Conglomerate shake-ups overdue

Shipping group STX is drowning in a liquidity crisis. STX Group Chairman Kang Duk-soo applied for court receivership for the group’s construction unit and offered his entire equity stake in the group affiliates to creditors as collateral. Kang built his shipping empire by acquiring Ssangyong Heavy Industries amid a chain of bankruptcies and restructuring after the Asian financial crisis in the late 1990s. He expanded his business from shipping to offshore and shipbuilding and construction.

But the downturn in the shipping industry and a slowdown in global commodity demand after the global financial meltdown and European credit crisis hit hard on the group that ran primarily on revenue from shipping and shipbuilding operations. The group struggled to stay afloat as freight and shipbuilding orders from overseas dropped.

STX’s downfall is an ominous sign for Korea Inc. Many conglomerates are shaken from the prolonged slowdown in construction, shipping, shipbuilding and chemical businesses. The poor first-quarter results of large listed companies are the proof. Except for a handful of manufacturing giants like Samsung Electronics, Hyundai Motor and LG Electronics, most large companies reported poor revenues and worsening operating profits. Their performance will likely worsen as they vie poorly against Japanese rivals backed by cheaper yen.

Large companies should prepare themselves to go into corporate dieting or restructuring as economic prospects remain dim. They will follow STX’s footsteps if they keep up sprawling operations on credit and debt. They must stop enlarging themselves and instead restructure their organizations. Financial institutions should be vigilant and watch over their large corporate borrowers. They must prioritize risk by helping out promising companies and acting fast to dissolve weaker ones. They must stock up more loss reserves, which is their only way to prevent a bigger catastrophe.

The struggling construction and shipbuilding industries are among Korea’s key industrial sectors that account for a large share of the labor market. Many companies could be sold to foreign buyers at cheap prices, leading to mass unemployment, as in the aftermath of 1997 financial crisis. The fate of STX group could set the guidelines for other large companies facing liquidity crunches. Group chairman Kang has given up all his wealth and authority to save the companies. Creditors are mulling whether to save the offshore and shipbuilding company while selling or merging other smaller units.

STX Group’s liquidity crisis is already sending chills to the capital markets, making fund-raising harder for small and mid-sized companies. Yet the group could rebound from a bailout. Creditors should accelerate financing to STK units that are deemed competitive in return for strong restructuring such as surrender of management control and streamlining.