Hanjin Shipping’s stock price hit rock bottom zero and the company was declared bankrupt as of Friday, February 17th, 2017. The demise of the former container shipping industry giant paints a bleak picture of what the future holds as the shipping market continues to show no signs of recovery. Now, instead of going into explicit finance theories and how methodical calculations could have prevented the downfall of Hanjin, this analysis will look in the organisational structure and culture of the ‘Chaebol’ as a whole instead.
The Background Story
To start off, one should look into the context of the South Korean culture. In South Korea, one often hears the term ‘Chaebol’ which in direct translation means a ‘wealthy clan’. It is a term that is often associated with South Korean multinational companies with a single chairman holding power over all operations in the conglomerate. The backdrop to which these Chaebol came into power arose out of the ashes of the dreadful Korean war that ravaged the socioeconomic status of the country back in the 1950s.
The government, under the leadership of President Park Chung-hee, reformed the country from a predominantly agricultural-based economy reliant on imports, to one which was rapidly industrialised with new markets and exports. Park employed the services of several large businesses and introduced what was known as a ‘Five Year Economic Plan’ to spur economic growth in several key primary sectors of the industry and thus, in the process, the Chaebol were born.
Fast forward 50 years, the Chaebol in recent times have come under immense scrutiny due to their large concentrations of wealth and implicit political ties with the government. This has led to a proliferation of negative sentiments held by the bourgeois of South Korea and the subsequent strikes and protests demanding income redistribution and a greater degree of transparency. Now, herein lies the question: what are the Chaebol doing wrong from an organisational perspective?
If one were to take a closer look at the breakdown by market cap of Asia300 companies in South Korea, the market is dominated by Chaebols such as Samsung and Hyundai. This implies strong downward pressure on businesses that are non-Chaebol which can come in the form of domestic businesses and local start-ups. Given the large market cap divide between the Chaebol and the non-Chaebol, it is thus paramount to perform an organisational analysis of the Chaebol and thereafter form a conclusion with regards to the long-term sustainability of such a market structure in South Korea.
1. High Power Leadership
Typical of Asian businesses and conglomerates, South Koreans place emphasis on the values of respect towards a legacy-based hierarchy which stems from a Confucian-based ethos. With the global marketplace evolving into one which delves deeper into the digital landscape, many companies such as Apple and Tesla are leading the way in employing new age technology through automation or artificial intelligence.
Samsung and other Chaebol have struggled to adapt to such a rapid change in the marketplace (the recent foray by Samsung with the Galaxy Note 7 in an attempt to match Apple’s iPhone 6S was nothing less than a disaster) and this can be attributed, in part, to the rigidity of the organizational cultures of the Chaebol themselves.
2. Centralism and the Emphasis on Collectivism
Strategic objectives are often laid out by a central group of directors acting on behalf of the controlling shareholders. In these circumstances, the top management works hard to implement the business strategies and bears full responsibility for it. While some may argue that such an arrangement is lean and efficient, others beg to differ, as the scope of operations for the company from a macro perspective is narrowed under such structures.
3. Low Uncertainty Avoidance
After the brutalities of the Korean War, South Korea transformed from a poor agricultural country to the world’s eleventh largest economy. As a result, its people had to adapt quickly to new environments and change. The Chaebol are no exception as they spread out into different global markets.
One prominent example is Samsung’s rise between 2010 and 2014 when its mobile series were viewed as the ‘Anti-iPhones’ meant to disrupt the mobile telecommunications market. However, with such low uncertainty avoidance, large South Korean conglomerates such as Hanjin, often lack the structural stability in terms of business strategies. This would therefore not allow for a sustainable operational structure, in the long run, due to the volatility and the increasing risk posed by new entrants from other countries such as China.
Hanjin’s Shipping nightmare has come to an official end, but the risk to other Chaebols is still omnipresent. With Samsung’s heir-apparent embroiled in a political scandal that has rocked South Korea in recent months, it must be said that connections can only go so far in ensuring a business’s success.
Putting aside morality and assuming business ethics are upheld to begin with, the main strategy implemented by the Chaebol must be one that is diverse and dynamic in the modern workplace. Engaging external stakeholders to ensure good corporate governance is a vital cog in any organisation and the added perspectives will definitely aid in ensuring both efficiency and policy relevance.
What can one say about the ocean of debt Hanjin is now facing? Only time will tell.