Heads roll in a Korea adjusting to slower growth, higher rates

Industry

Published: 30 Nov. 2022, 19:28 Updated: 30 Nov. 2022, 20:09

Heads roll in a Korea adjusting to slower growth, higher rates

Commuters walk to work in Yeouido where many financial companies are located. [SHUTTERSTOCK]

Korean companies are cutting jobs as economic growth slows and rates rise.

A wide range of business are affected — including those in tech, construction and finance — and they are lowering head counts in a number of ways, with hiring freezes, voluntary retirement programs and the wholesale dumping of entire divisions.

Falling stock prices and property market troubles are hitting financial firms hard, especially the smaller firms.

Cape Investment & Securities is halting the operation of a sales team for institutional investors and a department that provides research to the institutional investors. The company said it instead plans to focus on investment banking because growing brokerage competition has made it difficult to generate enough profit from the service.

Around 30 people in the teams will lose their jobs or be relocated by end of the year.

“Shutting teams is almost unprecedented,” said Choi Yoon-young, a spokesperson for Cape Investment & Securities. “Those who want to stay will be relocated.”

Daol Investment & Securities started accepting voluntary retirement from its employees on Nov. 28. Korean companies turn to early retirement schemes for reducing their workforces since strict employment protection laws make it almost impossible to execute large-scale layoffs.

The company said the number of people that will be retiring has not yet been decided.

“Our core business is investment banking, but the market environment isn't projected to improve next year,” said Choi Jong-su, a spokesperson for the company. “Since we can’t proceed with project financing, it’s become inevitable for us to cut down the workforce. The rapid rise of interest rates has made it too dangerous to proceed with new deals.”

“It will take a considerable amount of time until the business environment normalizes,” Choi said.

Daol also recently decided not to extend the contracts with six workers in a bond department. Plans on refilling the spots could be considered when the bond market recovers, said another spokesperson Kim Do-hee.

Also in the cards is selling non-essential assets. Daol will sell its Thai unit to “preemptively secure liquidity.”

Daol runs overseas subsidiaries in New York and Thailand. It acquired a local firm in Thailand in 2008.

Hi Investment & Securities is another brokerage firm planning to take voluntary retirement.

“It is being discussed, but specific details cannot yet be confirmed,” said Jeong So-ri, a PR manager at the company. “The industry situation is very unfavorable compared to that of last year. Companies are making decisions in a very careful and conservative manner.”

Hi Investment & Securities generated about 70 percent of its profit from real-estate projects last year.

Korea’s unemployment rate stood at 2.4 percent in October, the second lowest rate since data were first compiled.

The downsizing efforts come as global central banks are tightening monetary policies to tame inflation, which is weakening investment sentiment.

The Bank of Korea upped the rate by a quarter percentage point to 3.25 percent on Nov. 24 from just 0.50 percent in July last year, increasing costs for households, corporations and investors.

Shares net purchased this year through Tuesday stood at 3,650 trillion won ($2.7 trillion), compared to 6,268 trillion won in the same period last year.

Dozens of financial companies are located in Yeouido, a financial district in western Seoul. [YONHAP]

The rate increases along with the default of a company related to Legoland Korea's developer triggered a crunch in market liquidity, especially in the short-term money market.

The yield for commercial paper with 91-day maturity was 5.53 percent on Wednesday compared to 1.55 percent at the beginning of the year.

The liquidity crunch in the short-term market was also cited as one of the reasons the central bank’s Monetary Policy Board decided to go with a quarter percentage point rate increase instead of half a point.

“Big brokerage firms don’t seem to be suffering much because they raised such large profits last year and their sources of income are diversified from brokerage fees to underwriting initial public offering,” said Kwak Jun-hee, a research fellow at Korea Institute of Finance’s Capital Markets Division.

“But the problem is with small and mid-sized firms that tend to raise profit from a certain department, like project financing.”

Hi Investment & Securities consolidated net profit through the third quarter this year was 73.7 billion won, down 43 percent from a year earlier. That of Daol in the same period fell 4 percent to 116.46 billion won.

Daol said it was able to defend the earnings through the third quarter, but earnings in the mid to long-run are “opaque.”

eBest Investment & Securities, which will undertake an “annual restructuring” in December, reported 44.58 billion won in net profit for the same period, down 66 percent on year.

Big tech companies are also slimming down, faced with weak demand for electronic devices and rising costs.

LG Electronics opened an early retirement program in the first quarter of this year for under-performing employees. The company said that the costs for the program were reflected in the first quarter financial results, but it declined to confirm the number of employees enrolled and the size of benefits.

The LG Electronics head count shrank 11 percent to 34,755 as of September compared to the same period last year, according to its business report.

A spokesperson at the company denied that the change in the figure is the result of the retirement program.

“As we terminated smartphone business, those in the business division were transferred,” said Kim San, a public relations official at LG Electronics.

He also cited the transition of workers from the vehicle component division to LG Magna e-Powertrain, a joint venture between LG Electronics and Magna International, as a reason for the decline.

Local media outlets reported in August that Samsung Electronics posted a notice for voluntary retirement.

For some cash-bleeding start-ups, the situation is more dire as their fate depends on external funding.

Mesh Korea, operator of the Vroong delivery service, let go of some 100 employees in October as the start-up faced trouble raising money.

“We are suspending money-losing businesses like early morning delivery and grocery shipping, and about 100 people left the company in the recent early retirement program,” a spokesperson at Mesh Korea said.

Mesh Korea filed for court receivership earlier this week.

Streaming service provider Watcha also went through business restructuring amid falling profits and user numbers.

"As conditions for funding have shifted, we streamlined the business structure to focus more on improving profitability rather than long-term investment," said Lucas Heo, a public affairs director at Watcha. "Consequently, the workforce has been reduced to some degree."

Gaming start-up Vespa requested in July that employees except for 10 percent of key developers resign. The developer of King’s Raid had over 100 employees last year.

“The market downturn and IPO drought darkens jobs prospects at start-ups,” said a public relations director at a fintech company based in Seoul.

“Even big players like Naver and Kakao adjust new hiring,” he said, “And things are worse at smaller start-ups even if they are the so-called unicorns with over $1 billion in valuation.”

BY PARK EUN-JEE, JIN MIN-JI [park.eunjee@joongang.co.kr]