Korean Air, Asiana face turbulent tailwinds

 South Korea’s main flagship air carriers appear to be facing strong headwinds at the same time and it is worrisome.

Korean Air and Asiana Airlines are embroiled in their own difficulties, and it is all connected to the typical family-owned conglomerate management system that is so prevalent here.

While there have been calls for chaebol reform over the past years I have been here -- starting with Roh Moo-hyun administration -- there have been no drastic changes so far.

I have always admired Roh, and think he genuinely tried to reform chaebol governance and the prevalent system -- but even he was not successful and got bogged down by the entrenched system.

That aside, I am referring to the problems faced by Hanjin Group and Kumho Asiana. Their problems are different, but not completely. It all boils down to how the chaebol -- family-owned “kingdoms” operate here.

The unexpected passing away of Hanjin Group Chairman Cho Yang-ho, came as a real shock here. It came weeks after he was ousted from the board of directors of the group that controls Korea’s flagship air carrier Korean Air.

Cho, 70, who had served as the airline’s CEO since 1999, died in the United States on April 7, where he had been receiving medical treatment for a chronic lung disease -- all hush-hush till he died.

If you talk of transparent corporate governance, it should have been made public that he was sick -- after all it is a listed firm. But don’t expect such corporate transparency here, not yet.

His only son and Korean Air President Cho Won-tae is now set to take control.

Hanjin, Korea’s 14th-biggest conglomerate by assets, including its affiliates Korean Air, as budget carrier Jin Air, Hanjin KAL and several other logistics companies face an uncertain future now.

The Cho family has been struggling with a string of controversies, especially regarding the high-handed behavior of the patriarch’s two daughters and his wife.

His removal from the board was the first time a founding family member of any chaebol had been forced out of a key post by shareholders. It is a good start.

He was on trial after he was indicted last year on multiple charges that include embezzlement and tax evasion. But that is nothing, chaebol owners here have been let off on far more serious charges after presidential pardons.

His death is expected to speed up changes to the ownership structure of Hanjin Group as a whole, with his son likely to take the reins of the group’s management. Of course given the inheritance taxes the family has to pay it could delay the process … till they figure out the “legal” loopholes.

According to news reports the group has adopted an emergency management arrangement that will leave the chairmanship vacant for now and entrust decisions to a collective leadership made up of several top executives.

As regards Kumho Asiana, which owns Asiana Airlines, it is also complicated.

Reeling under humongous debt and pressure from creditors, the group’s board decided this month to sell the air carrier, a day after main creditors rejected its latest self-rescue proposal.

“For normalization of Asiana, we considered the best option and decided that its sell-off will recover trust in the group and the airline,” it said in a statement.

“The sale of Asiana -- with a 31-year history -- is also for the sake of the future development of the company, as well as for some 10,000 employees,” it said, adding that the group would proceed with the sale process.

This follows a “qualified opinion” issued by Asiana’s auditor Samil PwC.

Samil suggested that “the company might have provided limited financial information.”

It disagreed with Asiana on how much the airline allowed liabilities for operating-leased aircraft repair and earnings from mileage.

While airlines across the world have faced similar situations for decades, it is really sad that the top air carriers in Korea are in trouble.

For example, 24 airlines in the US have filed for bankruptcy under Chapter 7 since the early 1980s, while 60 have filed for bankruptcy under Chapter 11.

Chapter 7 bankruptcy is a legal process that can help individuals get relief from debts by discharging -- or clearing -- some or all of what’s owed. Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor’s business affairs, debts and assets.

Meanwhile, SK and Hanwha groups have been mentioned as potential buyers of Asiana, but they are also family-controlled, so I don’t see how the ground situation will change.

With low jet fuel prices now, one would have expected Korea’s top air carriers to rake in profits, so it certainly means there was something wrong with their management.

It all boils down to the chaebol culture. The “family” reigns supreme and they do whatever they want without bothering about other stakeholders.

That is why it is good that the National Pension Service which has substantial stakes in chaebol firms is now strengthening its stewardship code. Hopefully, politicians with a vested interest won’t put pressure to derail it.

