Shared growth: master key to advanced economy
Conglomerates will be encouraged to give fair opportunities to SMEs both inside and outside of Korea
By Kim Tae-gyu
When big firms do overseas businesses with state funds such as development assistance programs, they are strongly advised to form partnerships with small- and medium-sized enterprises (SMEs).
This is aimed at strengthening SMEs, whose growth has been arrested by chaebol or family-oriented big businesses’ monopoly on resources, and helping correct a lopsided industrial structure to be more in their favor at the cost of weakening the national economy overall.
Of course, it is a small step that will go with the existing encouragement and incentives for conglomerates to create partnerships with SMEs in non-governmental projects, said Yoo Jang-hee, chairman of the Presidential Commission on Shared Growth for Large and Small Companies (CSG) during a recent interview.
“I visited Vietnam recently where many big Korean firms have businesses. They mostly tapped into the country with their own subsidiaries, not giving chances to outstanding SMEs,” Yoo said.
“We would ask large companies to change the practice so that SMEs can have fair opportunities overseas. In particular, they have stronger reasons to do so in programs where Korea’s taxpayers’ money is involved.”
Yoo, who took the reins of the CSG earlier this year, said that large-sized corporations had better embrace the suggestions not merely for SMEs but also for their own shakes.
“In my view, SMEs sharpened by competition might offer better benefits to the big firms rather than their affiliates, which are feared to be lacking competitive edges due to hitherto protection of their parent companies.”
The agenda, which might rub against conglomerates dubbed chaebol, is the CSG’s latest initiative of underpinning exports of SMEs, which is one of the five major missions of the blue-ribbon commission.
The recommendation has no legal binding power but the public opinions and the social atmosphere supportive of SMEs practically forced them to pay keen attention to the CSG guidelines.
Yoo said the win-win growth without regard to corporate sizes is the foremost task for Korea to lead in the global economy.
“We have moved up from the economic backwaters to become one of the world’s top-tier economies and we have many champions like Samsung, LG, Hyundai, SK and Hanjin,” he said.
“Their mush-storied success cases should be respected but their ‘partners’ have been somewhat estranged. The task of shared growth between them are the master key for Korea to become the genuinely advanced economy of the 21st century.”
The joint advances are a global version of the CSG’s agendas, which include selection of SME-only items in Korea where big companies are discouraged from entering.
Last September, CSG picked a total of 16 industries as suitable only for SMEs including traditional sauces, soaps, cardboard boxes, plastic moldings and automobile component recycling.
It plans to add a flurry of service and retail areas to the list later this year and toward the end, massive research are currently underway.
Yoo fell short of saying that the CSG plans to expand the SME-only industries to exports but urged conglomerates to take proactive actions for Korean SMEs to rise because they would not be able to keep competitiveness in some items in the face of emerging low-wage countries like China and Indonesia.
``For example, big companies now export a large chunk of clothing but smaller outfits have the capacity to take charge of the markets although they cannot wade into the overseas markets on their own,’’ the 72-year-old said.
``Large corporations have successfully explored offshore markets. Rather than losing the markets to Chinese competitors, they had better open the roads for our SMEs.’’
The professor-turned-chairman said that its policy of underpinning exports of SMEs are based on two tracks _ one is the above-mentioned strategy of joint advances and the other is to stimulate SMEs.
``In finding their purchasers, many SMEs have been accustomed to the easy solution of selling their products in bulk to large-sized companies up until now without the efforts of making a foray into other states,’’ Yoo said.
``They should change the long-held, domestically-oriented mindsets first and with support from big companies, they will have a shot at making splashes in the world.’’
Indeed, chaebol units have been mostly responsible for exports of Asia’s No. 4 economy where such exporters as Samsung Electronics and Hyundai Motor Group are based.
The former is the world’s largest manufacturer of semiconductors, flat-panel displays and mobile phones while the latter has joined the rank of the world’s top five automakers.
Currently, a mere 2.4 percent of the country’s numerous SMEs sell their items outside of the country, which is comparable to double-digit rates of advanced economies like Germany.
The low percentage has been dubbed as one of major concerns for Korea Inc. because SMEs account for more than 95 percent of the business in terms of its numbers and around 85 percent in terms of employment.
Maintenance, repair and operation
The professor emeritus at Ewha Womans University said that he will strive to put a break on conglomerates’ time-honored practices of offering maintenance, repair and operations (MRO) businesses to entities typically associated to their owners.
