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Thursday, August 28, 2014

Bad Practices Put Korean Companies at Risk

South Korea flagTimes have been tense recently on the Korean peninsula, mostly due to geopolitics. A recent analysis by AlixPartners, a global advisory firm, finds that many South Korean companies face tense times, as well, because of outdated corporate practices.

At a recent meeting of the Asian Leadership Conference in Seoul, AlixPartners Vice Chairman Al Koch placed 17 percent of Korean industry in the “on alert” zone in terms of the potential for insolvency, and 45 percent more “on watch.”

In other words, 62 percent of the 1,400 listed companies that AlixPartners analyzed face significant financial problems that could have calamitous results for their operations, employees, customers, and, ultimately, South Korea’s economy.

Significant to exports and imports, 44 percent of shipping companies are in danger of insolvency, which could affect procurement and other sourcing operations worldwide. Other industrial categories with on-alert risks for insolvency include telecommunications and high tech, at 18 percent; industrials, 16 percent; metals, 14 percent; consumer products/retail and automotive, 13 percent each; and chemicals, 10 percent.

Compounding the problems, Koch notes, is a downgrade of South Korean GDP growth this year by ratings agency Moody’s, to 3 percent from 3.5 percent, which, if true, will further tighten revenue.

Koch blames many of the problems on the country’s entrenched business culture — specifically, the reluctance by struggling companies to act decisively on problems. This has resulted in the creation of “zombie companies,” he says, which perpetuate bad practices and contribute to weakness in the general economy.

Koch knows about entrenched business practices and troubled companies: he led AlixPartners’ input into the restructuring of General Motors. In fact, he finds similarities between the problems GM had and those of Korean companies. These include “high debt, slow growth, and seemingly intractable long-term structural issues, some of them culturally oriented.” He believes there is the potential for a resurgence among Korean companies that “reexamine their … past orthodoxies” as part of a turnaround.

The way ahead, though, must go beyond simple fixes, the company counsels. Cutting costs and reducing personnel won’t solve anything, advises Yung Chung, managing director of AlixPartners. “Companies need to simultaneously undertake operational as well as financial actions, a holistic approach, to survive and prosper today.”


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