Chaebol block sunlight for small firms
Chaebol, or Korean conglomerates have two faces. They represent the national team for Korea Inc. in the global market, as their efficiency and marketing power are unquestionable. They are better than the country itself in global branding power and are motors of the economy.
Without the chaebol, Korea would not have become the world’s 14th largest economy and the seventh largest trading country. They played a key role in propelling the country to realize $1 trillion in trade, $1 trillion in GDP and $1 trillion in market capitalization on the Korean stock market.
Like Korean football team captain Park Ji-sung; Lee Kun-hee, Chung Mong-koo, Koo Bon-moo and Choi Tae-won are corporate heroes.
Only four ― Samsung, Hyundai Motors, LG and SK ― could be called chaebol, as the combined sales of the other 26 conglomerate-like giant corporations are less than those of Samsung.
The eulogy for the chaebol ends here. They are also the source of the troubles facing the Korean economy.
First, they are superbly capitalized but do not invest in youth job creation, hiring less than 1 million here. On a corporate level, they need to hire less and grow more to maximize efficiency, but on a macroeconomic level, they must recruit more. However, the chaebol cannot be blamed for jobless growth ― this is a dilemma facing Korea.
Second, the chaebol block the sunlight. No other trees can grow beside them. They must be hit for their abusive relationship with suppliers in contrast to large Japanese companies which treat suppliers as ``family.’’ Chaebol growth does not always make small-and medium-sized enterprises (SMEs) happy. SMEs have to provide parts to these groups at the most competitive price so that they can maintain their global competitive edge. SMEs account for 99 percent of the number of companies and 88 percent of all employment.
Third, ironically, chaebol expansion is creating a sense of alienation and polarization in society, as they only take the best graduates and provide the most attractive salary to them.
Fourth, chaebol are family-oriented. While their marketing is global the tycoons are sometimes comparable to owners of mom-and-pop stores in a back alley in their way of thinking. Their global operations are booming despite the existence of non-global executives. Let’s take Hyundai as an example.
Feuding over the ownership of the Hyundai Empire has not yet ended more than a decade following the death of its founder Chung Ju-yung. Over the ownership of Hyundai Engineering and Construction, Chung Mong-koo, the eldest living son of the late founder, is in a serious feud with his sister-in-law, the wife of Chung Mong-hun. Without exception, a father-to-son ownership transfer is the norm, although curiously, their payment of inheritance tax is miniscule.
Fifth, many chaebol owners have criminal records for breach of trust and violation of other corporate laws during the transfer of wealth to their children. They were set free later because of their “contribution to the national economy” ― chaebol lords enjoy ``Get Out of Jail Free’’ cards. Koreans may be happy that Samsung smartphones are making a splash around the world, but they remain unhappy as there are two sets of laws in Korea ― one that applies to ordinary Koreans and another that encourages chaebol lords to act above the law.
Sixth, their influence is now moving beyond the corporate world. President Lee Myung-bak came from Hyundai, and Rep. Chung Mong-joon also led the majority Grand National Party.
Seventh, few chaebol lords get respect as they are not corporate philanthropists like Bill Gates and Warren Buffet.
Eighth, a few large corporations are criticized for their dual pricing policy ― selling expensively at home and cheaply overseas.
Ninth, chaebol are notorious for their propaganda. Each year they announce plans for massive investments and recruitment but do not publish the results; nor do they make public where a large amount of the investments is made ― at home or abroad.
Ironically, the crumbling of Daeoo was partly attributable to a successful PR campaign. Its founder Kim Woo-choong was unable to feel the sinking of the Daewoo ship until the last minute of bankruptcy as it received positive media coverage.
Tenth, conglomerates are prospering on the back of strong support from the government and the sacrifice of local consumers. As was widely shown during the currency crisis in 1997, they got massive bailout funds from taxpayers.
Without Park Chung-hee’s fostering of chaebol through “business” favors, they might not exist now.
Another negative aspect of chaebol is ``di-worsification’’ ― taking money from a company with a successful core competence, and throwing it away into a completely unrelated venture that fails. They also waste resources by propping up weak affiliates.
People still have a love-hate sentiment toward them, as they are the key beneficiaries of a high exchange rate policy. The lower value of the local currency makes their products competitive overseas, but forces consumers to buy foreign goods more expensively.
The government must encourage chaebol and other firms to build more factories here. It is quite disturbing to see that Hyundai produces more than half of its cars overseas. Samsung will manufacture its iconic Galaxy S model in China. The government has to expand the industrial sectors that are off limits for chaebol.
Korea also has a chaebol risk ― their misguided investment policy might deal irreparable damage to the economy.
Their military culture will lead to the production of neither iPhones nor software.
They are run like personal kingdoms by former owning families who now hold minority shares; and they have yet to improve corporate governance, focus on core competence and receive equal treatment before the law.
An economist would get a Nobel Prize if he successfully developed a practical model for retooling chaebol without killing them.
Lee Chang-sup is the chief editorial writer of The Korea Times. He can be reached at email@example.com