Of course some blue chip firms will continue to thrive with their skullduggery. There are many which I won’t name.

It is also good that activist shareholders -- not just overseas investors, but even Korean firms -- are not keeping quiet and demanding changes to the way the chaebol operate.

There is still a long way to go, but finally things are moving -- 15 years after I first landed in Korea.

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Is Korea’s launch of world’s 1st 5G services hype?

 The next-generation wireless network technology 5G is in the limelight as South Korea is poised to beat the United States as the first to cross the finish line.

Tech giant Samsung Electronics has said it will launch its Galaxy S10 5G device in collaboration with the nation’s largest telecom operator SK Telecom on Friday, beating US telco Verizon, which is scheduled to launch its fifth-generation services across the country on April 11.

But how exactly will 5G telecom services benefit consumers? Why this rush to be the world’s first?

It will make no material difference if services are below par, and going by the palli-palli (fast-fast) Korean culture, I am sure many Samsung and SKT executives are trembling to launch services by the given deadline. Remember the Galaxy Note 7 fire fiasco when they did not look before they leaped?

According to a recent report by MarketWatch, the 5G penetration rate in Korea will be 5 percent by 2020, and subscribers will increase from 30 percent in 2020 to 90 percent in 2026.

“The 5G hype across the world has led Korea to invest $1.7 billion to roll out 5G wireless services that would enable users to download a full movie within a second. This would enable the related industries to upsell new 5G related devices and infrastructure equipment, and earn revenue worth $350 million by 2026. This will help in the expansion of the telecom infrastructure equipment industry,” the report noted.

The major growth factors driving the 5G market are continuous evolution toward enhanced bandwidth, lower latency, enhanced security and openness of mobile networks.

However, the region faces growth challenges, such as regulatory pressures. For instance, the Korean government is forcing SKT, the dominant mobile carrier, to lower the rates that it is proposing to recoup its investments.

Another report by the International Telecommunication Union noted that expectations of 5G are high, with many assuming it will deliver a “transformative promised land.”

“As long as the investment case for 5G remains uncertain, industry and policymakers should remain cautious and should consider enhancing the availability and quality of existing 4G networks in the run up to 5G,” said the report.

But the Korean telcos and government want to be the first to launch 5G services -- an obvious case of ego issues.

I will be the first to applaud if Korea -- my home since 2004 -- gets that distinction but caution is needed.

Do consumers really need this hyped-up costly service now, without adequate field tests and knowing how they will really benefit? The current Long Term Evolution 4G services are very comfortable.

The 5G services won’t be available in every country at the same time. Estimates say that by 2023, up to 32 percent of North American mobile connections will be on a 5G network. Central American countries will most likely see a slow 5G rollout. Asia is far behind.

Korea’s push to be the world’s first is understandable in this context. But I personally think it is taking the palli-palli culture to the next level.

There is no need to commercialize a next-generation service and fool consumers to pay for something that will bring no immediate material benefits. It may actually benefit customers one year down the road -- not now.

To understand the logic behind their rush, I tried contacting the three telcos in Korea -- KT, SKT and LG Uplus -- which operate mobile services here.

KT, which tested its 5G services during the 2018 PyeongChang Winter Olympics, responded.

The firm, which has massive telecom infrastructure here that actually made Korea an ICT powerhouse before it was overtaken by SKT, has invested heavily to build the next-generation network that will allow customers to experience faster and more secure services.

“We are preparing B2C (business-to-consumer) 5G plans and services to deliver the maximum benefits of 5G to the general public. KT plans to introduce specialized apps and connected devices (neckband cameras and GiGA Live TV, etc.) with the launch of the full-scale 5G commercialization,” a spokesperson noted.

KT is especially focusing on what people enjoy the most with their mobile phones, such as making calls, playing games and watching videos, so that they can better experience what true 5G is.

“We are also developing various use cases in the B2B (business-to-business) areas, such as smart factories, smart cities and connected cars, by utilizing 5G’s ultra-low latency and massive connectivity,” he noted.

