South Korean Economy Weigh Down by Hyundai’s Largest ever Labor Strike

While it is no stranger to worker strikes, but alarm bells are rising at Hyundai Motor, the world’s fifth-largest automaker, by the current episode—its biggest ever.

Over demands for wage increases, a first nationwide, full-day walkout in 12 years on Monday was conducted by the company’s labour union in South Korea. A union spokesman told Reuters that depending on the company’s response, the strike is expected to continue until next week.

According to statistics from brokerage Kiwoom Securities, this year’s stoppage is particularly severe even as for the past three decades, Hyundai workers have gone on strike nearly every year.

While the direct impact is expected to be limited, the outlook is not rosy, this week’s events are sure to dent the company’s third quarter earnings, due October 1.

Daniel Yoo, head of global wealth management at Kiwoom said that Hyundai’s operating profit will likely to take a 2.5 percent hit from strike-related losses. He continued that Hyundai does have more room to increase labour costs and end the current deadlock due to the relatively mild overall impact on earnings.

Yoo suggested that bosses may be wary to give into worker’s demands, as recent earnings growth has been poor. In the 10th straight quarterly decline, the company’s second quarter net profit fell 2.6 percent on year.

“Korea’s overall corporate earnings peaked in 2011 and there hasn’t been much earnings growth since then so you can’t blame management,” Yoo said.

The larger, impact, however, could be on the company’s reputation.

“Hyundai’s image is currently having a hard time; there’s a perception that the firm is behind the curve when it comes to electric cars so this strike is magnifying the negative image,” Yoo said.

South Korea’s Ministry of Trade, Industry and Energy warned in a statement this week that the strike “will throw a cold blanket over the slight recovery pace of the country’s exports.”

“The labour side should end the strike and make efforts to normalize operation, while the management should do its best to complete negotiations with the union to minimize the impact on the local and entire economy,” the ministry said.

The auto industry in South Korea makes up around 12 percent of Korea’s manufacturing industry and 14 percent of total exports and Hyundai, Korea’s largest carmaker, and its sister company Kia Motors, dominate the domestic auto industry.

The nation’s already-vulnerable exports which declined for 19 out of the past 20 months could be further weighed down by Hyundai’s output losses from the strike.

The Korea Herald reported, citing the government if left unresolved, the labor dispute could delay exports of Korean vehicles worth $1.3 billion.

The Korea Herald reported that given its impact on the broader industry and national economy, the government would consider all possible measures to end the strike, said Labor Minister Lee Ki-kwon on Wednesday.

Trinh Nguyen, senior economist for emerging Asia at Natixis, explained that Hyundai’s deep-rooted issue of compensation is symptomatic of labour market challenges in South Korea.

“At the moment, 40 percent of Hyundai’s production is within Korea. But given the challenges the firm face regarding production and profitability, it will likely consider off-shoring more production in the future,” Nguyen said.

Nguyen said that companies including Samsung Electronics, have moved factories into lower-cost countries such as Vietnam due to the country’s labour unrest. “Increasingly, other Korean firms will be pushed to do so to remain competitive globally.”

(Adapted from CNBC)

Categories: Economy & Finance

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