Korea's key industries faltering

Experts blame gov't drastic labor policies

By Nam Hyun-woo

Korea's key industries underpinning economic growth are slipping into a downward spiral, with major companies reeling from earnings shocks amid lingering uncertainties abroad.

Multiple indicators that hint at a worse situation down the road deepen concerns for the Korean economy hit by a worsening job market and sagging investment.

Experts say the Moon Jae-in administration's labor policies have undermined Korean firms' productivity and industrial competitiveness, as the performances of the automotive and shipbuilding industries in recent months illustrate.

“It is true that Korean firms' industrial fundamentals are challenged, but there is no other way but to blame the policy impacts accumulated so far in the Moon government for the rapid industrial gloom in the third quarter,” said Sung Tae-yoon, a professor at Yonsei University.

“As the government employs policies increasing labor costs, such as the steep minimum wage hike and rigid working hour cap, Korean industries were hit hard in their price competitiveness,” he said. “The situation could have been better if the government had been more delicate in controlling the speed of the minimum wage hike or working hours cut.”

The latest warning came from the car industry in the form of lackluster third-quarter numbers.

Hyundai Motor posted 288.9 billion won ($252.9 million) in operating profit in the third quarter, down 76 percent from a year earlier. Its operating margin shrank to 1.18 percent.

Its affiliate Kia Motors also recorded a shocking operating margin of 0.8 percent in the third quarter.

Its 117.3 billion won operating profit in the period was a plus compared to a 427 billion won operating loss a year earlier, but regarded as a major setback because the carmaker posted a loss last year after reflecting a nearly 1 trillion won provision for expected labor expenses.

Smaller players SsangYong Motor, GM Korea and Renault Samsung also underperformed, logging contracted numbers in vehicle sales.

The shipbuilding and shipping industries are already facing doubts in their conventional status as the country's growth driver.

Hyundai Heavy Industries has been logging losses for three consecutive quarters from the fourth quarter last year, and Samsung Heavy Industries also turned to the red in the second quarter this year.

Analysts expect the two shipbuilders' losses to continue in the third quarter.

“Shortages in order backlog are dragging down Hyundai Heavy Industries, while rising raw material prices and declining building prices remain as its whammy,” said Cheong Dong-ik, an analyst at KB Securities.

A remaining growth driver for Korea is the semiconductor industry, led by Samsung Electronics and SK hynix. They posted handsome numbers and some record highs in the third quarter, but their outlook is bleak, with foreign analysts saying their heyday is expected to end soon.

In its conference call last week, SK hynix has already heralded cuts to its memory chip investment, citing a downtrend in DRAM and NAND chip prices.

Also, the company said its high exposure to global trade uncertainties led it to be more conservative in looking ahead for the industry.

Casting more concern is those industries' outlook for the fourth quarter.

According to the Korea Chamber of Commerce and Industry (KCCI), most of Korea's key industry expected tougher business conditions in the fourth quarter. The automotive industry's business sentiment index for the fourth quarter was 66, followed by shipbuilding with 70 and info-tech with 73. A reading below 100 means pessimists outnumber optimists.

“The indices are interpreted as structural drop in businesses' mid- and long-term productivity, not a periodical shrink,” said Cho Seong-hoon, a professor at Yonsei University.

“The government should have a long-term perspective on the industry and make structural changes, such as lifting regulations that hamper businesses from making innovative trials,” Sung said.

“If the government keeps the current labor policies, the industrial downturn will continue or even worsen next year, given the probation period for working hour cap is reaching its end and more than a 10 percent hike in the minimum wage is scheduled next year.”

He added the situation is also attributable to external factors such as the trade conflict between the U.S. and China.

“But those are beyond our control,” he said. “The government has to understand that what it can control is the speed of its labor policy.”