In restructuring, a cautionary tale from Japan

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In restructuring, a cautionary tale from Japan

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From left: Nippon Steel & Sumitomo Metal ’s Kimitsu Works is located about an hour away from Tokyo. The steel mill is as big as 22 Tokyo Domes combined and is the fourth largest in the world; Imabari Shipbuilding has announced that it will build its first new dock in 16 years for the first time among Japanese shipbuilders. [PARK SUNG-MIN. SHIP PHOTOS HOMEPAGE]

During the 1990s, Posco Gwangyang Steelworks grew by benchmarking Japan’s Nippon Steel, the predecessor of Nippon Steel & Sumitomo Metal (Nssmc). Soon, Nippon Steel quickly fell behind Posco, after the Japanese company scaled back production to focus on other businesses.

After a period of heavy restructuring in the past few years, though, the company has bounced back. In 2012, its deficit surpassed the 1 trillion won ($893.7 million) level, but last year, its operating profit reached 1.59 trillion won, even as the steel industry around the world slowed.

With several Korean industries now mulling their own restructuring, Japan may once again prove as an example to look to, after many of its industries underwent drastic changes to turn themselves around.

Nippon Steel was once No. 2 in the global market for crude steel manufacturing. During the late 1990s, though, concerned about oversupply, the Japanese government pushed the company to decrease its output, and Nippon Steel expanded into real estate and semiconductors.

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As the Japanese steelmaker was dabbling in other sectors, Korea’s Posco grew rapidly, becoming a major threat to Nippon Steel in the global steel industry. By 2010, the Japanese steelmaker fell to No. 6 in crude steel manufacturing, below even Posco. It was also at this time that Chinese steelmakers began entering the market with low-priced goods.

Nippon Steel then came up with plans to restructure the company, acquiring Sumitomo Metal in 2011 and Nisshin Steel, the No. 4 steelmaker in Japan, this February. The company gave up business lines found to be less profitable and restructured them to maximize their strengths.

After the merger, the company became Nssmc, and it is now back to being No. 2 in the world.

Nssmc decided to stop manufacturing steel sheets and ended operations in 14 other business lines related to them. The steelmaker also cut down the number of its furnaces in order to maximize effectiveness.

After going through such restructuring, Nssmc’s operating profit-to-sales ratio rose from 0.5 percent in 2012 to 5.4 percent last year.

Japan’s shipbuilding industry saw a similar situation. Korea’s industry had surpassed Japan in 1999 and the gap continued to widen, but now, the space between the two countries as of June has narrowed down to where it was in 2003. According to Clarksons Research, a global shipbuilding market analysis agency, the Japanese industry, the third biggest in the world, had its global orders reach 22.1 million compensated gross tonnage as of the end of June. It is catching up to Korea, ranked No. 2 at 25.1 million compensated gross tonnage.

In fact, it is not uncommon to see such heavy yet successful restructuring going on in Japan. Currently, major companies in various industries that run into oversupply problems, such as shipbuilding, chemicals and steel, are trying to reorganize their management as well.

During the early 2000s, there were six big steelmakers in Japan, but there are now only three main competitors after No. 1 steelmaker Nssmc merged with No. 3 Nisshin. Some experts believe that JFE Holdings and KOBE Steel, currently the second and third largest steelmakers in Japan, may merge as well.

In Japan’s oil refining industry, there were some 10 companies competing with each other, but after the largest oil refiner, JX Holding, and the third largest, TonenGeneral, agreed to merge last year, there are now only three big companies competing in the industry.

The electronics sector is going through a similar experience. Small and midsize companies that manufacture products such as organic light-emitting diode displays cooperate with each other to compete with global companies.

Japanese companies have been able to push through their restructuring plans because their financial situations are stable.

According to a recent report by the Korea Economic Research Institute, the interest coverage ratio, which measures a company’s ability to make interest payments on debt in a timely manner, was 38.1 for the top 500 Japanese companies, much higher than that of Korea (7.2) and the United States (8.4). The figure means that the companies make 38.1 times more earnings than its current interest payment.

In 2014, Japanese Prime Minister Shinzo Abe introduced the Industrial Competitiveness Enhancement Act and has been supporting companies that are restructuring. Korea adopted a similar law called the One-Shot Act, and these rules allow the government to give financial support or tax cuts to companies that decide to restructure themselves in order to solve oversupply problems.

However, the Japanese economy is still having a hard time. Experts around the world often say “Abenomics” failed. But even though the nation’s economy still remains slow, Japanese companies have found ways to strengthen themselves by continuously restructuring when needed.

A JoongAng Ilbo analysis of top 100 Japanese companies’ sales, operating profit and hiring process found that all have continued to improve since 2012. Their sales, which were around 40.49 trillion won as of 2012, rose to 44.98 trillion won last year. Operating profit jumped from 932 billion won to 1.7 trillion won during the same period.

Kenichi Yamaoka, a director at Mizuho Bank, pointed out that ways of restructuring in Japan have changed compared to the past.

“Back in the 1980s and 1990s, restructuring decisions were made by the government or from the top down, but now, companies are wishing to do it by themselves,” he said.

According to Yamaoka, Japanese companies were able to merge and cooperate with their rivals to strengthen their competitiveness.

“In Japan, restructuring is often made without backlash from labor unions,” said Woo Ki-hoon, an economics professor at Hankuk University of Foreign Studies.

The professor noted that it was possible in Japan because companies that went through restructuring had the financial capability to do so and were willing keep their employees, which allowed labor unions to cooperate with them.

However, others caution against using Japan as a model for Korea’s industries.

“Restructuring a whole industry might be dangerous, when it is done in the wrong way at the wrong time, since it can collapse all at once when just one of the companies goes off the rails,” said Sung Tae-yoon, an economics professor at Yonsei University.

“It is hard to predict and prepare for the future as the world is changing rapidly. I believe it is better to restructure companies individually rather than doing the whole industry at once.”

Lee Ji-pyong, a researcher at LG Economic Research Institute, also expressed similar concerns.

“Restructuring needs to get done very fast in order for it to actually have the expected positive impacts on the economy,” Lee said. “However, the Japanese model has weaknesses since it took a longer period of time to complete restructuring. Japanese companies that underwent restructuring didn’t hire new employees in order to hold on to their existing workforce. This type of method won’t be as effective enough to have big changes.

“Furthermore, some social issues such as high youth unemployment might worsen if companies cut down on their new hiring.”

PARK SUNG-MIN [kim.youngnam@joongang.co.kr]

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