Leading chaebol gave up MRO and outsourced suppliers over the past year as it surfaced as a national issue but many still assign the jobs to outfits related to the chaebol or its tycoons.
MRO refers to businesses of providing non-core components such as the office supplies and fuels so that any companies involved can perform routine actions in order.
``We are thinking of making standards with regard to MRO. Out of many MRO items, we think that conglomerates had better offer the cleaning business to SMEs,’’ Yoo said.
`That is also one of our top five missions along with one of promoting exports of SMEs.’’
In addition, he took issue with the problematic conventions where large firms took talented employees and technologies from their subcontractors and suppliers.
``We vie to establish some ways to prevent the practices.’’
Underperformers in honor class
Asked about the CSG’s recent announcement on chaebol firms whether they successfully work together with their suppliers, Yoo said that all the players that received the evaluations were winners.
After a year-long study on 56 large-sized companies, seven were listed in the rock bottom out of the four-grade scheme including Dongbu Engineering & Construction, Hanjin Heavy Industries & Construction, LG Uplus and Hyosung.
They came under criticism because the CSG had surveyed upside of 5,000 subcontractors of the 56 to learn how they were being treated by their main corporate customers.
The ``underachievers’’ will not be punished but they will suffer disadvantages relative to those who garnered good reviews in the CSG annual will get special treatment from the government.
For example, the champions will be exempt from some investigations of the nation’s anti-trust watchdog as well as being given an advantage when applying for government projects.
``More than 1,824 qualify for the category of big companies. Out of them, the CSG has shortlisted the best 56 players, which we can boast of across the world,’’ Yoo said.
``Even though they received relatively low marks in the prestigious group, that does not mean that they are underachieving.’’
Yoo likened the seven companies in question with the worst grade to students at the accelerated program class.
``It is an honor to be included in the accelerated program class and members of the honor class get marks from As to Ds. Those who get Ds do not mean that they are inferior,’’ Yoo said.
``The school gives the mark to spur them to greater efforts. Regardless of the marks inside the honor class, their final report cards will carry As.’’
Since its inauguration in 2010 with the strong supports of incumbent President Lee Myung-bak, the CSG has generated controversies on the committee’s jobs and authority.
President Lee put the issue on the front burner as the gap between large and small companies widened under his stewardship, which started in early 2008 just before the global financial crisis.
The profit ratio before taxes of large corporations went up from 7.9 percent back in 2007 to 8.4 percent in 2010 but those for SMEs fell from 3.8 percent to 2.9 percent during the same period of time.
Understandably, CSG has received mixed responses due to the conflicting interests of those involved.
In particular, large-sized firms and their lobbies raised voices that CSG undermine their vested interests and sometimes labeled the committee’s dubious policies as ``not compatible with the market economy.’’
Yoo said that some misunderstandings led to such a clumsy situation at the onset of CSG because of some miscommunications, which he said are almost gone by now.
He said some deemed the CSG’s scheme of chalking up cooperation between large outfits and small ones as a zero-sum game of taking something from the former so as to give them to the latter.
But Yoo said what CSG guns for is actually a plus-sum game.
``CSG does not intend to ask for sacrifices of conglomerates. Rather, we delve into ways how they can sharpen their competitiveness through viable and sustainable partnership with their suppliers,’’ he said.
The chairman with a Ph.D. in economics continued that large firms have to look after its partners to keep remaining ahead of pack.
``We do not regard all the front-runners as smart companies. Only business bellwethers that pay attention to losers and followers are called the smart power,’’ he said.
Regarding the compulsory shutdowns of large retail chains _ twice a month _ he said that CGS pays a close attention from the perspective of the shared growth.
As the SME-only items are expected to be added regarding the retail industry, the committee’s stance on the issue has been closely followed by not only the interest group but also media.
Yoo has served as head of many research institutions, commissions and academic societies _ he was the dean of the Graduate School of International Studies at Ewha Womans University.
He is still an honorary professor at the Seoul-based ivory tower and is serving as an advisor to the Korea Federation of Small and Medium Business.
Over the past two years, he took the helm at BBB Korea whose thousands of volunteer members provide interpreting services around the clock and free of charges through mobile phones.
He caught headlines as he offered the interpretation services himself together with many volunteers.