'No hope for domestic-oriented firms'

Korean economy on course toward rebound on back of global recovery

Analysts talk about economic issues of Korea and the world in a roundtable discussion held by The Korea Times at Dalgaebi restaurant in central Seoul. They are, from left, Park Sung-wook, director of the Macroeconomic & International Finance Division from the Korea Institute of Finance; Jung Sung-chun, research fellow at the Korea Institute for International
Economic Policy's Department of International Economy; and Shin Min-yong, head of the Economic Research Department at the LG Economic Research Institute. / Korea Times photo by Shim Hyun-chul

By Na Jeong-ju

Korean conglomerates must develop their global sales network instead of competing with smaller firms in the domestic market, economists said.

During a roundtable discussion recently arranged by The Korea Times, they said there is no hope for domestic-oriented conglomerates in this era of global competition.

"Globalization is no longer a matter of choice for chaebol. They should go abroad," said Shin Min-yong, a senior researcher at the LG Economic Research Institute. "Most of the firms are still complacent with their leading positions in the domestic market. That's not good for them as well as Korea's economy. They must see the much bigger markets out there."

Park Sung-wook, director of the Macroeconomic & International Finance Division from the Korea Institute of Finance, said chaebol firms have become an obstacle for the growth of promising small companies.

"It's difficult for a small firm to compete in the domestic market being dominated by chaebol. They are stifling growth of small players," said Park. "Under the current circumstances, it's impossible for a small firm to become a company like Apple here. The first step to address this is to give firms equal opportunities and remove the barriers posed by chaebol."

Park said Samsung cannot make another Samsung.

"We need to establish a system in which any firm can become a company like Samsung. Of course we need to help Samsung compete better internationally, but it's a different matter if a small firm cannot grow because of Samsung," he said.

Jung Sung-chun, research fellow at the Korea Institute for International Economic Policy's Department of International Economy, agreed.

"It's meaningless for chaebol to compete in a saturated domestic market," Jung said. "It's time for them to set up globalization strategies with a long-term perspective instead of competing with small players here for squeezed margins. That's a matter of the country's economic future."

Shin said conglomerates that rely on domestic demand for growth, such as Lotte, will have to face harsh reality.

"We can divide chaebol into two types ― globalized ones and stagnant ones," Shin said. "Look at Samsung and Hyundai Motor. They are selling goods to international consumers. LG is expanding globalization plans because it knew that's the way it must go for survival. But there are still many more firms that don't take this situation very seriously."

Globalization for survival

A recent data on economic performances of chaebol suggests the gap between globalized firms and domestic-oriented firms are widening fast.

According to the Bank of Korea, Samsung Electronics and the two automakers of Hyundai Motor Group ― Hyundai Motor and Kia Motors ― accounted for more than a quarter of the combined net profit of about 460,000 Korean companies in 2012.

The three firms reaped combined earnings of 24.8 trillion won ($23.4 billion) in 2012, which was about 28.6 percent of the 86.6 trillion won earned by 464,425 enterprises.

The combined net profit of the firms excluding Samsung, Hyundai and Kia fell 33.9 percent from 93.5 trillion won in 2010 to 61.8 trillion won in 2012. In contrast, the three's earnings rose 36.8 percent from 18.1 trillion won to 24.8 trillion won during the same period.

Jung said Korean conglomerates can compete better than small firms on the global stage.

"Competing with global players requires a lot of capital and brand power. In this sense, conglomerates are better positioned than small firms to expand overseas markets," Jung said. "Small firms should be given opportunities to grow in the domestic market, and then compete internationally. That's how the country's economic power grows."

Park said conglomerates tend to take the government's preferential tax rates or electric consumption charges for them for granted.

"These benefits were offered to firms to spur exports and rapid industrialization. However, that doesn't mean they should be given special treatment forever," Park said. "There will be a huge backlash from firms if the government scraps all these benefits. However, it must do so eventually because it violates fair competition."

Shin said the government's another big job is to make chaebol's governance structure more transparent.

"One of the easiest ways of making money is to get exclusive business licenses from the government. That's how the oil and mobile phone industries have grown here," Shin said. "These firms didn't have to compete. They didn't have to raise their competitiveness and revamp their governance systems. This poses a big challenge for Korea's globalization."