Korea Inc. faces more bad news
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Samsung Electronics employees enter the company’s office in Seocho, southern Seoul, Friday, after Vice Chairman Lee Jae-yong was arrested earlier in the day. / Korea Times photo by Shin Hyun-chul
By Kim Yoo-chul, Yoon Sung-won
Samsung Electronics Vice Chairman Lee Jae-yong’s arrest is casting a dark shadow over the long-term perspective of the national economy, according to industry experts, Friday.
Lee’s arrest has come as another blow to the management of Korea’s top conglomerate with his father, Chairman Lee Kun-hee, still in his sickbed. Experts expected that Samsung will not face serious immediate losses after Lee’s arrest.
“As a large conglomerate, Samsung is run under a systemized structure. This means there will no heavy impact in the short-term,” Professor Yoon Chang-hyun of the business administration department of University of Seoul said Friday.
Patrick Moorhead, president at Moor Insights and Strategy based in Texas, concurred.
“I don’t see any short-term impact. Certainly, there’s nothing positive about the news. Lee Jae-yong is not the global face of the brand,” Moorhead said. “Lee isn’t really involved in the day-to-day activities and Samsung followed a stovepipe organizational structure where each unit is a business itself. Lee isn’t a part of operations.”
Yoon said the more pressing concern is that the arrest may consequently undermine the nation’s competitiveness in a longer-term perspective.
“Chiefs like Lee are needed to make big decisions such as employment and investment,” he said. “Competitiveness depends heavily on timing and Samsung’s competitiveness will be damaged if such decisions are delayed or canceled. And, in turn, the national competitiveness will also be undermined.”
Major organizations of the business circle here said in one voice that Lee’s arrest and the following management vacuum will inflict a negative impact on the general economy of Korea.
“The business community cannot repress shock and concern,” the Korea Employers’ Federation (KEF) said in a statement. “Samsung Electronics is one of the most representative enterprises which holds the domestic manufacturing industry’s 11.7 percent in sales and 30 percent in operating profit. Samsung’s management vacuum will elevate uncertainty and damage its international credibility. This will lay a heavy burden on the domestic economy.”
The KEF also said, “Chairman Lee Kun-hee has not recovered his health for three years. Adding to this, the vice chairman’s arrest will put heavy damage not only on Samsung’s business plans but also to its 250,000 employees, partner firms and their families. We hope multiple suspicions and misunderstandings related to Samsung will be quickly resolved through the upcoming judicial proceedings.”
Korea International Trade Association (KITA) also expressed regret over Lee’s arrest.
“It concerns us whether the negative impact on Korea’s economy and its international credibility have been thoroughly reflected in approving the arrest of the top executive of the nation’s largest global company,” the KITA said in a statement. “We expect a advance to a more deliberate decision if there ever will be a similar case that targets a businessman.”
Multiple indices show that Samsung is the largest and the most influential business in the country.
As of 2015, Samsung Group’s affiliates posted a total of 272 trillion won in annual sales. The 2016 sales have been estimated to reach 300 trillion won, according to the industry. This is equivalent to 80 percent of the 387 trillion won government budget in 2016 and 20 percent of Korea’s 1,627 trillion won gross domestic product in 2014. The conglomerate takes about 20 percent of Korea’s total exports and is shouldering some 8 percent of the government’s annual tax revenue.
The group affiliates also have the largest number of employees with over 250,000, as a Korean company. Including employees of Samsung’s partner companies, related agencies and their families, more than 5 million people are estimated to be directly and indirectly influenced by the country’s biggest conglomerate.
Meanwhile, the vice chairman’s arrest is drawing yet another concern that Samsung may face the Foreign Corrupt Practices Act (FCPA) in the United States.
The FCPA was introduced by the U.S. government in 1977 to punish U.S. enterprises for bribing an overseas government official or committing accounting fraud. This act only influences enterprises that are listed on a U.S. stock market or their subsidiaries. Though Samsung Electronics is not listed on the U.S. stock market, the possibility still remains as the FCPA was revised to have a wider range of applications in 2008.
If a company falls into the FCPA’s restriction target, it not only has to pay a penalty but will also not be able to conduct business with the U.S. federal government.
Korea Economic Research Institute President Kwon Tae-shin, who used to work at the Organization of Economic Cooperation and Development (OECD) in 2006, said Samsung can be ruled out of making bids to international organization bodies.
“The OECD at that time had banned deals with corrupt businesses and the international standards on corporate corruption have continued to be tightened,” Kwon said.