KT believes that it can pursue a good balance between providing world-class 5G services and making sustainable investments by optimizing the deployment of its 5G network and cooperating with global partners to develop and upgrade 5G technologies.

The company is working on introducing data plans that are appropriate for 5G customers by analyzing their needs and data usage.

It launched its commercial 5G network in December last year following the government’s 5G spectrum auction. Since then, KT has successfully demonstrated various 5G services, such as robot guides and baristas as well as real-time broadcasting.

“Considering the time it usually takes for developing and making new apps or special devices, Korea is likely about a year ahead of the competition. Overseas, many 5G services are still in initial development,” the spokesperson noted.

KT has the upper hand for now. In collaboration with Samsung, it has already installed the largest number of 5G base stations across the country.

It is true that local telcos are investing heavily. But how will Korean citizens benefit? Higher download speeds are just a marketing point for now to rake in more revenue. It is still early days for the 5G ecosystem to flourish. I would prefer to wait one year before I make the shift from LTE.

I agree that 5G will not only enable faster connections, but will provide improved bandwidth. The benefits will spread further than just smartphones. The technology will cover the internet of things and will act as a catalyst for a wide range of new consumer and enterprise experiences, including both data intensive and energy efficient applications. But not now.

Juniper Research forecasts a healthy adoption of 5G services, with revenues set to exceed $65 billion by 2025 globally. It might be a few years away, but the potential improvements a 5G network can provide are enough to get tech-savvy Korean consumers very excited.

I am proud that Korea is the first country to commercialize 5G services, but will not fall into the trap telcos have set for customers. I will wait and watch. Why pay more for a service when the present LTE 4G network is efficient and satisfies my needs?

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S. Korea-India economic ties need more heft

 It is now nine years since the South Korea-India Comprehensive Economic Partnership Agreement -- a de facto free trade agreement -- went into effect. However, while much progress has been made, there is still a long way to go for economic ties to reach their potential.

It was widely anticipated that the CEPA, which came into effect in January 2010, would lead to more bilateral trade and investments. South Korea abolished tariffs on 93 percent of Indian imports and India has done the same on 75 percent of Korean imports. 

Besides, the agreement sought to increase the interactive trade account, as it includes investments in various sectors like goods, services and even intellectual property.

They have since set a target to increase bilateral trade to $50 billion by 2030 from around $25 billion last year.

While bilateral trade has no doubt improved, it is still way below expectations.

It is true that large South Korean brands are household names in India and their strength has grown in the years since they began operations there. However, foreign direct investment inflows have been growing at a tardy pace.

The India-South Korea CEPA has certainly helped, according to Rishi Ramachandran, an Indian entrepreneur and CEO of Group IBI, an Asia-focused business intelligence and market development consultancy.

He has lived in Seoul for more than two decades, during which he has followed the evolution of trade ties between both countries and advised organizations on CEPA in particular.

“Rather than an agreement, I would term it a useful mechanism for fostering trade between South Korea and India and for easing trade barriers and tariffs in the long run,” he told The Korea Herald, adding that both sides are trying to access sectors in which they can be competitive.

“But these are subject to progressive easing of both tariff and nontariff barriers. For example, in a sector like pharmaceuticals, both South Korea and India have successful manufacturers of generic drugs, and for whom countries in Africa, Southeast Asia and Central Asia are key target markets. However, the best Indian drug companies can hope for is supplying APIs (active pharmaceutical ingredients) to the Korean pharma sector, as opposed to supplying finished formulations.”

But even then, successful cases are rare and the scope is highly limited since the pharma industry is highly regulated in South Korea with significant nontariff barriers. On the other hand, India could export more food products and consumer products in areas such as coffee, tropical fruits, leather goods and fashion accessories for which there is plenty of demand, he said.

As key economic partners, Ramachandran noted that trade relations are continually improving. However, what India needs is a significant boost in the promotion of Indian brands in South Korea.

“The ‘Made in India’ moniker still has questionable quality and packaging issues attached to it. India needs to address this as a priority and promote well-established brands in South Korea,” he said.

