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Strategies & Market Trends : Korea

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From: Sam Citron3/3/2009 6:42:37 PM
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Koreans Take Pay Cuts to Stop Layoffs [WSJ]

ANSAN, South Korea -- Shinchang Electrics Co. offered union leaders a proposal that would reduce wages at the auto-parts company by 20% in exchange for no layoffs among its 810 workers this year. Eight days later, the union agreed.

The deal is one sign of the unusual way South Korea is grappling with the global economic crisis. Across the country, executives, salaried employees and hourly workers at companies from banks to shipbuilders are joining to slash wages and other costs with the goal of avoiding layoffs.

" We have to go through this together. We are colleagues and friends," says Shim Ho-yong, a seven-year employee who molds ignition components for Shinchang. "If one disappears, it's awkward and uncomfortable."

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Leaders of major industry groups, unions, civic organizations and the government hold hands after having struck a 'grand bargain for social unity' to preserve jobs in exchange for wage freezes or cuts.

The global recession has been marked by a steady onslaught of layoff announcements around the world. Even in Japan, once the home of lifetime employment, big-name firms like Sony Corp. and Toyota Motor Corp. have eliminated tens of thousands of jobs in recent weeks.

In South Korea, job preservation is the government's biggest goal in shaping its response to the onset of recession, President Lee Myung-bak declared in January. Last week, leaders of major industry groups, unions, civic groups and government ministries struck a "grand bargain for social unity." Under the plan, which isn't legally binding, employers won't fire workers, unions will accept wage freezes or cuts, and the government will provide tax breaks to companies that preserve jobs.

The handshake deal raises the question of whether South Korea can survive the global recession while hanging on to traditional views about work, which include a deep aversion to layoffs. The country accomplished one of the great economic miracles of the 20th century with government-led development that embraced centuries-old notions of putting community ahead of individual achievement.

Until the 1997-98 Asian financial crisis, laying off workers was illegal, in large part to preserve that deep sense of community. And even during that crisis, which South Korea weathered better than most countries, layoffs only happened when companies collapsed -- not when they were trying to save costs, as is happening in much of the world today.
[Shim Ho-yong]

Shim Ho-yong

Some other countries and companies are also attempting to stave off massive job cuts by asking workers to scale back hours, take pay cuts or schedule time off without pay. Last week, Ford Motor Co. Chairman Bill Ford and Chief Executive Alan Mulally agreed to take 30% cuts in salary for two years to help win union support for capping wages. In Canada, a United Steelworkers union of nearly 600 salaried employees agreed in January to a four-day work week to avoid layoffs.

However, no place seems to be making such a coordinated national push as South Korea. It's too soon to tell precisely what the country's no-layoff drive will produce, whether a viable means to cope with recession or a mere delay of painful job cuts.

Economic indicators -- led by a sharp drop in exports, which account for nearly two-thirds of the country's gross domestic product -- show that South Korea is on the verge of its worst downturn since the country industrialized in the 1960s. Today's global recession is likely to hit South Korea harder and longer than the Asian financial crisis did largely because of the disintegration in the exports market. Companies' survival may ultimately hinge on the ability to cut jobs.

"If exports continue to fall, companies will either have to take a loss or they will have to make a hard decision," says David Eldon, a former chairman of HSBC Holdings PLC, who served on an economic advisory committee to South Korea's president for the past year.

For now, companies across a range of industries are holding firm. In the southern city of Gwangyang, steel maker Posco is wrestling with a problem never faced in the company's 41-year history: how to reduce production as world-wide demand slows. So far, the company hasn't cut any jobs.

South Korea's unemployment rate hit 3.6% in January, compared with 7.6% in the U.S. and 4.1% in Japan. Job growth turned negative only in December.

Many developing countries still study South Korea because of the way it embraced global trade and built local firms into world-class competitors in industries such as electronics, cars and steel. Last week, Iraqi President Jalal Talabani spent four days in South Korea visiting factories and learning about its rapid economic development.

"In a way, for the brighter future of the global economy, South Korea has to be successful in getting through this crisis," says Jun Kwang-woo, who just finished a yearlong stint as the country's chief financial regulator. "If we are, other countries will follow our footsteps. Otherwise, they will be cautious about globalization."

'Lifetime Employment'

A major factor behind the push to save jobs is avoiding the acrimony and violence that occurred when South Korean companies attempted layoffs in the 1997-98 crisis. At that time, the International Monetary Fund and others loaned South Korea about $60 billion. The loans required the country open its stock market and banks to foreign investors, lift constraints on currency trading and reduce corporate debts.

