Major Korean conglomerates are realigning their businesses to cope with the increasing risk and unpredictability of the rapidly changing global market

Updated : 2014-05-09 17:15

Conglomerates realign businesses

By Yi Whan-woo
Major Korean conglomerates are realigning their businesses to cope with the increasing risk and unpredictability of the rapidly changing global market.
They have adopted different retooling strategies depending on their goals and the conditions ― merging two or more affiliates in order to create synergy, selling uncompetitive subsidiaries and changing corporate culture to encourage communication and creativity.
Kim Jung-su, a partner at Bain & Company, said the conglomerates, including Samsung, Hyundai Motor, SK, LG and POSCO, are on the right track regarding their efforts to take preemptive measures to secure agility and resilience in the international market.
“They used to encourage internal competition among their subsidiaries, many of which had overlapping businesses,” Kim said. “It turned out that many subsidiaries were not as competitive as their overseas rivals,” he added.
He cited three Samsung Group affiliates ― Samsung Heavy Industries, Samsung C&T and Samsung Engineering ― as examples. Each has a construction division, and many speculate that the conglomerate will merge the divisions into one. The conglomerate, however, has denied the speculation.
“Regarding Samsung, the recent mergers among its affiliates are seen as part of the generational ownership transfer within the group. However, I would say such effort will eventually help enhance the conglomerate’s competitiveness,” he said.
The latest realignment made by Samsung Group, the No. 1 conglomerate in the country, came on March 31.
It merged Samsung SDI, its TV display and smartphone battery manufacturing arm, with Cheil Industries, its chemical and electronic materials affiliate.
According to Samsung SDI, the merger will enable it to use Cheil Industries’ technologies and strengthen its competitive edge.
In September, Cheil Industries handed over its textile and fashion division to fellow affiliate Samsung Everland for 1.5 trillion won. Many speculated that the merger was made to enable Samsung Everland, a theme park operator, to nurture the division as a new growth engine.
LG Economic Research Institute economist Lee Han-duk had a similar view.
“A number of firms affiliated with the conglomerates, except for flagship units, suffer from poor business performance and need measures to improve the situation,” Lee said.
“For instance, a significant portion of the profits for Samsung Group and Hyundai Motor Group, respectively, comes from Samsung Electronics and Hyundai Motor. On the other hand, their affiliates in the construction and steel industry are staggering because of the slump in the market. And I think it is crucial for the conglomerates to solve such problems,” he added.
Hyundai Steel, the steel manufacturing arm of second-largest conglomerate Hyundai Motor Group, purchased the cold-rolled steel unit of Hyundai Hysco, the automotive steel manufacturing affiliate of the conglomerate.
Hyundai Steel and Hyundai Hysco were key links in Hyundai Motor Group’s automotive supply chain, which ranges from making steel for raw materials to making cars. Hyundai Steel sold hot-rolled coil steel to Hysco, which the latter used to make car sheets, which it then sold to fellow affiliate Hyundai Motor, the world’s fifth-largest carmaker.
On April 1, Hyundai Motor Group also merged its two construction-related arms ― Hyundai AMCO and Hyundai Engineering ― in a bid to strengthen the group’s competitiveness in the construction and engineering industry.
Under its new CEO Kwon Oh-joon, number-five conglomerate POSCO is restructuring its businesses in a bid to improve its financial health and establish new growth engines. Industry sources say the country’s top steelmaker is expected to finalize its plans this month.
POSCO is considering sorting its units into six or seven sectors, including steel, materials, energy, services and distribution, and then place them under a holding firm. In addition, POSCO is deciding what to do with its 60.31-percent stake in Daewoo International Corp., a trading and energy company that it bought for 3.37 trillion won ($3.3 billion) in 2010.
SK Communications, a content affiliate of the third-largest conglomerate in the country, SK Group, closed Cyworld, once the country’s most popular social networking service. SK Communications was in the red for the eighth straight quarter in December 2013.  None of its businesses, including Cyworld, which it acquired in August 2003, were profitable.
The number-four conglomerate LG Group is changing its corporate culture to encourage communication and creativity among employees. To this end, it has implemented a number of programs, including “Open Talk,” which gives workers and executives 15 minutes each to talk about their creative ideas.