“India needs to realize that South Korea (and most other Asian geographies) is highly brand- and image-conscious. Therefore, Indian products sold here not only have to be of impeccable quality -- as they are competing against domestic products as well as products from overseas -- but they also need to be packaged well, presented well and marketed well.”

As a case in point he noted Indian mango shipments, which are renowned the world over but can hardly be seen at retail outlets here today, contrary to their sudden surge here in late 2016.

Rather than a single bottleneck, there are two main factors hindering growth of mango exports to South Korea, he said.

One is tariffs since, just like CEPA, South Korea also has a free trade agreement with the Association of Southeast Asian Nations as well as the Regional Comprehensive Economic Partnership that benefit exports from the Philippines and other regional countries.

While CEPA entails gradual scaling down of tariffs on Indian products from 30 percent to zero percent over eight years, the tariff targets with ASEAN are far more aggressive and trade-friendly.

Also, when compared to the Philippines, Vietnam or other Asian countries that sell mangoes in South Korea, India does not have a visible dedicated entity on the ground in Seoul promoting mangoes and Indian agricultural exports.

“A dedicated entity can ensure not just maximization of tariff benefits, but more importantly ensuring maximum front-end promotion in South Korea, i.e. customization in terms of product quality, packaging and selling to the right channels.”

The Agriculture and Processed Foods Export Development Authority of India organizes seminars and promotional events at trade fairs where importers can inquire and place orders. If there was a dedicated team here for promotion year-round, the products could go to the right retail channels. As an example, what Australia does with meat and livestock for promotion in international markets is a good benchmark, he said.

As regards economic areas, Ramachandran noted that the country is already benefiting significantly not just through exports to India, but also through large-scale investments that Korean conglomerates and their supply chain partners have made, be it Hyundai Motor, Samsung Electronics, LG Electronics or Lotte Group.

“India is therefore not only a huge captive market for South Korean consumer goods and cars, but also a huge low-cost manufacturing base for Korean exports to other countries. And it will continue to increase as all of these companies scale up their production, or add new facilities, like the world’s largest mobile phone factory for Samsung that was inaugurated in Noida (near New Delhi) during President Moon Jae-in’s visit to India last year.”

Indian Prime Minister Narendra Modi’s recent visit to Seoul, he said, should by default lead to better ties “That said, this visit by Modi was a short one and ostensibly did not include a business delegation from India. So while headline issues and geopolitical climate in the region may have been discussed, in terms of economic ties, this was at best a follow-on to the platform laid by President Moon’s high-profile visit to India in July 2018.”

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India’s demonetization and Korea’s currency reform

