Aftermath of COVID-19, Companies Activating 'Plan C'...Revising Business Strategies

Review of Businesses Concerned with First Half Performance in Refining, Chemicals, Shipbuilding, Steel, and Aviation

[Image source=Yonhap News]

[Asia Economy Reporters Kiho Sung, Changhwan Lee, Hyesun Lim] "Instructions to reduce costs have already been issued. Due to the unexpected impact, we are lowering our sales targets and are now in a situation where we need to completely revise this year's business plan."

As the novel coronavirus infection (Wuhan pneumonia) spreads, companies closely linked with China in industries such as automobiles, petroleum and chemicals, shipbuilding, steel, aviation, and distribution have begun reviewing the management strategies they set at the end of last year for this year. In particular, companies that import Chinese parts to sell finished products are thoroughly managing their inventory and reconsidering their business strategies to reflect how this situation will impact first-half performance.

◆Direct hit to 'imports from China'... Most are key components= According to the Korea International Trade Association on the 5th, the top import item from China to Korea in December last year (based on MTI code at the 3-digit level) was semiconductors, recording $1.8312 billion. This volume consists of products manufactured at local factories of major domestic semiconductor companies such as Samsung Electronics and SK Hynix and imported back to Korea. These companies carry out labor-intensive front-end processes (wafer processing) in China and then perform back-end processes (wafer cutting and packaging) domestically. If the novel coronavirus situation prolongs, they will face direct impacts. The second and third ranked items, computers ($680.1 million) and wireless communication devices ($610.6 million), are also essential products for Korean companies.

The fourth-ranked item is fine chemical raw materials ($545.5 million). These materials are used for secondary batteries, and if imports are cut off, companies producing electric vehicle batteries such as LG Chem, SK Innovation, and Samsung SDI will face difficulties. 'Automobile parts,' which halted production lines in Korea's automobile industry, ranked ninth with imports worth $156 million in December last year.

◆High dependency on Chinese parts, increased impact due to supply uncertainty= Companies whose top import items are from China inevitably face greater aftereffects from this situation. Especially in the automobile industry, which has entered shutdowns, having low inventory of certain items leads directly to production disruptions.

The problem is that even after China's holidays end, it is difficult to expect that supply uncertainties will be easily resolved. Issues such as quarantine measures remain in China, and the psychological fear among locals is also a concern. Moreover, if the Lunar New Year holiday is extended, the volume of goods that need to be transported within China accumulates, making it difficult to guarantee timely supply even if key parts are produced.

Accordingly, domestic companies are activating emergency response systems for the novel coronavirus. Hyundai Motor Group, whose production has been halted, is operating an 'Emergency Response Comprehensive Situation Room,' and Samsung Electronics and SK Hynix have formed task force (TF) teams.

At the same time, the strategy and planning departments of each company are reviewing business plans that can flexibly respond depending on the spread and duration of the novel coronavirus. Hyundai Motor Group is reexamining its overseas market strategies centered on China, while Samsung Electronics and LG Electronics plan to analyze the impact on key business divisions related to the novel coronavirus situation and conduct a comprehensive review of their business plans. Other large corporations also plan to hold related meetings soon to devise countermeasures for changes in the management environment caused by the novel coronavirus situation.

Major distribution conglomerates closely connected to consumers, such as Lotte and Shinsegae, have also begun a full review of their business plans for this year. A senior official in the distribution industry explained, "Although specific adjustment plans have not yet been finalized, sales targets are being lowered due to increased uncertainty in business." Investment scales are also expected to decrease. A Lotte official stated, "Unexpected variables have occurred, so we have no choice but to operate more conservatively than before."

Given the major adverse factors emerging from the beginning of the year, there are also forecasts that intensive corporate restructuring efforts will accelerate this year.

Researcher Seung-eun Jung of Yuanta Securities said, "Based on past cases, when a global disease outbreak occurs, it takes at least 3 to 4 months until a declaration of its end," and added, "Especially, the impact on Asian countries adjacent to China is expected to be significant."

This content was produced with the assistance of AI translation services.