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Korea Chair Platform
South Korea, one of the world’s leading exporters, is on the verge of losing its biggest shipping company in the worst corporate fiasco the country has seen since the 1998 economic crisis. As the company sinks, two of the big ideas that helped drive 50 years of rapid development in South Korea are fraying: that the government will always help out the country’s big companies and that the country’s big companies are always served best by their founding families.
The change of these two firmly-held perceptions may yet take awhile to harden. But if they do, it would be another big advance in the liberalization of South Korea’s economy. The incentives and behavior of the leaders of South Korean businesses would be altered, and the risks to investors in South Korean businesses would be lowered.
The bankruptcy filing of Hanjin Shipping on Aug. 31 left about 100 ships carrying $14 billion worth of goods in limbo at sea. Four weeks later, about one-half have been able to offload their cargo in ports around the world. An infusion of $100 million from Korean Air, a sister firm in the Hanjin Group, and the Korea Development Bank appeared likely to cover the costs for the rest to reach port.
But Hanjin Shipping still needs more than $1 billion in cash to rollover its $6 billion in debt. It has less than $200 million. The company, which is the world’s seventh-biggest shipping firm, appears headed for liquidation, with some of its key assets likely going to its smaller rival, Hyundai Merchant Marine, which will continue on and likely become South Korea’s main player in the shipping industry. But in one sign of just how distorted the global shipping industry has become, overall capacity for container shipping will grow this year even with the consolidation of the two South Korean firms.
Ever since the Hanjin Shipping bankruptcy, the South Korean business community, media, and some in the public have speculated that the government would eventually step in to rescue the firm. The government has a record of bailing out big businesses in trouble, assistance that South Koreans have seen as part of the price for the company’s hyperfast growth since the 1960s. Just this summer, the government formed a $10 billion fund to assist the country’s three largest shipbuilding firms, which are suffering from the same contraction in global trade as the shipping industry.
Since Hanjin Shipping’s bankruptcy, the government has been helping exporters and owners of cargo that is stuck on Hanjin ships – but not the company itself. Instead, it has let the forces of creative destruction unfold. In mid-September, President Park Geun-hye said, “Lazy thinking that the government will have no choice but to help shippers if they run into problems has ended up hurting trading companies.” She added she would not be quiet about executives “who do not aggressively try to recover their businesses” and wait for government help. And last week, Finance Minister Yoo Il-ho told South Korean lawmakers, “It’s heartbreaking to see the trouble the country’s No. 1 shipping company faces now. But it’s improper to inject further taxpayers’ money into it.”
Some business leaders, politicians and media pressured Park to do more for Hanjin Shipping. “The government has brought international shame to Korea by dumping the country’s largest shipping company in the hands of the court without studying the repercussions,” the Joong Ang Ilbo, one of the nation’s big newspapers, wrote in an editorial after the bankruptcy. It added the government was sacrificing national security for an economic principle. Other reports hypothesized of a personal rift between Park and the family that controls Hanjin. But that speculation simply underscored how ingrained the idea has become that South Korea’s biggest companies can always count on the government and taxpayer when the going gets tough.
That belief led to moral hazard in Hanjin Shipping where it shouldn’t have existed. The problems of the shipping industry have been emerging for years, clear for all to see. Global trade slowed in the aftermath of the 2008-09 recession but capacity kept growing, fueled in part by overinvestment by China’s big carriers. Freight rates tumbled. And about one-fifth of the world’s container fleet is now anchored because there isn’t enough demand. As scholars and policymakers study the company’s demise, the looming question will be: Did Hanjin’s executives react slowly, or not at all, because they felt no matter what happened the company was too important for the government to let fail?
Just as the expectation of a government safety net is being shattered in South Korea, so is the perception that family leadership of big businesses is best. South Koreans routinely learn about the social misdeeds, and an occasional white-collar crime, in the founding families that control giant business groups known as chaebol. Hanjin Group, which oversees businesses like Hanjin Shipping and Korean Air, experienced such an episode of social embarrassment when a daughter of its chairman threw a tantrum over macadamia nuts on a Korean Air plane in late 2014. But the business acumen of the controlling families is little questioned. Hanjin Shipping’s demise adds to a series of recent chaebol problems that are directly tied to mistakes by controlling families. A fight between brothers has shaken Lotte Group, for instance, and even the mighty Samsung empire is struggling with how control should pass from a father who was incapacitated by stroke two years ago to his children.
The Hanjin empire, like many of South Korea’s biggest business groups, was split on the death of its founder. Cho Jung-hoon, who died in 2002, left businesses for each of his sons. But the son who got Hanjin Shipping died in 2006 and that business was left to his widow, Choi Eun-young, who led it until 2014, when she turned control back to one of the other Cho sons, Cho Yang-ho, and it went into his Hanjin Group. During her tenure, Choi contended with the global economic downturn but also undertook a gamble that added to Hanjin Shipping’s current difficulties. She expanded the Hanjin Shipping fleet with lease agreements that significantly raised its debt. Regulators are now looking into stock sales by Choi and her daughters, who divested of their Hanjin Shipping shares shortly before it sought a creditor-led restructuring in April. Called before a parliamentary committee in late September, Choi confessed she was never prepared to lead the company when her husband died. “I had no expertise as I had been stuck home as a housewife,” she said.
The effects of Hanjin Shipping’s demise are not as threatening to South Korea as the troubles of 1997 and 1998, when many chaebol were forced to restructure and the country’s economy was much smaller. But they are not trivial. The Federation of Korea Maritime Industries estimates the country’s shipping industry will face $15 billion in costs from the collapse. Among the likely outcomes: a substantial downsizing of the Hanjin terminal in Busan, which employs 11,000 and handles 70% of the containers going in and out of South Korea.
Harder to measure is the opportunity cost to shareholders, employees and South Korea itself of acquiescence to the Hanjin founding family and belief in a government safety net. If those had not existed, would managers have expanded the fleet and the company’s debts? Would they have done a deal, either a sale or an acquisition, that left the company a survivor amid the industry’s shakeout?
The big lesson of Hanjin Shipping’s demise should be that South Korean executives own the risks they take – and there’s no connection between genetics and past success.
Mr. Evan Ramstad is digital business editor at the Star Tribune in Minneapolis. He was a Seoul-based reporter for The Wall Street Journal from 2006 to 2013, and earlier worked for the Journal in Hong Kong and Dallas. He also worked for Associated Press in Dallas, New York and Washington. He’s a graduate of Trinity University in San Antonio.