Preparing for a winter

Global sales of automobiles reached 84.45 million units last year, of which 8.33 million were in the luxury class. In another noteworthy data point, sales of vehicles in the popular price range rose 6 percent annually over the last five years, while those of the top-drawer brands climbed 10.5 percent. Profits in high-end models are larger. Makers of mass-market models like GM and Ford register operating profit margins of about 3.9 percent, while luxury brands like Mercedes-Benz and BMW generate average margins of 8.8 percent. Hyundai Motor’s decision to launch a new luxury line under the Genesis brand stemmed from the belief that there is no future for an automaker without a stable position in the high-end segment.

Hyundai Motor is breaking out of its old mold in another way. The country’s largest automobile conglomerate did not take part in the recent auction of Hyundai Securities. Four years ago, it attempted to take over Hyundai Engineering & Construction for the sake of “upholding the group identity.” Last week, it made clear that it had no intention of acquiring the financially troubled Hyundai Merchant Marine. Hyundai Motor vice president in charge of public relations Kong Young-woon said the company cannot afford to pay attention to other industries. The group is already up to its neck trying to keep abreast of new technological demands in electric and automated vehicles.

Chaebol watchers were also surprised by Samsung Group’s recent sales of its chemicals units to Lotte Group, including its controlling stake in Samsung Fine Chemicals. The company was born in 1964 under the name Korea Fertilizer. Samsung founder Lee Byung-chull had to donate a 51 percent stake in the company to the government as a penalty for smuggling saccharine. Due to the founder’s special attachment to the company, Samsung quietly amassed shares and regained control when the government offered its stake for sale in 1994.

The secretariat office, which served as the headquarters of the conglomerate at the time, was strongly against the purchase. Prospects for the fertilizer business were poor, and the company had ended up with a strong union as a public entity, which goes against the no-union policy for Samsung group companies. But Lee Kun-hee was determined to regain control as a point of honor for his father. Samsung ended up purchasing the company by bidding 230 billion won ($196 million) for the stake, much higher than the 130 billion won Korea Development Bank was hoping for. The investment was not small considering Samsung Electronics’ market capitalization was under 2 trillion won at the time. And now the group has sold off a company laden with so much family history.

Korea’s younger-generation business leaders - Jay Y. Lee of Samsung, Chey Tae-won of SK, and Chung Eui-sun of Hyundai Motor - all speak of concentrating on what their groups do best. They want to strengthen their global identities in select, core areas. Samsung aims to be the best in electronics and the bio sector and Hyundai in auto-making. The chaebol tradition of sprawl may be coming to an end.

The fear of Korea entering a long tunnel of stagnation like Japan has turned cash-rich corporate giants financially sharp and prudent. Deflation can put a pall over an entire economy, spreading its spell of lethargy to one and all. Japan somehow shook it off thanks to its technology stocks. But Korea lacks fundamentals and resources to weather such a long winter. The China risk has also been a wake-up call. Korean companies can no longer expect a boom from China. In fact, quite the opposite is true: Chinese companies are threatening Korea’s mainstream industries with cheaper costs and competitive technology. Backed by unlimited government funding, China Inc. fearlessly goes on plowing deeper into industries to boost capacity and market share.

Two corporate giants are, thankfully, preparing for a difficult future. The government and legislature, on the other hand, have eyes entirely on the general election in April. Consumers continue to borrow money and live off debt without worrying about interest rates that could go up once the U.S. Federal Reserve hikes its short-term rates. Income inequalities inevitably will deepen. The large will become larger because they have prepared well ahead. The public and consuming sector could fall way behind because they have fiddled away the summer. Winter arrives equally to those who prepared well and poorly.

JoongAng Ilbo, Nov. 17, Page 34

The author is a senior editorial writer of the JoongAng Ilbo.

by Lee Chul-ho