(542) Chaebol in Korea

2010-10-07 : 16:52
By Andrei Lankov

The 1997 “Asian crisis” led to a dramatic re-arrangement of the Korean economy dominated by a small number of family-owned conglomerates, known as chaebol.

Some conglomerates, like the once mighty Daewoo, collapsed, while many others faced a very uncertain future. So far, it seems that only two of the traditional “Big League” players are weathering the storm reasonably well.

These lucky chaebol are LG and Samsung. Both underwent some serious restructuring 10 years ago, but compared to their fellow chaebol, they are doing very well. So, it is probably a good time to remind ourselves how all this began.

Like most Korean business groups, Samsung is the result of the efforts of a single person.

Lee Byung-chul, it’s founding father, was born in 1910 to a landowning family, spent a few semesters at Waseda University in Japan (majoring in economics) and then returned home to start his own business with family support. This was a pretty standard career start for a young scion of an elite landowning family in colonial Korea.

Lee and other chaebol leaders overwhelmingly came from the second tier of colonial-era businessmen. By 1945 the future commanders of South Korean industry had amassed some entrepreneurial experience but did not yet occupy the top positions within the nation’s business hierarchy. It was the first post-liberation decade when the foundations of their eventual success were laid.

On March 1, 1938, Lee, already a rice mill owner, established a new company, which he called Samsung (“three stars” in Chinese characters). In its early years, Samsung, initially located in Lee’s native city of Daegu, was largely a trading company.

By the mid-1940s, the business was diversified into noodle-making, wholesale trade, real estate, brewing and transportation among other similar areas.

At the time of liberation from Japanese rule in 1945, Lee ran a successful medium-sized business. There were few if any chances to grow much bigger, since the top levels of the business hierarchy were occupied by the Japanese and a handful of prominent collaborators. However, liberation changed everything.

Most of the future chaebol leaders managed to rise because they established cosy (and corrupt) relations with Syngman Rhee’s government, and Lee was second to none in handling officials. He managed to strike up good relations with President Rhee, who was a friend of his father.

In 1947, he moved his headquarters to Seoul, to be closer to the seats of authority and voracious but powerful people who occupied the said seats. This also made it possible to venture outside Korea.

The next year, Lee established an affiliate company which was to deal with international trade, a field where Samsung’s fortunes were initially made. Samsung’s first major international business was exporting dried squid to Hong Kong. This does not sound impressive now, but back in the 1940s dried squid was a major export item!

During the 1950-53 Korean War, Lee continued his operations from the southern port city of Busan. In the early 1950s, Samsung became one of the nation’s top 10 companies.

By 1960, with 16 affiliate companies, Samsung was the largest chaebol in Korea. A major role in its rise was played by lucrative government subsidies for sugar and wheat, imported from overseas to be processed locally.

In April 1960, Syngman Rhee’s government was overthrown. This meant the collapse of any established connections. In May 1961, disgruntled young military officers led by General Park Chung-hee took power and established a new military government.

The junta promised to punish “corrupt businessmen.” Lee Byung Chul’s name was included in their proscription list: he was accused of giving large sums to Rhee and his entourage ― in all probability, not without good reason.

At the time of the military coup, Lee was in Japan, in his own house in Tokyo. Having learned of the news, Lee waited for a while and then flew back to Korea.

In late June 1961, he met Gen. Park in Seoul. This was the first in a series of meetings which greatly influenced both participants ―and, to some extent, the fate of South Korea.

In spite of all his populist rhetoric, Park understood only too well that punishment of all “corrupt businessmen” would be impossible: there were too many of them.

Nearly all prominent businessmen of the Syngman Rhee era were involved in kickbacks. Lee was not only the richest man in Korea, but also one of the few Koreans who knew how to run a large business.

In their conversation, Lee impressed Park with his vision of the country’s future economic development. The allegations against him were quietly scaled down, and Lee soon emerged as the major architect of Korea’s new economic strategy which soon brought surprisingly great success.

In the years of Korea’s long economic boom, Samsung developed into a huge conglomerate and in the late 1990s once again ranked the country’s largest business group.

Professor Andrei Lankov was born in St. Petersburg, Russia, and now teaches at Kookmin University in Seoul. He can be reached at anlankov@yahoo.com.