Samsung, SK, Hyundai pressed to sell non-core units

FTC Chairman Kim Sang-jo

By Yoon Ja-young

Conglomerates are facing pressure from the government to sell non-core businesses controlled by owner families. While the measure aims at blocking owner families from fattening their own wallets through intra-group trading at the sacrifice of small- and medium-sized enterprises (SMEs), conglomerates say they will lose efficiency.

Fair Trade Commission (FTC) Chairman Kim Sang-jo, at a meeting with the media Thursday marking one year since his inauguration, urged owner families of large business groups to sell their stakes in affiliates that rely on intra-group trading. He cited system integration, logistics, real estate management and advertising as such.

He wondered why conglomerates should have a real estate management company owned by the group owner family.

"Family members of the large shareholders who participate in management should own stakes in only key group businesses. I am asking them to sell off the rest as soon as possible," he said.

"If it is difficult to sell off the stakes, they can split off those companies."

Though it cannot be enforced by law, he warned they will be subject to FTC investigations in the future if they hold onto the stakes.

The comment is based on the chairman's firm belief that conglomerates are hurting the business ecosystem by supporting these subsidiaries owned by owner families through intra-group trading. These companies owned by owner family members win orders from group subsidiaries, enabling the owner families to make money easily. They make enough money to inherit managerial control of the whole group, while SMEs and small traders are deprived of business opportunities.

The chairman cited system integration, logistics, real estate management and advertising as business sectors that conglomerate owner families use to fatten their wallets.

Most conglomerates have such affiliates. Samsung Group, for instance, has Samsung SDS while Hyundai Motor Group has Hyundai AutoEver. SK Group has SK C&C and LG Group has LG CNS. Hyundai Motor Group also has the ad company Innocean as well as logistics company Hyundai Glovis. LG also has the logistics company Pantos. Hanwha Group has been under FTC examination for allegations of the owner family profiteering through Hanwha S&C, a system integration affiliate.

There already exists a regulation to block owner families from profiteering through internal trading. The regulation applies to listed companies where owner families have over a 30 percent stake, as well as to non-listed companies in case their stake is over 20 percent. If these companies record over 20 billion won in total sales or over 12 percent of the sales come from internal trading with other group subsidiaries, it is considered profiteering by owner families. However, many conglomerates have been evading the law by maintaining the owner family stake slightly under the benchmark. There are revision laws pending at the National Assembly to strengthen the regulation.

"In core businesses, large shareholders should own a stake and take responsibility. That suits the principle of the market economy. However, if the owner family owns non-core businesses and the group gives those companies favors, SMEs will lose ground," he said.

It is not the first time Kim had urged conglomerate owner families to sell off stocks.

"I want the families of the governing shareholders to make long-term efforts, to hold shares of the group's core businesses, not the non-core businesses or non-listed companies," he said at the meeting with the CEOs of the country's top 10 conglomerates last month. He has been increasing the pressure since then, even pointing to sectors where they should sell off stakes.

However, conglomerates complain they prefer dealing with affiliates since they need to deal with confidential business information of the group. It is especially so with systems integration or ad companies.

"We deal with a lot of data of customer companies. Among it is sensitive information," said an official at a conglomerate system integration company who refused to be named.

"For instance, there could be information about their production facilities or those related with management. They are globally competitive companies, and there is the risk of such information being leaked or handed over to competitors."

Conglomerates also point out a company within the group can enhance efficiency. Logistics affiliates can make quick and efficient deliveries for overseas businesses, and internal systems integration companies can benefit many through lower costs.

"While some of the group companies may not have enough funding to improve their computer systems, they all can benefit if a internal systems integration company improves the whole system," an official at another SI company explained.

Kim, however, disagreed.

"I don't think each of the business groups in developed countries have their own system integration companies for better efficiency or security," he said.

He said it would be better for conglomerates to get professional services from system integration companies that are efficiently operated, adding that a virtuous cycle will be set in which these system integration companies can develop into global players.

"It is questionable whether owner families should have much stake in these companies. Most of the conglomerates have system integration affiliates, and the owner families have considerable stakes in them," he said.

Following Kim's pressure, Samsung SDS fell over 10 percent in the stock market Friday. Innocean also dropped over 7 percent.