slow. According to the Bank of Korea, revenue from manufacturing has been contracting since 2015, but labor costs against revenue have increased from 9.9 percent in 2015 to 10.8 percent in 2016 and 11.2 percent in 2017, which suggests redundancy in the field. The government must seriously consider whether state lenders are the best institutions to be leading turnarounds.

For years, ailing companies have become the responsibility of state lenders. Over 10 trillion won ($9.8 billion) went to Sungdong Shipbuilding and STX. Korea Development Bank has become burdened with hundreds of troubled companies under its wing. The company has maintained a rare tradition of sending troubled firms to the care of a state bank. It has pampered the corporate sector so that companies in trouble all turn to the state for help.

The rules must be reset. Corporate turnaround should be led by private equity funds and market capital. U.S.-based KKR bought OB Brewery, the industry’s second-largest company, for $1.8 billion in 2009 and sold it back for $5.8 billion five years later as the industry’s largest company. Coway gained competitiveness by exploring overseas markets after it came under MBK Partners in 2012.

When General Motors filed for bankruptcy in 2009, the U.S. government chipped in public funds, but the actual work was left to Wall Street. When Nokia went under, the Finnish government did not provide any funds. Instead, it retrained workers and motivated them to start new ventures. Over 40,000 jobs were lost, but the new companies have strengthened the Finnish economy with new growth drivers. The Korean government, too, must take its hands off troubled companies and give the work to the private sector.