Restructuring isn’t easy
I was baffled by the answer. The question was pretty straightforward: What should be done to salvage the Korean shipping industry, which is drowning in a sea of debt. The vice president of the Korea Development Bank (KDB) shrugged his shoulders and said, “Why ask me? I don’t know.”
Who does know, I wanted to retort. The state-supported KDB is the largest shareholder of the STX shipbuilding group. The group, which owns one of the country’s three largest bulk carriers, filed for court receivership last year after failing to meet payments on its debt, having wasted its 1.6 trillion won ($1.44 billion) capital in keeping subsidiaries afloat amid a global downturn in the shipbuilding and shipping markets.
KDB had to acquire the group because it was its major creditor. Kang Duk-soo, STX’s founding chairman who established a shipbuilding empire after starting out as a salaried worker, was sacked for the putting the group in deep debt. The state bank then brought in commercial banks to arrange a bailout of 3 trillion won to keep the shipbuilder afloat. It was the duty of a state bank in charge of financing the country’s key industries. Yet a senior executive of the bank was now telling me he has no idea about the bigger picture of the shipbuilding sector. “Our role is to normalize STX as the main shareholder,” he continued. “We have no interest or right to be involved in drawing a bigger picture for the industry. If we do, we would be under fire [for excessive state interference].”
In August, KDB studied a merger between Sungdong Shipbuilding & Marine Engineering with STX. Sungdong is being managed by another state-supported bank, the Export-Import Bank of Korea. The industry believed an arranged marriage between Sungdong, which excels in shipping facilities, and STX, which had competitiveness in engineering skills, could work out well. Shipyards like STX have been surviving by accepting rock bottom prices just to get orders, benefiting foreign clients. A merger could help resolve the problems of excess facilities and workers. But the merger talk immediately prompted howls of outrage. KDB came under criticism for trying to get a problem off its hands and was dogged by calumnies against the people who were behind the talk. The KDP vice president shuddered at the memory of the flak that came from all corners.
Restructuring isn’t easy. The so-called third arrow of Abenomics, Prime Minister Shinzo Abe’s three-pronged plan to pull the country’s economy out of long deflationary cycle, is structural reforms and it has yet to be even taken out of the quiver, possibly dooming Abenomics to failure. Choi Kyung-hwan, deputy prime minister for the Korean economy, has been imitating Japan’s aggressive policy mix to revive the local economy, but he too is struggling with the hard part of getting the economy back on the track of sustainable growth.
Structural reform is not as simple as fiscal or monetary policies, which can be carried out without ruffling many feathers. Structural reform comes at the expense of jobs. It faces life-or-death opposition. A bloodbath is inevitable in one part of the economy before the seeds of growth can be planted in other part. Before going into a bloody war, a thorough strategy is needed.
Fortunately, we have been through it before. In the late 1990s we experienced massive layoffs and corporate restructuring following an international bailout. We had a clear principle back then. Restructuring had to come in order to get the bailout. Companies disposed of assets and workers and if creditors were happy with their cost-cutting, they offered loan relief.
The situation is different today. Creditors offers money first and then leave business up to the companies. Restructuring is put off. As a result, there are too many zombie-like companies turning out products out of habit and barely breathing. They suck up the ecosystem’s nutrients - investments and work force - which should be put to better use.
The Korea Development Institute recently released a report that the country’s economy would do better if it does away with some of the zombie companies. If companies that survive on debt bailouts are reduced to 5.6 percent from a current 15.6 percent of all Korean companies, normal firms will benefit by recruiting 110,000 experienced workers. The state think tank’s study should be an important policy reference.
Let’s go back to the shipbuilding industry. If a way is found to save that industry, the Korean economy can be saved. But no one bothers to look at the big picture. The biggest trouble with Korea Inc. is that there’s no vision.
The deputy prime minister for the economy should take up the role. He should leave the pile of studies and reports on his desk and jump on a horse to command a crusade for structural reform. Of course, the companies will dither and the government will get frustrated with slow progress. He may make enemies with banks and companies. He would also have to demand layoffs.
But restructuring cannot be carried out without pain. Is the incumbent government ready for such a tough battle? I realize I posed the question to the wrong person. It should have gone to the deputy prime minister or even the president. But will I get an answer from either of them?
JoongAng Ilbo, Nov. 27, Page 34
*The author is an editorial writer of the JoongAng Ilbo.
by Yi Jung-jae