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Subject   November 2018 - Restructuring Story
1. Introduction

As the economy becomes more difficult, companies try to survive by reducing costs, especially with labor being the item that costs a company the most. Low labor costs help to overcome difficult times, thereby increasing the likelihood of survival. Restructuring is utilized by companies as a short-term effort to reduce labor costs. This restructuring can include unpaid leave, voluntary resignations, layoffs, etc., with layoffs being used as a last resort whenever possible. Before the economic crisis in 1998, the concept of a lifelong workplace was established along with the rapid growth of companies, and most employees continued to work until retirement; the laws and the system were set accordingly. However, during the economic crisis, the managerial dismissal law and the dispatched workers law were introduced as conditions necessary for procuring an IMF loan. Most of the companies suffering from the economic crisis chose to dismiss a large number of workers by using the managerial dismissal law (among other various methods of restructuring), and then, as the economy recovered, began using fixed-term workers or dispatched workers with lower labor costs instead of full-time workers. This type of employment raised concerns that all workplaces would use irregular workers only, and in order to cope with this trend, in 2007 the Non-regular Worker Protection Act was enacted to restrict the use of non-regular workers.
This type of employment has led to the establishment of dual employment structures in Korea. Full-time employees in large corporations are groups that receive stable employment and high wages, while non-regular workers are groups that receive insecure employment and low wages. The restructuring of SsangYong Motor is a typical example of the adverse effects of this dual structure. During and since restructuring in 2009, more than 30 workers have tragically committed suicide over nine years, as a large number of workers in the first group were dismissed for managerial reasons and demoted to the second group. I will attempt to determine the most suitable restructuring methods by analyzing the restructuring of SsangYong Motor and by comparing that case with another in a foreign country.

2. SsangYong Motor's restructuring: Layoffs

SsangYong Motor has changed ownership (and names such as Shinjin Motors and Dongah Motors in the 1970s and 1980s), and eventually came to belong to the SsangYong Family Group in 1988. SsangYong Motor produced the Musso SUV in 1993 through technical cooperation with Mercedes Benz in Germany, and then produced the new Korando in 1996, making the company a representative maker of 4WD automobiles.
However, since 1992, deficits had accumulated and the company was sold to Daewoo Motor in 1998. When Daewoo went bankrupt in 1999, SsangYong Motor was moved to court administration and then sold to Shanghai Motor Company in 2004, after its management status had improved thanks to the court administration. After this, Shanghai Motor did not invest in new car development for four years and was placed into administration in court in 2008. Shanghai Motor withdrew from the Korean market, taking with it only current SUV technology and key personnel.
In April 2009 SsangYong Motor announced that it would cut 2,646 people (out of 7,135) in order to normalize management. In May 2009, the union took over one of plants in the Pyeongtaek factory, went on strike and proceeded to occupy the plant for 76 days, until August. The strike was stopped after a police suppression operation and successful negotiations between the union and the company. As a result, out of the original 2,646 employees, 2019 voluntarily resigned, 459 were put on unpaid leave, 3 were switched to the sales team, and 165 (159 production and 6 management) employees were laid off.

A total of 156 persons dismissed for managerial reasons filed suit against the company in November 2010 for invalid layoff.
On 1 August 2012, the court of First Trial said, "As a result of the financial crisis, there is no way to solve a liquidity shortage, and a company that is going through the regeneration process is forced to overcome the difficulties in management and lay off as part of restructuring to secure competitiveness through cost reduction. It is recognized that there is a necessity to carry out managerial dismissal."
On February 7, 2014, the Court of Second Trial (the High Court) said, "The 'Court of Appeal' has no problem in meeting the requirements related to the selection of the dismissal candidates and the consent of the collective agreement. However, it is not clear that the actual requirements of dismissal as an effort to avoid dismissal are not implemented, and so this managerial dismissal has not satisfied the validity requirements of managerial dismissal as provided in Article 24 of the Labor Standards Act."
On November 13, 2014, the Court of Third Trial (the Supreme Court) said that that the "urgent management necessity" among the requirements of managerial dismissal should respect the judgment of management unlike the ruling of the High Court. In the judgment of "urgent management necessity", it is a requirement for judging the legitimacy of managerial dismissal. The existing interpretation in the Supreme Court accepts that there is objective rationality in order to cope with a crisis that the company may have in the near future. And this concept is also reaffirmed in this Supreme Court ruling.

In November 2010, SsangYong Motor was sold to Mahindra in India. Since then, SsangYong Motor has gradually reinstated workers previously placed on unpaid leave and dismissed other workers, in line with the company's business status. Following the reinstatement of 454 of the unpaid leave personnel in March 2013, 40 people were reinstated in February 2016, 62 in April 2017, and 16 in 2018. In September 2018 the company also agreed to complete the reinstatement of the remaining 119 dismissed workers by the end of the following year. This reinstatement was possible through the improvement in the management status of the company. As company sales improved (a deficit of KRW 141.2 bn in 2011, a deficit of KRW 9.9 bn in 2012, a deficit of KRW 8.9 bn in 2013 and finally a surplus in 2016), it outperformed GM Korea and Renault Samsung Motors, achieving third place in the domestic market in September 2017. (1st place was Hyundai Motor Company, and 2nd place was KIA Motors).