It also forced South Korea to change the layoff law to allow healthy companies -- or more importantly, the foreign investors who would take over poorly performing Korean companies -- to restructure as they saw fit.

"The concept of lifetime employment vanished and it was shocking
," says Kim Kyeong-won of Samsung Economic Research Institute in Seoul.

The government passed a law in February 1998 that let companies impose layoffs at will. But because of union pressures, no South Korean company attempted to do so until July of that year, when Hyundai Motor Co. announced it would fire 1,600 of its 36,000 workers. In response, the company's union shut down and occupied its main factory for a month. The strike ended when Hyundai agreed to lay off only 277 workers, most from its cafeteria service.

Overall, nearly one million people lost their jobs during that crisis, largely a result of major conglomerates closing and weak subsidiaries merging. When South Korea started to recover, companies compensated for union resistance to job cuts by hiring people in lower numbers than before. It took two years for employment to climb back to its pre-crisis level.

In the third and fourth quarters of last year, job growth trailed the nation's GDP growth, as it did for portions of the past few years. As a result, South Korean companies have some room now to hold off on job cuts. "They didn't go through a boom in employment so they're more covered on the way down," says Fred Neumann, economist at HSBC in Hong Kong.

Most of the hiring that did occur happened in temporary jobs, where workers by law can only stay at a company for two years and are provided few benefits. In a 2006 report, the IMF expressed its dissatisfaction with the country's rigid labor market, saying the inability of management to cut jobs and the related rise of the use of temporary workers had worsened income inequality in the country.

The current economic crisis hit South Korea later than other countries because its banks had little exposure to distressed property investments in the U.S. But South Korea was slapped hard when the banking crisis turned into an economic one, leading to job losses and lower consumer spending in the U.S. and Europe.

Demand for the electronics, steel, cars and other products South Korea sells to those places fell sharply, sending its fourth-quarter gross domestic product down at an annualized rate of 21%, the biggest drop of any developed country -- and more than three times the U.S. rate of 6.2%.

South Korea didn't face a drop in exports during its two previous recessions, which meant it could recover relatively quickly. Today, exports account for about two-thirds of South Korea's near-$1 trillion GDP, up from about one-third in 1998. And the shock of a rapid drop in shipments -- down 17% in February from the previous February after a decline of 32.8% in January -- is rippling through the country's manufacturing base. The country's weakened currency has provided some cushion to corporate profits, since it means that money earned abroad is worth more when converted to the Korean won.

An entrenched cultural force is also at the heart of the push to avoid layoffs at all costs. Like many Asian societies, South Korea's is more communal than individualistic. The loss of a job can be deeply humiliating and also mean the loss of a kind of second home. All but the smallest employers offer benefits such as education and weekend getaways.

Shinchang Electrics, the auto-parts maker, provides meals, education subsidies, and sports and activity clubs for workers. While it idled production for a week in February, some workers showed up just to get out of their house and socialize.

Shinchang's management began preparing for the downturn last September, when executives estimated that declining auto sales would push its 2009 revenue down about 23% to around $132 million. By December, the company identified a way to cut 10 billion won ($6.5 million) in costs, with about half that coming from cuts in pay.

Company Chairman Sohn Byung-whuy and Chief Executive Lee Chul-hwan each offered to take a 40% reduction in pay. Other executives followed with a 30% cut, and office and union workers agreed to 20%.
[Park Jong-nam]

Park Jong-nam
Sharing the Cuts

In the 1998 recession, Shinchang and its union agreed to a similar pay cut. A year later, as the country started to recover, the company boosted pay for workers above their pre-recession salaries by 20% for the next two years before returning to its normal wage agreement.

Nothing in the latest agreement specifies that Shinchang will boost wages above current levels after the economy recovers, but Park Jong-nam, the company's personnel manager, says it is likely. And Mr. Shim, who molds ignition components, says, "They didn't say they would reward this, but we trust them."

In January, the Federation of Korean Trade Unions, the second-largest umbrella group of unions, and the Korean Employers Federation, a group representing midsize companies, proposed the building of a national consensus on layoffs and wage cuts. A series of meetings followed that produced the broad agreement last week.

"We find it's getting more serious than the [1997-98] period," said Kang Choong-ho, a spokesman for the Federation of Korean Trade Unions. "This time we thought we must keep jobs and yield what we can, sharing the pain."

But the endgame in South Korea may turn out to be more painful. At a news conference early last month, LG Electronics Co. CEO Nam Yong said he's watching the cost savings that the firm's Japanese rivals are achieving by cutting jobs, and he will try to match them. "There are no reasons to lay off staff for now," Mr. Nam said. Down the line, he added, "It's difficult to give a clear answer."
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