Published on September 11, 2007
Challenges for Restructuring in Korea: Challenges for Restructuring in Korea Feb. 18, 2005 Lee Soo Young Chairman Korea Employers Federation Slide2: The Economic Situation in Korea before and after Financial Crisis Main Elements of Corporate Restructuring Problems of the Corporate Restructuring Challenges: Directions to Improve Corporate Restructuring Contents The Economic Situation in Korea before and after Financial Crisis: The Economic Situation in Korea before and after Financial Crisis Scenery before 1997 : Scenery before 1997 High growth (6~8%) and Volume driven economy No consideration of cash flow, No RISK concept Fleet-type management Multi legal entities in one group, summarized : Cross debt guarantee and Cross shareholdings Large volume of short-term foreign borrowings overestimated exchanges rate $=￦800 Too big to collapse perception Warning unnoticed : 11 large conglomerates bankruptcies during 1997 Viewed rather as an economic cycle than inefficient business structure Unconscious market watching Lifetime employment practice, social safety net never questioned 4 At the end of 1997 : At the end of 1997 $35 billion reserve Stagnant export, an accelerated withdrawal of short-term F/X loan from Korea Government’s defend of local currency Won depreciation with $35 Billion, resulted in fast dried-up of F/X. Failed to declare emergency, and did not admit what we were doing wrong No precise concept of what the market would do 5 What the collapse did for the Korean economy : What the collapse did for the Korean economy With IMF accord, local currency Won depreciated to $=1,800 from $=800 over night. Making Dollar borrowers very difficult to revolve Bank loans to cover such a local currency demand drove interest rate to 20~24% from 9~11% P.A. Economy quickly contracted Many Chaebols and companies’ bankruptcies (※ Chaebol : proper noun for Korean Conglomerate) Large number of workers laid off At the beginning of the crisis, viewed as mis-management of F/X, But gradually realized fundamental economic structure problem 6 2. Main Elements of Corporate Restructuring: 2. Main Elements of Corporate Restructuring Analysis: Analysis Analysis on the causes of the economic crisis The initial discussion the problem of exchange rate and foreign currency management Later corporate insolvency weak financial industry – 'collateral rather than cash flow' mismanaged government policies Vicious Circle Insolvency of companies → insolvency of the financial industries → the financial crisis → Insolvency of companies 8 Measures: Measures Multilateral measures taken to overcome the crisis Reform in four sectors Financial Corporate Labor Public Corporate structural adjustments being a very critical task from the long term perspective Bottom line – guarantee sustainable economic growth 9 Reform of Chabols: Reform of Chabols The broad structural reform of Chaebols demanded by IMF and IBRD Combined financial statements International accounting principles Introducing : auditing committee and outside board of directors Class action suit Implementing more flexible labor market policies Five principles of corporate restructuring Improving corporate financial structure : min. debt ratio 200% Selecting core businesses Eliminating the cross guarantee Improving transparency in business management 10 Reform of Chabols (II): Reform of Chabols (II) Concrete measures taken to carry out corporate restructuring Top five Chaebols : 'Big Deal‘ (voluntary structural adjustment) Chaebols next to the top five : 'Workout' program (creditors-initiated structural adjustment) 11 Problems of the Corporate Restructuring: Problems of the Corporate Restructuring Problems of the Corporate Restructuring: Problems of the Corporate Restructuring Policies lacking reasonable grounds were implemented at the same time, causing considerable level of trials and errors Indiscriminate standards were applied to every company, not reflecting size and characteristics of each industry The government intervened forcibly instead of corporate restructuring by needs Rigidity of the labor market made it difficult for a company to adjust employment Weak companies are difficult to restructure 13 Problems of the Corporate Restructuring (II): Problems of the Corporate Restructuring (II) Stability and profitability has improved since financial crises, but Bi-polarization (The rich get richer, the poor get poorer), No further investment, No willing to take risk 1997 2004 $ reserve (Bil $) 20.4 199.1 Export 136.2 230.7 Import 144.6 203.5 Manufacturers’ Debt Ratio 396% 123% (’03) Manufacturers’ Profitability* -0.3% 11.9%(3Q) Top 5 16.7% Others 7.5% (Profitability = Ordinary Profit/Sales) Unemployment 2.0% 3.5% 14 4. Challenges: Directions to Improve Corporate Restructuring: 4. Challenges: Directions to Improve Corporate Restructuring Directions to Improve Corporate Restructuring: Directions to Improve Corporate Restructuring The corporate restructuring experts should be reared under the market mechanism Corporate restructuring needs to be established as an everyday life matter rather than events The importance of good corporate governance Employment adjustment must be the last resort Stability in wage and industrial relations is needed 16 5. Conclusion: 5. Conclusion Changing corporate environment 17 Past : Companies focused on growing size for the economy of scale, as big fish ate up small fish Present : Only fast fish can survive, but slow fish will die Restructuring is an inevitable choice for a company to make it adjustable to the speed of changes in the environment. 5. Conclusion: 5. Conclusion 18 ' Specifies fittest to environment will survive, not the strong or intelligent ones.' 『Origin of Species by Darwin』
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