SEOUL, Oct. 2 (UPI) -- The surprising step by KT Corp (formerly Korea Telecom), South Korea' top fixed-line and internet broadband operator, to slash 5,500 jobs has won positive responses from the market and economists, and produced a surging stock price and a forecast of growing operating profits.
But huge expenditures arising from severance packages which amount to 825 billion won ($717 million) could hurt its profits and sap a recovery in the country's slump-hit telecom sector, analysts say.
As KT cuts its workforce by 12.6 percent, or 5,500 jobs, through a voluntary retirement plan, it agreed to pay an average 150 million won ($13,043) per retiree as a lump sum severance payment, which equals to the retiree's net income for more than 45 months. The telecom giant said a total of 825 billion won has been set aside to cover the retirement costs.
A local newspaper described the huge retirement payments as a "spending spree" in neglect of interests of investors and stockholders. "It is high time for KT to take belt-tightening steps and seek investment at a time when its rivals around the world are battling for survival," said the Herald Business newspaper said in an editorial.
Analysts say KT's job cuts, the largest-scale downsizing in its 100-year history, will have a great impact on the country's overcrowded telecom sector and restructuring plans of other local companies.
KT, the country's fourth largest stock with a market value of $11.5 billion, surged 3.64 percent to 46,950 won on Wednesday, the largest jump in three months, after it announced the hefty job cuts that it says will lead to $287 million in cost savings. KT shares rose again 0.85 percent on Thursday.
Samsung Securities said the massive job cuts will improve KT's profit model and reduce its labor cost to 20.5 percent of its total sales in 2004. "Investors are responding favorably to KT's drive to restructure," Samsung analyst Choi Young-suk said.
Hyundai Securities also praised the sharp reduction of KT's workforce, saying the effects of labor cost reductions will materialize from 2006. "The job cuts can be an attractive long term investment," it said in a report. Dongbu Securities raised KT's target price to 62,000 won from 58,000 won.
KT said it expects the job cuts will save about 330 billion won ($287 million) annually from the work force reduction, which it said will help improve operating profit. After the layoffs, KT's workforce will decline to 38,200 employees from the current 43,700.
KT said the massive job cuts were aimed at grappling with worsening market conditions triggered by sluggish sales. The telecom giant has suffered a protracted slump after its growth engine -- broadband access services -- lost steam.
South Korea's telecom industry had enjoyed dramatic growth. About 70 percent of its 48 million people have access to the Internet, with 11 million having high-speed connections, the highest broadband penetration rate in the world.
But the country's broadband market has been beset by slower growth amid a flurry of signs of saturation, posing a threat to the growth outlook of KT.
KT's second-quarter net profit fell sharply due to slower demand and tough competition. Net profit was 325.5 billion won ($283 million), compared with a profit of 479.6 billion won ($417 million) a year ago. Sales were 2.95 trillion won ($2.57 billion) versus 2.9 trillion won (2.5 billion won).
KT's broadband rival, the second-largest competitor Hanaro Telecom Inc. is facing liquidity crunch in the wake of snowballing debt after spending heavily to catch up with its peers. The third-largest broadband operator, Thrunet Co., has been up for sale since filing for court receivership in March.
In another threat to KT, the LG Group, the country's second biggest conglomerate, is seeking to acquire Hanaro, which will force KT to lift marketing costs and capital spending again to try to protect its market share. Risks of strengthening government regulation are also posing a threat.
As of the end of August, KT's 21 million fixed-line telephone subscribers gave the firm a 96 percent market share. Its broadband Internet subscriber base stood at 5.5 million for a 52 per cent share.
The massive layoffs came one year after KT was fully privatized in 2002 when the government sold its stake as part of its broader privatization campaign for state-run enterprises.
Since the Asian financial crisis hit South Korea in late 1997, KT has moved steadily to trim a workforce that topped 62,000 employees in 1992, when it had a government-protected monopoly over the telecom sector.
KT is now looking for a new growth engine that can bolster its profitability. The company said last week that it has signed a preliminary agreement with Nippon Telegraph & Telephone Corp.'s NTT Communications Inc. unit to provide global roaming Internet services.
KT said the alliance with NTT Communications will also entail joint marketing, development of products, and cooperation on various wireless LAN projects. It is also looking to seek partnerships with other firms in the United States and Europe to provide wireless LAN services.