India’s Prime Minister Narendra Modi stunned the nation when he made a public announcement at 8 p.m. on Nov. 8 that 86 percent of the currency in circulation -- 500-rupee (US$7.40) and 1,000-rupee notes -- would no longer be legal tender at the stroke of midnight.
The ostensible reason for this was to fight rampant corruption and the underground economy along with counterfeit notes printed by Pakistan to fuel terrorism in India.
He asked the Indian citizens to bear the short-term inconvenience for long-term benefits that would accrue to the economy. While the public has by-and-large supported the move, the anti-Modi cottage industry and opposition politicians have been very critical.
Sure, the public has been inconvenienced because the central bank did not ensure that adequate replacement currency was supplied to commercial banks and the ATM’s were fully stocked across the length and breadth of the country. As a result, there have been long queues of people waiting to exchange their invalid currency and withdraw lower-denomination notes for daily expenses. India’s massive cash-dependent informal sector has been hit hard, and there are even reports of people dying in queues.
However, the public has still not lost patience as Modi has pleaded for time until Dec. 30 for things to get back to normal. The common citizens are willing to give him the benefit of doubt, although his rivals do not.
The jury is still out on whether the move will bring economic benefits to Asia’s third-largest economy or prove to be a huge blunder that could see Modi out of power in 2019, when the parliamentary elections are due next.
That aside, I see in this an opportunity for the Korean authorities to draw lessons from India’s demonetization exercise and see how they can effectively implement the long overdue currency reforms to tackle the underground economy here.
The size of Korea’s underground economy is estimated at 161 trillion won ($143.62 billion) a year. A recent study by Kim Jong-hee, professor of Chonbuk National University, showed that it is equivalent to 10 percent of the nation’s gross domestic product, much higher than the Organization for Economic Cooperation and Development average -- 6.65 percent of G-7 countries as well as 7.66 percent for the other member states.
The amount of tax evasion stood at an annual average of 55 trillion won in the last 20 years, 3.72 percent of the GDP.
“Underground economic activities induce tax dodging, leading to fiscal deficits and tax hikes for key economic actors to make up for the uncollected taxes,” Kim said in the report.
In Korea, it is common for corporates to set up slush funds to bribe politicians, as evident from the frequent raids by prosecutors, which are obviously held in cash of large denomination notes and not in banks. For that reason, there have been many calls to scrap the biggest note, 50,000 won, something that the Bank of Korea is wary of.
In my opinion, Korea should also go in for the bold move of demonetizing the 50,000-won note without notice, so people do not have a chance to convert their illegal currency -- as they will be forced to deposit it in banks and account for it -- and then go in for redenomination of the currency.
This is where the Indian experience will prove handy.
The ground situation in Korea is different and many of the problems India is facing now will not affect the country. Especially since the banking network is more widely used and people are more financially savvy.
For instance, unlike India which is a cash-dependent country, Koreans are increasingly favoring cashless transactions.
According to a central bank survey, Koreans carry on average 1.91 credit cards, 2.03 mobile cards and 1.26 check or debit cards. Four out of 10 picked credit cards as the means of payment they use most, up from three out of 10 the previous year. The ratio of those picking cash, meanwhile, continues to fall.
As Koreans are carrying less cash, with the average standing at 74,000 won last year, down 3,000 won from the previous year, the central bank is also issuing less cash. It released 12.3 percent fewer 10,000-won banknotes last year from the previous year, while the issuance of 5,000 won notes dipped 5.9 percent and 1,000 won bills 3.7 percent.
Statistics from the BOK show that credit cards, at 39.7 percent, make up the largest share of consumer transaction activity while cash accounted for 36 percent in 2015. There is also the increasing popularity of mobile payments, something that is negligible in India.
It would be prudent for the Korean policymakers to watch the Indian experience closely and flush out the problems.
Once the demonetization exercise is successfully completed, it should roll out the redenomination exercise.
Redenomination is the process of lowering the face value of a currency while preserving the same real value. It is simply moving decimal points, so a 1,000-won note will be redenominated as 1 won.
Since South Korea issued banknotes of 1,000 won and 5,000 won in the 1970s, there has been no redenomination to abbreviate the unit of the currency. The 50,000-won bill only made its debut in 2009 in the wake of the rapidly falling value of the 10,000-won bill.
Korea has redenominated twice since the Korean War. In 1953, when the hwan was introduced, with 1 hwan equal to 100 won. In 1962, the won was reinstated, with 1 won equal to 10 hwan.
The BOK claims it has carried out no task on a currency redenomination since 2004 when the government decided to put off discussions on the issue. Finance Minister Yoo Il-ho also recently said that the government has no plans for a redenomination, noting it could cause great confusion.
It is true that a redenomination can cause public inconvenience in the process of adjusting to new bills and a possible hike in consumer prices and spread psychological anxiety among economic players.
Deciding to redenominate during an economic downturn signals that an economy is in very serious trouble and likely to face a currency crisis. It can lower a nation’s international credibility and prompt outflow of foreign capital.
It can also cause prices to become unstable. Redenomination is usually adopted during high inflation and political insecurity (something that Korea is currently facing). Under such circumstances, preference for hard assets rise, pushing up prices for real estate and gold. Such appreciation of hard asset prices can put inflationary pressure.
Moreover, issuing and circulating new coins and paper currency is costly. Financial institutions need to replace their existing payment systems and ATM machines, which requires huge expenditure.
According to some experts, redenomination can drive illegal money into the underground economy because information about personal wealth can be revealed during the process of exchanging old currency with the new one. This is invalid if demonetization takes place.
That is a sure way to tackle the underground economy and boost the currency. It of course requires political will and a strong leader like Modi.

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