The Korea Inc. blues

Choo Kwang-ho
*The author is the director of job strategy at the Korea Economic Research Institute.

The air was leaden at a labor-themed forum of small and mid-sized companies. One participant complained, “I have been running a business for 35 years. We survived the Asian economic crisis (1997-98) and global financial meltdown (2008-09), but I don’t know how long I can hold up. I cut my payroll 30 percent last year, but things are not getting better with the minimum wage up by double digits.” Another said, “30 years of doing business has only left me with debt. But I can’t quit because of the debt.” Their laments sounded too real to pass as exaggerated whining.

From statistics alone, Korea Inc.’s public companies did not do so badly in the first quarter. Combined sales gained 4.8 percent and operating profit grew 10 percent compared to a year ago. But when you exclude Samsung Electronics and SK Hynix, which are enjoying an extraordinary semiconductor boom, sales rose just 2.3 percent while operating profit fell 14.2 percent.

In March, the average operating rate of Korea’s factories was 70.3 percent, the lowest level since 69.9 percent in March 2009. In April, the number of new hires barely exceeded 100,000 for the third month in a row, the worst levels since the global financial meltdown a decade ago. In particular, the number of those employed in the manufacturing sector fell for the first time in 11 months. The economy overall has turned listless.

There are many risks to business management. One of them is policy risk, which escalated under the liberal government due to its decisively pro-labor and anticorporate proclivities. Our minimum wage jumped by 16.4 percent from last year’s level to 7,530 won ($7). When counting in weekend overtime, our average hourly base wage has become 9,045 won — the 11th highest among Organization for Economic Cooperation and Development members.

Shortening the work week — to be capped at 52 hours a week — affects many workplaces from July and will only add to the management woes. Companies will need 266,000 new hires to maintain their annual production levels, which translates into an extra 12.1 trillion won in labor costs. The shortening of the work week is drawing angry protests from most industries, including the consumer goods sector, which is labor-intensive and hinges largely on seasonal factors; the IT sector where timing of the release of products is key; the drug and gaming industries, which do not work conventional hours for research and development; and the chemicals industry, which must work overtime for maintenance and repairs. A poll of foreign companies doing business in Korea showed that a majority of them — 65 percent — named the government’s labor policy as their biggest burden. Regardless of the righteousness of a policy, the execution and timing should be tailored to economic conditions and a full understanding of the ramifications.

The government’s zeal to reform our corporate ownership structures also gives problems to large companies. The fact that Korea Inc. became an easy target for activist hedge funds underscores its vulnerability in management. Demands from authorities can further weaken their defense of management. There cannot be a set rule on corporate governance. The reforms should depend on each company’s condition and situation.

The bigger a company’s size, the more regulations it faces. Regulations pile up steadily depending on whether a company has assets above 100 billion won, 500 billion won, 2 trillion won, 5 trillion won or 10 trillion won. As a result, companies try to keep their size below each threshold to avoid a new set of regulations even when demand allows them to grow bigger. Regulations must be amended so they are not levied upon companies because of their size, but on an individual basis upon discovery of unfair practices or illegalities.

Lack of consistency in policies also confounds companies. Governments around the world are cutting corporate taxes and encouraging investment to increase jobs. Korea alone has raised its corporate tax. Labor and commerce policies also flip-flop upon administrative reinterpretations. Public policies are adding unpredictability to corporate management.

It is companies, after all, that create jobs and add value to the economy. The economy cannot run well if entrepreneurs lose spirit. One businessman at the forum mentioned above said all entrepreneurs he knows face the day with a heavy heart. His comment drew sympathizing sighs and nods. Instead of censure and pressure, Korean businessmen need cheering and encouragement.

JoongAng Ilbo, June 5, Page 29