’Ready for the worst’

Korean companies brace for currency fluctuation, liquidity crunch after US credit downgrade

By Jung Sung-ki

A historic U.S. credit downgrade has sent jitters across Korean industries about a potential repercussion on their sales here and abroad amid growing fears of a double-dip recession in U.S. and European markets.

Some of the major corporations here are even considering implementing contingency plans to cope with the worst-case scenario as the Aug. 5 downgrade by Standard & Poor’s (S&P) from AAA to AA+ is expected to have a far-reaching effect on the export front of domestic firms.

“China’s exports to the United States are expected to be shrunk in the wake of the U.S. economic turmoil, which means Korea’s exports to China will be affected in turn,” said Lee Hang-koo, a chief researcher at the Korea Institute for Industrial Economics & Trade. “Korea’s heavily dependency on exports is likely to suffer from the double or triple impact of global economic problems.”

In fact, Korea’s exports to American consumers account for about 10 percent, while the Chinese market takes up about 23 percent of Korea’s total exports.

Brake on car exports

The automobile industry, which has led the country’s export-driven economy, is likely to be hit the hardest if the situation gets worse, analysts and industry sources observe.

“There is a high possibility that the downgrade of the U.S. credit rating will intensify uncertainty in the global automobile market,” said Lee Hwa-won, spokesman for Hyundai Motor Group. “Any economic crisis affects job security and wages, so that the sales of durable goods, such as cars, are hit the hardest. That’s because the demands for cars, in general, are closely tied to current economic moves.”

The group is closely monitoring market developments and preparing to respond to any contingency situation, he said.

The performance of Hyundai Motor and its affiliate Kia Motors were outstanding in the first half of the year. The two business units are expected to see their collective market share in the United States surpass 15 percent this month based on robust July sales, according to the group.

They sold 72,440 passenger cars to American consumers in July, increasing their market share to 14.6 percent in the segment excluding trucks and recreational vehicles. The figure marked a new monthly record for the automobile giant.

GM Korea, the country’s second-largest automaker, is also bracing for a repercussion from the downgrade of the U.S. credit rating, as about 90 percent of the company’s products are sold overseas.

The country’s automobile exports hit a new high in the first half of this year, as the five automakers led by Hyundai Motor shipped a record 1540,772 units of locally manufactured vehicles.

As a matter of fact, the solid car export was largely attributable to growing demands in emerging markets, a benefit from production disruption at Japanese automakers in the aftermath of the devastating earthquake in March.

These factors, however, would not shore up Korea’s car exports any more if the economic crises in the United States and Europe continue.

“With the world’s automotive market stagnating, Japanese automakers, which are recovering from the impact of the earthquake, and U.S. car manufacturers embarking on aggressive marketing strategies, local automakers are facing more severe competition with them amid the global economic downturn,” said Lee.

Electronics & IT sectors

For Korea’s electronics and IT companies, the latest turmoil in the United States is like rubbing salt into the wound, as the country’s major technology firms have already been struggling with poorer-than-expected sales in the U.S. and European markets in the first six months of the year.

The country’s semiconductor exports in the first half of the year saw a 13 percent decrease from a year earlier, according to government data.

Samsung Electronics, the world’s biggest technology company by revenue, is being challenged to pass last year’s revenue and profit of 154.6 and 17.3 trillion won, respectively.

The electronics giant has similar market shares in North America, Europe, China, and other emerging economies. But if the market situations in advanced nations were to deteriorate, the company would have to resort to emerging countries, according to Samsung officials.

“The problem is that emerging markets are in favor of lower priced products instead of luxury items, such as smartphones and smart TVs. That means a rise in sales in emerging countries is not a great help for our firm’s profits,” a Samsung official said. “We’re trying to come up with measures to cope with this crisis.”

The company will focus on marketing premium products like LED and 3-D TVs while speeding up the development of 20-nanometer-class dynamic random access memory modules as part of efforts to stay ahead of foreign rivals, he said.

LG Electronics is also bracing for the worst.

“If the situation worsens, we should cut costs and boost efficiency by tightening inventory or shortening export routes,” said an LG official.

Despite the grim outlook for the world economy, Samsung and LG will go ahead with their planned investments for this year, according to officials of both firms. Samsung plans to invest 23 trillion won, and LG plans on 4.8 trillion won for the year.

“Unlike the economic crisis in 2008, the bond market remains stable though the stock market is tumbling, so there is little possibility that corporate funds are shrinking drastically,” Jeong Yeong-sik, a researcher with the Samsung Economic Research Institute, said. “In this context, a negative impact on the real economy could be restricted, and major conglomerates are expected to maintain their investment and employment plans.”

Steel, shipbuilding & construction

POSCO, the world’s fourth largest steel maker, has begun an extensive risk management effort. The company is planning to raise its production-cost reduction target originally set at 1.4 trillion won, company officials said.

“To prepare for an economic slowdown and a decrease in steel demands, we’re readjusting our production targets,” a POSCO official said.

Shipbuilders and airlines are anticipating a possible drop-off in trade with the United States and other countries that will eat into profits.

“There may be difficulties getting paid for shipping orders we’ve won from foreign buyers,” said an official at Daewoo Shipbuilding and Marine Engineering. “So there certainly will be a negative impact on the shipbuilding industry.”

Construction firms, which had already suffered difficulties following unrests in the Middle East earlier this year, are moving into an emergency mode.

“In the aftermath of unrests in the Middle East, major construction projects were deferred to the second half of the year,” an official at Hyundai Engineering & Construction said. “If the U.S. economic crisis were to worsen, those projects would suffer further setbacks.”

According to the International Contractors Association of Korea, overseas construction orders for the first eight months of the year reached $26.9 billion, 58 percent down from a year earlier.

M&A bids

SK Telecom and STX Group, which are vying to take over Hynix Semiconductor, are focusing on securing enough cash.

SK Telecom spokesman Kim Ji-won said his company plans to use its internal cash to minimize the effects of external factors.

Some observers say STX Group, seeking to acquire the controlling 15.1 percent stake of Hynix, the world’s second-largest memory chip manufacturer, may opt for scrapping its bid for the chipmaker since it needs to sell non-core assets to secure the acquisition money amid external struggles. “The situation is not favorable. We need to go back to the basics for our financial soundness,’’ said STX spokesman Lee Sung-hee.