Korean companies can’t relax in 2012

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Korean companies can’t relax in 2012

The global stature of Korean companies is as high as ever after weathering the worldwide slump triggered by the global financial crisis. But they have no time to rest on their laurels. The euro zone fiscal crisis continues to bear the risk of repeating the upheaval of 2008 and upending the recovery. Even if that does not materialize, austerity in Europe, the U.S., and China might result in a slowdown.

Indeed, the growth momentum of companies listed on the Korea Stock Exchange is already diminishing. After a healthy first half this year, 67 percent of the companies in the third quarter experienced a decline in their operating income or suffered a deficit.

With lower year-on-year growth and increased uncertainties on the horizon, Korean companies in 2012 will likely go into “constant crisis” mode. Accordingly, there are five issues they will have to tackle next year.

First, they must figure out how to be both aggressive and defensive. In previous periods of uncertainty, companies that adopted this approach achieved sustainable growth. An aggressive strategy is only possible if a company has steady profitability, which can help weather a crisis. It is akin to “the best offense is a good defense” thinking of generals. Defensive steps to solidify their cash flow will enable companies to execute both short- and long-term aggressive strategies such as increased marketing over the short term and higher R&D investment over the long term to unlock new technologies and growth areas.

Second, companies will need to address the question of their role in society. Companies are increasingly being asked to fulfill their social responsibilities beyond just maximizing profits. The importance of ethical management is also being emphasized more and more. To communicate its efforts on corporate responsibility, companies should embrace social media, which increasingly channel and shape public opinion in Korea.

Third, Korean companies should use their strength to advance into emerging markets, which have propped up the world economy since the 2008 global financial crisis. Emerging economies are a “red ocean” of cutthroat competition by global companies for market share. The Korean Wave of entertainers and economic development know-how can be effective vehicles for entering emerging markets and establishing brand recognition.

Fourth, companies need to recognize the changing cooperative and competitive relationship between Korea, China and Japan. The era of Chinese companies acting as the subcontract workshops and assembly lines of advanced countries is shifting. Now they are acting as competitors or equals. Korean companies should strengthen local production and R&D capabilities in China and actively use the Chinese workforce. Meanwhile, Japanese companies, suffering a supply disruption due to the March 2011 earthquake that struck Japan, are increasingly seeking cooperation with competitive Korean companies. They will increase their presence in Korea to utilize Korean companies’ technological, product development and production capabilities.

Finally, to gain competitiveness in new business fields for a short time, mergers and acquisitions would be a most effective medium. Considering that Korea is the world’s 10th largest economy, Korean companies’ M&A results are meager. Korean companies rank 30th to 40th in terms of M&As. They should remember that there are many M&A opportunities in bad economic times with assets available at discount prices.

Korean companies need to have a constant sense of urgency and be always prepared to seize opportunities. With an enhanced internal soundness and experience from successfully overcoming crises, they should focus on improving competitiveness in new business areas. To that end, Korean companies need to simultaneously mount cost-saving efforts and preparations for the future.

The issues in 2012 will have inherent pressure and stress. To handle them effectively, improved work environments will be necessary.

*The writer is a research fellow at the management strategy research department at the Samsung Economic Research Institute. For more SERI reports, please visit www.seriworld.org.

By Kim Jong-nyun

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