We Need Recessions to Cleanse the System

You must constantly change and adapt to a new environment.

Jong Yong Yun

Back in 1996, Samsung Electronics was in trouble.

The company was a big producer of memory chips. They also made cheap TVs and microwaves.

But semiconductor prices had plummeted as more supply had come into the market and the company was losing money. What’s worse, they had also racked up a lot of debt.

They needed to change.

So in December 1996, engineer Jong Yong Yun took over as President and CEO of Samsung Electronics. Samsung’s group chairman, Kun-Hee Lee, was very clear on what he expected.

Change everything except your spouse and children,’ he told Yun.

Yun made big changes.

He cut the workforce by 30% and sold any nonperforming businesses.

But barely six months after Yun took over, the Asian crisis hit in 1997.

Korean currency depreciated, foreign investors fled the country and the stock market plunged.

Yet Yun saw this as an opportunity.

While Samsung’s competitors were cutting investment and R&D spending, Yun did the opposite.

He also reduced inventories and slowed the production of things like TVs and juicers. Instead, he started investing in developing innovative products like MP3s and mobile phones.

As CNN reported:

This period saw him crystallize what he calls his “sincere management” philosophy: Cut costs for short-term competitiveness. Spend on research in core technologies for long-term competitiveness. Don’t enter new markets or product lines unless there’s a real chance to become No. 1. Ruthlessly cut any business that does not earn the company a growing profit. Be the first to get innovative products to market. Constantly refine supply-chain and decision management. Adapt quickly. Put quality first.

He also changed the company culture.

According to one of his employees, Yun is always emphasizing that ‘if you relax, if you become complacent, a crisis will find you.’

For Samsung, a technology company, being ahead of the times is important.

The company could be at the edge of a crisis anytime. Competitors could render the company obsolete, any product could bring a massive fail.

That’s why Yun instilled the notion of ‘perpetual crisis’ and pushed employees to come up with innovative products.

Yun turned around the company.

In his first year he saw a 100% increase in productivity.

Samsung went from the brink of bankruptcy to being one of today’s biggest tech companies in the world.

Anyway, did you watch the Phil Anderson versus Harry Dent debate last night? It’s the reason why I am telling you the Samsung story.

Both Phil and Harry are cycles people. And I noticed that both Phil and Harry agreed on something during the debate.

That is, that we need of all parts of the cycles, the boom and the recession.

As Harry pointed out, there is this notion that we need to constantly grow and get better. Central banks are pushing stimulus and doing anything they can to avoid a recession.

Recessions can bring innovation

As he said in the debate:

‘[C]ycles are the logic of life, and cycles are the way you can do whatever you do — business, family, raising kids, whatever, getting married — better. It’s that simple.

‘And people ignore cycles because what most people think is, “Oh, if there’s a cycle then there’s an up and there’s a down, and I don’t like the down”. No, no, the down’s just as good as the up, if you understand them. […]

It’s clear that we need recessions as much as we need booms.

Recessions are not all bad. They are a way for the system to cleanse itself.

We need recessions to cleanse the system, but also because recessions can bring innovation.

With no recessions people can get complacent. They get used to things being the same, to always having growth. There is no need to change things.

But in recessions there is less money around, less credit.

Things drop in price too.

There are less jobs around, which means you can hire better people. You can get cheaper rent, furniture. People can create amazing companies with smaller budgets.

There is a need to change, to innovate. To create new ways to stand out from the competition. It can bring different ways of doing things.

Many innovations have come out of crisis. Just as Harry said in the debate:

‘People want to get better, better, better, better, better, go to heaven, stay there. That’s what people want life to be. Life doesn’t work that way. Again, a battery doesn’t work without positive and negative poles. You don’t get innovation and economy when things are always good, businesses get more complacent, less innovative the longer the economy is good. It’s when it goes down and there’s challenges, they have to rethink everything, “how do we do this?” and “how do we do this better?”

‘People make the best decisions when they’re challenged.’

I mean, in the last global crisis we got bitcoin and blockchain. We got companies like Airbnb that have made travelling around the world cheaper and have created different experiences.

Yes, a recession can send a company under. But it can also bring more opportunities.

Take the company Mercadolibre.com [NASDAQ: MELI]. The Argentinean company is one of the most popular e-commerce websites in Latin America. It is thriving in Venezuela as people turn to the website to buy things when they find shop shelves empty. They also look at Mercado Libre when they need to sell things to get some extra money.

There are reasons to be concerned about the next recession. But you should also be looking at the next recession as an opportunity to change, create and innovate.

Best,

Selva Freigedo,
Editor, Markets & Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is an editor for Markets & Money and every week goes through each report and research note produced by our global network of trusted advisors to find, in her opinion, the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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