3. Volkswagen restructuring:Job sharing

Volkswagen was founded as a German state-owned enterprise in 1937 under Adolf Hitler's Nazi government. After privatizing its shares in 1960, it became the largest automaker in Europe following the acquisition of the Audi Group in 1969 and Skoda in 1990.
In 1993, Volkswagen reached a peak of 103,000 employees in Germany, but the factory made no profit at all. Wages of workers comprised 25% of sales (its ratio of wages vs. total sales was 20% higher than competitors such as Ford and Opel), and their productivity was the lowest in the industry. In 1992 Volkswagen's net profit was only 147 million marks, a drop of 87% from the previous year, and became a deficit of 1.94 billion marks in 1993. This was a result of the fact that Japanese car companies had entered the European market in full swing and the company could not handle the aftereffects of the collapse of the economic bubble which occurred after German unification. German media at the time pointed out that Volkswagen should take restructuring measures as soon as possible.
Volkswagen announced plans to cut 30% of its German workers (about 31,300) by 1995. The union, after consultation with the company, chose to shorten the working hours without wage maintenance, instead of dismissal. In November 1993, Volkswagen signed a labor-management agreement to strengthen job security and competitiveness after bargaining for four weeks with the union (which agreed to introduce job-sharing). This agreement was a dramatic resolution, created between a company that originally tried to dismiss 30,000 workers and a union that worked desperately against layoffs. The agreement included three points: ①The core of the job sharing initiated in 1994 was that the company guaranteed the employment of the workers, while the union agreed to shorten the working hours without wage preservation (from 36 hours to 28.8 hours per week, with the introduction of a 4-day week). This reduced labor time by 20% and labor income by up to 20%. However, due to employment security, the trust between the union and the company improved, and additional measures for labor flexibility were taken. ②In 1995, the Ministry of Labor introduced a "Work Time Account System" that covered wages equivalent to the existing working hours when production was reduced; the deficient hours were settled during subsequent production. As a result, the company laid the basis for a flexible adjustment of production volume in response to fluctuations in demand, and the shift system also diversified into a one-shift system or a three-shift system, depending on the characteristics of each system. ③Workers with reduced working hours received a block-time benefit from the government, guaranteeing paid vocational education for up to six months. As a result, workers were able to increase their work proficiency even during idle hours and the company was able to reduce labor costs.
In other words, the core content of the labor-management agreement was that first, instead of guaranteeing the employment of all workers, they shortened working hours and cut labor costs, both by 20%. The second was to introduce a working time account system to replace overtime with vacation instead of allowance, while, if the work time fell short of the contractual working hours, the company would demand that the worker concerned work overtime when required. Through this agreement, the union achieved job security and the company was able to preserve its highly-skilled workforce as it controlled labor costs. The effects were immediate. In the first year, the company reduced labor costs by 1.6 billion marks. In addition, the proportion of labor costs to sales, which was 25% in 1993, dropped to 16% after six years. As a result, the labor productivity of workers, guaranteed to secure employment stability, rose by 6 percentage points.
Volkswagen's success was due to job-sharing and structural improvement. In particular, the innovation of the production process, which had been suffering from high cost problems, and the development of new cars suited to the market, coupled with effective marketing, saved the company. Cost reduction efforts such as platform integration and modularization greatly improved the profit structure of the company. At the time of the crisis in 1993, a total of 16 platforms were sharply reduced, enabling the company to succeed in common use and to produce a variety of derivative models at low cost. In 2000, Volkswagen had 10.3 models per platform, surpassing Chrysler (1.8), Ford (2.8) and GM (3.5). Furthermore, R & D costs, which are expensive due to the adoption of the joint platform, have declined by 3 billion marks annually.
In return for the union's cooperation, the company responded with a guarantee of employment for all workers. The company also promised to create jobs by investing in the Hannover and Wolfsburg factories in Germany, instead of overseas factories. Volkswagen saved more than 1 trillion won (about 1.6 billion marks) over the year without employment reduction. The operating margin also improved from minus 8.7% in 1993 to plus 1.7% in 1998. Volkswagen's global sales volume has risen from 5.1 million units in 2004 (fourth in the world) to 9.93 million units in 2005, becoming the world's second-largest automaker after Toyota.

4. Lessons and Challenges

A company is a creature that constantly changes or disappears, in a competitive market. In order for a company to survive in a 'survival of the fittest' environment, constant adaptive restructuring is necessary. However, it is wrong to think that restructuring always requires mass dismissal. Restructuring can encompass various methods such as cost reduction and productivity improvement, reduction of working hours and wage cuts, in addition to labor-management cooperation. If dismissal is inevitable as a last resort, the dismissed workers should participate in job training and be given an opportunity to rejuvenate their mental and physical condition so they can get a new job and will not stay unemployed for a long period of time.
Volkswagen introduced a "work-sharing" system that increased productivity while preserving jobs, which was a shock to Korean industry, which focused only on the dismissal of workers when restructuring. In 2009, SsangYong Motor could have overcome many difficulties with incentives such as job-sharing rather than restructuring with one-sided layoffs, if both labor and management had only recognized their situation more maturely.
The survival of a corporation makes possible the continuous employment of workers. Since the employment of workers cannot be guaranteed without the survival of the enterprise, labor and management should seek a desirable direction for the survival of the enterprise and for the guarantee of employment. Managerial dismissal hinders the development of a company due to the lack of potential human resources due to the withdrawal of competent personnel. Therefore it is necessary to recover and restore employment by dividing the jobs in the manner of Volkswagen. This is a restructuring method in which labor and management can gain mutual benefit by restructuring in a manner in which both the company and the workers share the pain and overcome the difficulties.

5. Conclusion

Dismissed workers from SsangYong Motor endured the hardships of living as well as mental suffering during a long unemployment period, resulting in the deaths of more than 30 dismissed workers, who committed suicide. This was caused by the shortage of safety nets in Korea's social security system and the dual employment structure. As a solution for this problem, companies should adopt a variety of restructuring methods to enhance their competitiveness, while individuals should have lifelong vocational abilities, rendering them capable of re-employment. In addition, the government should provide unemployment benefits for job security and vocational skills education for reemployment so that workers can recover from unemployment.

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