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Economy

GM's restructuring plans are a timely warning for South Korea

Seoul must address structural problems to keep industry and the economy on track

The impact of the decision will not be limited to GM's 16,000-strong workforce in South Korea, but will also affect their families, as well as subcontractors.   © Reuters

TOKYO General Motors plans to shrink its ailing South Korean operations, and Seoul is rightly worried about limiting the immediate economic fallout from the move. But policymakers should also see it as a timely warning about the deep structural issues plaguing the country's economy.

The U.S. automaker's South Korean unit recently logged its fourth straight year in the red, and GM, as part of its global restructuring, decided to slash operations in the country.

In February, it announced that it will shut its factory in the southwestern city of Gunsan. This decision will impact not only GM's 16,000-strong workforce in South Korea, but also its local subcontractors.

The South Korean government is naturally anxious for the automaker to continue operating in the country. GM is well-aware of this and has apparently been using it as leverage to demand financial support from the government.

Critics in the country may scoff and say that President Donald Trump's "America first" policy has now spread to the corporate sector.

But such cynicism does not change the fact that there are several deep-seated problems that South Korea must overcome if it hopes to ensure longer-term growth.

Low productivity is one of them. At the Gunsan plant, one of three GM factories in South Korea producing finished cars, it reportedly takes nearly 60 hours to manufacture a vehicle. The Korea Automobile Manufacturers Association, an industry body, estimates that Toyota Motor and Ford Motor require just 24 and 21 hours, respectively.

The extreme inefficiency at Gunsan is attributed to repeated strikes by workers seeking higher wages and making other demands.

The fraught relationship between labor and management is the Achilles' heel in South Korea's industrial productivity. Lost workdays -- the total number of days when labor union members do not come to work because of strikes or other reasons -- totaled 450,000 in South Korea in 2015, compared with 170,000 in Britain and 15,000 in Japan, according to the Japan Institute for Labor Policy and Training.

Another factor is the numerous small and midsize companies doing business directly or indirectly with GM Korea, a common situation in the country. Experts point out that smaller South Korean companies are caught in a vicious cycle: They rely on big companies for sales, which weakens their bargaining power in price negotiations. This dents their profitability, making it harder to invest and hire more workers to generate more value. The resulting loss of competitiveness leaves them even more dependent on big companies for sales.

Japan, with its aging and shrinking population, is in no position to boast about its productivity, which stands at less than 70% of U.S. levels. But the problem is even more pronounced in South Korea, which faces similar demographic challenges. The country urgently needs to improve the productivity of small and midsize companies through such measures as expanding the country's reach in global markets and improving labor-management relations.

Another problem for South Korea is that the government is often tempted to prop up ailing businesses even after they are no longer viable.

It is uncertain whether the government will provide the support GM is seeking, but President Moon Jae-in has a motive for bailing out GM Korea and preserving jobs, especially ahead of local elections in June.

The practice of providing life-support for "zombie" companies can be traced back to the 1960s. The government, keen to kick-start the economy after the devastation of the Korean War, prompted banks under its oversight to keep providing funds to key companies, allowing them to pile on debt even if they were uncompetitive.

The financial crisis that erupted 20 years ago was the result of global funds coming in and taking advantage of this unhealthy aspect of South Korea's growth.

That crisis taught the country a valuable if painful lesson about postponing corporate death. In recent years, however, zombification has reared its head again. Troubled shipbuilders, for example, have been bailed out despite the global controversy caused by such moves. Treating a company as if it is "too big to fail" is a risky move that creates moral hazard and undermines competitiveness.

South Korea would perhaps do well to take a hint from Sweden and work out a shock-absorption mechanism.

Saab was once the biggest automaker in Sweden (and, coincidentally, under GM's wing). Nevertheless, the Swedish government rejected the company's plea for a bailout following the 2008 global financial crisis. It let the automaker go under and instead transfered employment to growth sectors. Sweden was able to do this because of its well-wrought social security and job training programs.

Another concern for South Korea is whether it can keep up in the global race to attract companies.

Shortly after GM's announcement about its Gunsan factory, Trump said the automaker would "move back to Detroit."

"You don't hear these things except for the fact that Trump became president," he added, boasting that American companies will resume production in the U.S. because of his decision late last year to implement big corporate tax cuts.

GM did not say it will relocate the plant to the U.S. But Trump's tax cuts have undeniably caught the attention of businesses around the world, and there are signs that other countries will soon be racing to lower their own taxes to prevent an exodus of companies.

It is curious, then, that South Korea has raised corporate tax rates for big companies. The government must offer a persuasive explanation for the increase. Otherwise, it risks earning a reputation as being unfriendly toward business, which could cause foreign and domestic companies alike to look elsewhere for opportunities.

The South Korean economy remains solid and is expected to grow about 3% this year, as it did last year. Stock prices have risen nearly 20% over the past year.

But while the country is not under any immediate pressure to make structural reforms, neither can it afford to be complacent. For one, the U.S. has pushed ahead with interest rate increases, and long-term rates there are now higher than those in South Korea.

This puts South Korea in a difficult position, particularly with the North Korea problem already denting its appeal as an investment destination.

If South Korea responds by raising rates, households will be burdened with higher interest payments on their debt -- which is already at record levels -- and curb their spending.

The country's economic future hinges on how well it can contain the risks factors facing it. GM's decision to restructure its South Korean operations should serve as an opportunity to think about how to resolve long-term problems -- not just weathering the current woes.

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