Covid-19 infects Korea Inc’s weak links

While South Korea as a nation has weathered the pandemic handily, firms that had been clinging to life before the unprecedented global crisis of 2020 are being pushed over the brink.

The country exited 2020 with the best macro-economic performance in the OECD. The key national industry, semiconductors, has flown through the pandemic as demand soared for digital devices and online services in a work-at-home, play-at-home world.

But there have been losers, too – including some of Korea Inc’s second-tier flagship brands.

LG Electronics’ announcement on Monday that it was killing its smartphone division makes it the first player in that space to completely exit the market. LG’s white flag, however, had been widely rumored and long anticipated, given its extensive losses in the sector.

Two other corporate failures are more closely connected to Covid.

Last week, hopes for an imminent rescue for sinking automaker SsangYong Motor – hammered by Covid-19’s ravaging of its lead investor, India’s Mahindra & Mahindra – fell through. Also last week, in the industry hardest hit by the pandemic, the merger of Korean Air and troubled rival Asiana Airlines was pushed back to 2024.

LG switches off smartphones

LG Electronics’ board of directors decided on Monday to kill off a business it had been engaged in for over a quarter of a century. In a “strategic decision,” LG announced it was “closing its mobile business unit.”

The decision “to exit the incredibly competitive mobile phone sector will enable the company to focus resources in growth areas such as electric vehicle components, connected devices, smart homes, robotics, artificial intelligence and business-to-business solutions, as well as platforms and services,” LG said.

Currently, LG’s global market share in the sector is just 2% and according to Reuters, the business division had incurred losses of $4.5 billion over six years.

Though a key player in cellphones, LG had never managed to capture the same kind of market share as Apple or Samsung, and was further threatened by the rise of high-tech, low-cost, mass-market Chinese players. While LG had excellent technology and a wide range of models, it had not managed to create a core line of branded phones to complete with Samsung’s Galaxy and Apple’s iPhone.

Mobile was the smallest of LG Electronics’ subsidiaries, which include Home Entertainment, Home Appliances and Vehicle Components. The company retains key strengths and wide market share in TVs, refrigerators and air conditioning. LG will fully exit the sector by end-July.

The announcement came as no surprise to pros.

“This had nothing to do with the pandemic,” Daniel Kim, head of research for Australian investment bank Macquarie in Seoul told Asia Times. “It was obvious to me – the company had been losing so much money, for such a long time.”

“It was a late decision,” Kim added. “But better late than never.”

Two more corporate developments, however, are much more closely correlated with the pandemic.

Korea’s unluckiest car maker

South Korea’s smallest automaker, SsangYong, is facing imminent court-led restructuring after it was reported on April 2 that hopes of a rescue by US vehicle importer HAAH Automotive Holdings Inc had fallen through.

Due to the pandemic in India, the company’s controlling shareholder, Mumbai-based carmaker Mahindra & Mahindra was unable to sink in more cash, a source familiar with the issue told Asia Times.

“Mahindra is very distressed, but very sincere about it. Because Covid-19 hit them so hard in India, they could not invest anymore,” the source, who spoke on condition of anonymity, said. “They think the solution is to get another investor – not necessarily for them to divest, but for another company to become the main investor.”

The source could not comment on whether HAAH may be playing a waiting game and hoping for SsangYong’s conditions to deteriorate further – such a by moving from court receivership to bankruptcy – thereby winning a better asking price.

SUV specialist SsangYong had previously filed for court receivership in December after creditors declined to approve the rollover of 165 billion won worth of loans.

The uncertain fate facing the unlucky company is nothing new. SsangYong Motor has been struggling to survive since its parent conglomerate, SsangYong Group, disintegrated amid the Asian financial crisis of 1997-8.

Mahindra, which acquired a controlling stake in 2010, is just the latest firm that has failed to transform the company’s fortunes.

SsangYong Motor was bought by Daewoo in 1997, but after the latter imploded, SsangYong was acquired by Shanghai-based carmaker SAIC in 2004. In the wake of the global financial crisis of 2008, SAIC duly exited SsangYong in 2009 amid furious allegations that it had technology stripped and failed to invest.

SsangYong may simply lack the economy of scale necessary for viability in the industry.

“In recent years they not have had the models, compared to Hyundai,” the source said. “They just have not had the volume.”

Asiana buffeted by turbulence

Perhaps the sector hardest hit by the pandemic has been airlines. Last November, it was announced that national flag carrier Korean Air would take over its long-troubled rival, Asiana, for 1.8 trillion won (US$1.6 billion). Earlier this month, Korean Air had raised 3.3 trillion won in a share sale that would finance the acquisition and pay off debts.

But on March 31, Korean Air executives told an online press briefing that the merger of the airlines, which had been expected to be completed this year, had been put back to 2024.

Korean Air will therefore operate Asiana as a subsidiary until a full M&A takes place.

According to the briefing, the merger delay is due to a delay in receiving approval from fair trade regulators in eight countries. The International Air Travel Association, or IATA, does not anticipate air travel returning to pre-2020 capacities until 2024.   

Asiana has been flying into headwinds since April 2019, when its parent group, Kumho Industrial, announced its intention to divest the airline. The indebted group had previously disposed of its flagship subsidy, Kumho Tire, in 2018, to a Chinese buyer.

Though Hyundai Development Company was chosen as preferred bidder for Asiana in November 2019, after Covid struck, the sales process slowed and in September 2020, fell through.

State-run Korea Development Bank, blamed HDC for walking away, and subsequently made an emergency cash injection to keep Asiana aloft. In November 2020, the government had announced that Korean Air would take over Asiana.

Who’s next?

The problems faced by the corporate bodies mentioned came as no shock: All were well signaled in advance. “I don’t think these are any surprises among them,” said Tony Michell, who heads Seoul-based advisors Euro-Asian Business Consultancy.

And there will be no immediate trauma. To avoid job losses, Seoul has long keep zombie firms afloat for as long as necessary.

For example, Daewoo Shipbuilding and Marine Engineering, a victim of Daewoo Group’s 1999 implosion, remains publicly owned after multiple state bailouts. A long-winded takeover by Hyundai Heavy Industries is underway, pending monopoly reviews.

Due to the government’s generous cushion, it is not clear where other problems may lie in Korea Inc. “Because the government has been very relaxed about lending money, we don’t know who is in trouble,” Michell told Asia Times.

His fears were less for the big boys of Korea Inc, and more for the smaller, service-sector players at the economy’s bottom end.

“In March the government renewed the debt holiday for six months until September, so SMEs won’t have to pay their bank loans back,” Michell said. “But one day that will stop, and then I think a lot of smaller companies are going to be in trouble.”