Major companies scramble to brace for potential perfect storm

By Kim Hyun-bin

Major conglomerates are scrambling to brace for a possible perfect storm amid the Russia-Ukraine war, China's blockade of Shanghai, inflation and the sharp rise in raw materials costs, according to company officials. Businesses have been conducting emergency meetings of CEOs to review the current status of business and carry out organizational restructuring to cope with the crisis better.

As negative factors are being prolonged, such as rising raw material prices, currency instability, and high inflation, there are concerns that the Korean economy is facing a perfect storm. In April of last month, the consumer price index soared amid low growth of 2 percent and high inflation of 4 percent.

LG Electronics is responding to crises by securing inventories in preparation for rising prices of raw materials such as steel and chemical products.

"Steel prices have recently increased, and resins costs are under pressure from rising raw materials along with strong oil prices. Prices are rising due to reduced production," LG Electronics said. "We are purchasing raw materials at a lower price than the market price through strategic collaboration with our partners."

As the crisis deepened, LG is scheduled to hold a strategic meeting in late May, led by LG Chairman Koo Kwang-mo, to review the mid- to long-term strategic direction of some affiliates and businesses. It is a preemptive response to the growing uncertainties in the global economy, such as the recent war between Russia and Ukraine and China's lockdowns in some cities due to COVID-19.

The strategic meeting is expected to focus on LG Group's key affiliates including: LG Electronics, LG Display, LG Chem, LG Energy Solutions, LG Household & Health Care, LG UPLUS. At the meeting, mid- to long-term analysis of customer and market changes to respond to global crises, future business portfolio strategies and measures to enhance execution are scheduled to be discussed.

Samsung Electronics recently reorganized its network division and established an organization to manage supply chain risks. The Biz Operation (BO) group was created by combining the sales strategy function of the strategic marketing team and the demand forecasting and production allocation function of the operation team.

Rising raw material costs cut profitability

Companies around the world are reorganizing their supply chains to strengthen response as the risks of the re-spread of COVID-19 are on the rise.

Hyundai Motor Group also established a company-wide consultative body to respond to raw material price issues, which aims to calculate the profit and loss impact of changes in raw material prices, especially of nickel, lithium, cobalt and aluminum, which are key battery materials.

"We have created and operated a dedicated organization for the strategic management of major raw materials, and are building and applying a system that can automatically calculate the profit and loss impact of changes in raw material market conditions," Hyundai Motor Group Vice President Seo Kang-hyun said.

Rising raw material prices and increasing labor costs have been slashing profits. "The pressure of rising material costs will increase in the second quarter more than in the first quarter," Kia said.

Earlier this month, Hanwha Group also held an emergency meeting of the CEOs of key affiliates in the petrochemical and energy business divisions, including Hanwha Solutions, Hanwha Energy, Hanwha Impact and Hanwha Total Energy, to review management issues arising from the global economic uncertainties.

The Hanwha CEOs decided to take preemptive countermeasures, based on the fact that crisis factors such as rising oil and other raw material prices, supply chain and logistics disruptions, and rising interest rates, still exist.

"We will closely monitor global energy prices, including oil prices, and supply chain disruptions, and establish an emergency plan through stress tests, so that we can respond flexibly to the rapidly changing international situation," Hanwha Solutions CEO Nam Yi-hyeon said.

Last month, Hyundai Heavy Industries (HHI) Group also convened an emergency meeting of its CEOs to respond to the global uncertainties.

"The future crisis may be different from what we have experienced so far, so thorough preparation is necessary by considering even the worst-case scenario and preparing countermeasures," HHI Group Chairman Kwon Oh-gap emphasized.

Other major groups, such as Samsung, LG, SK, Lotte and POSCO, are reported to have taken internal emergency responses to minimize the cost burden and speed up the strengthening of new growth areas.

Some companies have responded to the crisis by cutting executive salaries.

Hankook & Company cut the salaries of executives at all affiliates by 20 percent in April.

Some experts point out that government support for revitalizing the private sector is needed, as companies continue their emergency management amid the rising future uncertainties due to rapidly changing internal and external variables.

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