Keep conglomerates creative

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Keep conglomerates creative

Since the inauguration of President Park Geun-hye and her persistent emphasis on developing Korea’s “creative economy,” much ink and airtime have been devoted to the importance of small and medium enterprises (SMEs), vis-a-vis job creation and new engines for growth.

Yet at the midway point of her administration, there are still quotation marks around the term, as well as an only marginally improved understanding of what it is precisely that constitutes this “creative economy.”

Part of the appeal of “creative economy” emanates from the common wisdom that it will be start-ups and small businesses that drive future economic growth in the age of globalization.

The Park government has been generous in its financial and regulatory support of these enterprises, yet it is hard to detect much tangible return on that investment. While it would be foolish to discount the potential of start-ups and SMEs to add jobs and spur growth, it is unrealistic to expect too much too soon.

Neither would it be wise to write off the country’s conglomerates, despite their undeniable difficulties in 2014. Korea’s marquee chaebols - Samsung Group and Hyundai Motor Group - are cases in point.

Samsung has seen sales of its smartphones squeezed by low-priced Chinese competitors and new high-end devices from longtime rival Apple. In the third quarter, Samsung lost its No. 1 ranking in China to Xiaomi, which now has designs on the Korean market.

In the third quarter, Samsung’s revenue from smartphones shrank 32.8 percent year-on-year and 13.6 percent from the previous quarter. Overall profit from July through September tumbled 60 percent from 2013 to $3.79 billion.

The situation at Hyundai Motor Group has been even bleaker. The venerable automaker has been battered by recalls in the United States and a $100 million civil penalty for inflating the fuel efficiency of 1.2 million models sold there.

Not surprisingly, sales are down and foreign cars continue to make inroads on Hyundai’s home turf. In response, Hyundai introduced the Aslan, with its mediocre fuel-economy rating of 22 miles per gallon, into an already crowded luxury sedan segment. The company complains about the weak yen and a recalcitrant Korean labor union, even though 62 percent of its vehicles were made overseas in 2013.

And then there was Hyundai’s baffling bid of $1.4 billion - nearly triple what it needed to pay - for the 19.6-acre Korea Electric Power Corporation site in Gangnam. Media reports said Hyundai Motor Group Chairman Chung Mong-koo simply overruled the recommendation of his own bid team.

Investors were not exactly supportive. Knut Gezelius of Skagen Funds of Norway, the biggest holder of the company’s preferred shares, called the deal “an embarrassment to Hyundai Motor’s management team. We expect to see much better corporate governance and use of shareholder money going forward.”

In order to get back on track, Hyundai Motor Group must look inward and forward.

Back at Samsung, there have been no signs of panic. Heir apparent Jay Y. Lee has steadily and quietly taken steps to consolidate his leadership, while at the same time exploring new directions and partnerships. He has met with Mark Zuckerberg of Facebook and Larry Page of Google. He has huddled with executives of Nissan Motor, Volkswagen AG, Toyota Motor and BMW, possibly to explore automotive applications for technology. He has doubled down on the group’s cutting-edge memory chip business.

And for the most part, investors like what they see. When the conglomerate’s IT services affiliate - Samsung SDS - began accepting subscriptions for its upcoming IPO, there were 15 offers from retail investors for every available share.

Samsung Group also has bought into the “creative economy” initiative by establishing a start-up and venture firm project in Daegu and North Gyeongsang. It has committed $9.3 million over the next five years to seed promising ideas in such diverse areas as the Internet of Things and information and communications technology; parts manufacturing, including displays; software; and fashion.

Samsung Group is proof that even the biggest players can be innovative, entrepreneurial and creative, characteristics that benefit businesses of all sizes, but that they are perhaps most crucial for established companies if they are to evolve and prosper in an ever-changing economic landscape.

*The author is the business news editor of the Korea JoongAng Daily.

by Bertil Peterson

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