Chaebol’s birth in 1961: prime movers of nation building

Hyundai Group founder Chung Ju-yung, left, and Samsung Group’s Chairman Lee Byung-chull, right, walk together with Lee Won-sung, a founding member of the National Association of Entrepreneurs, in the early 1960s. They are now all dead. / Korea Times file

By Andrew Salmon

While North Korea’s only relevance in international society is as a military threat, South Korea boasts an increasingly diversified national portfolio. Yet at heart, the republic is an economic force: People across the world communicate over Korean-made cellphones, drive in Korean-made cars, and transport their products in Korean-made ships.

The manufacturers of these products ― the giant, family-run conglomerates known as “chaebol” ― were the core economic prime mover that lifted South Korea from rags to riches in three breathless decades. These priceless national assets are among the world’s top firms, yet their success has come at a price. Some worry that the chaebol, jealously controlled by the privileged second- and third-generation descendents of the legendary entrepreneurs who founded them and deeply entrenched in the national economy, are the most powerful, reform-resistant institutions in the land.

Five Decades of Expansion

The birth of the chaebol as we know them today dates back to 1961, when President Park Chung-hee’s first “Five Year Plan” was instituted. This is not to say proto-chaebol did not exist pre-Park. Samsung was founded in 1938 when Lee Byung-chull founded a small trading company near Daegu dealing in groceries. Hyundai started out in 1946 as a construction company run by legendary North Korean immigrant, Chung Ju-yung, gaining its first experience with international business norms when it dealt with the U.S. Army in post-World War II.

But it was under Park that these businesses would bulk up, for it was Park who made the strategic decision not to create national industries, but to harness private enterprise to his nation-building ambitions. Their corrupt behavior under the Rhee Syngman government, gave Park the leverage he needed over the early business leaders: He granted them pardons after payments of massive fines. From then on they would work together, but it was always clear who was in charge.

Park’s model was Japan. A graduate of the Manchurian Military Academy, the general-turned-president had seen how a military-industrial complex had built the infrastructure of Northeast China. The Japanese zaibatsu ― the family run firms that propelled Meiji Japan from medieval kingdom to industrial power in the late 19th century ― would be the benchmark for the chaebol’s rise.

While business was private rather than public, the chaebol would benefit, for decades (some would argue they still do) from advantages typically granted to national industries. They received preferential access to state capital; were enriched by the national infrastructure projects they executed; enjoyed a protected home market in which to test product before venturing overseas; and had significant governmental support when exporting. Moreover, Korean firms had privileged access to the rich U.S. market. Yet even given these advantages, their success would be staggering.

Guided by Park’s bureaucracy, the companies climbed the value chain: From textiles to construction and heavy industry, then petrochemicals, automobiles, hospitality, electronics and financial services. In this authoritarian society, any firms that did not play the game were quashed.

Park was assassinated; Chun Doo-hwan seized power in 1980. Chun’s relationship with the business godfathers would not be as cozy as Park’s yet the chaebol were no longer easy to challenge. With Korea’s economy surging amid increasing global trade, the chaebol became increasingly dominant in the 1980s and early ‘90s. But as they broadened their business portfolios, their ambitions over-reached.

Too big to fail?

The 1997-8 Asian financial crisis would be the chaebol’s sternest test. The conglomerates were part of a dirigiste, unholy triad ― banks, business and bureaucracy ― that had distorted capital flow. The result? Big business was hugely over-leveraged and over-diversified.

The “too big to fail” paradigm was tested in 1999 and found wanting. The Daewoo Group ― like most chaebol, leveraged well past the hilt, did what other chaebol did not do: It resisted government reforms. Without state support, the group imploded under $80 billion of debts; its founder/chairman Kim Woo-chung fled abroad. It was, at the time, the world’s largest bankruptcy.

Under pressure to de-link cross-shareholdings, many chaebol broke up in the wake of the crisis, notably Hyundai. (Though some would say the passing of Chung Sr. was a bigger factor.) Of the big boys, only Samsung retained its group format, and had to divest a range of non-core businesses, notably its nascent automotive arm.

Yet contrary to common perception, few companies actually closed their doors. Bailout packages kept them afloat. (Several ex-chaebol arms including Hynix Semiconductor, and various Daewoo affiliates are still government-owned over a decade later). Beefed-up accounting rules would not prevent financial scandals continuing well into the millennium and the crisis, ironically, strengthened the chaebols.

Forced to concentrate on core-competencies, they could no longer operate as “chips to ships” monsters, but as more nimble, specialized firms: Samsung Electronics; Hyundai Motor; Hyundai Shipbuilding; LG Electronics. A new focus appeared on quality and marketing. For the first time, Korean companies gained traction as brands.

Meanwhile, national infrastructure projects would again enrich the chaebol as world-class broadband Internet and CDMA cellular communication networks provided new business areas for the groups. And as Koreans eagerly adopted new gadgetry, the chaebol supplied demand with increasingly high-tech products.

The chaebol’s inability to innovate has not slowed their meteoric rise. Starting out as copycat manufacturers in the 1960s, 70s and 80s, they are now arguably the world’s most skillful incremental innovators. Few chaebol patents are for “blue ocean” product families, but their process innovation is top notch: A faster semiconductor, a thinner LCD, a cellphone that packages an ever-greater range of applications. Currently, Samsung Electronics, for example, is leveraging a latecomers’ advantage and rolling out a full product family to compete with Apple’s portfolio. Early indications are that Samsung will perform as strongly in these categories as it does in cellphones, TVs, displays and semiconductors.

The New Royalty

The chaebol have enriched the nation and are a component of national pride ― Samsung, has overtaken both Sony and Hewlett-Packard, becoming the world’s largest electronics company. For ambitious Koreans, they remain the employers of choice. At the top of the corporate ladder the controlling families of the big groups are the closest thing Korea has to royalty. They lead secretive lives in fortress-like homes and top-floor offices, appearing in public only among imposing entourages.

Like European royalty, chaebol families intermarry. Wives open museums and galleries; family heads take on quasi-diplomatic national tasks. Hyundai’s Chung Ju-yung was a key player in bringing the 1988 Olympic Games to Seoul; his son Chung Mong-joon was a core figure in the 2002 World Cup bid. At time of writing, Samsung Chairman Lee Kun-hee is working on PyeongChang’s 2018 Winter Olympics pitch.

Yet chaebol family and alumni have had mixed success in the political arena. While Chung Sr. failed in a presidential bid in 1992 and Mong-jun, a former chairman of Hyundai Heavy, conceded the leadership race to the late Roh Moo-hyun a decade later, a protégé of Chung Sr., Lee Myung-bak ― formerly CEO of Hyundai Construction ― currently occupies the Blue House

Too rich to jail?

Yet Korea has a conflicted relationship with its business empires, for there is a dark side to the story. Korean politics has democratized, and society in general is becoming increasingly open and inclusive, but the chaebol have not changed the way they do business.

The concept of shareholder as company owner is unrecognized, as seen by the low dividends paid and the fact that the corporate leaders are not answerable to shareholders: Chairmen rarely (or never) attend annual general meetings. Small and medium sized businesses who supply the chaebol constantly complain that they are being abused: disallowed to supply competitors, paid late, forced to accept rebates.

Although they are now multinational, chaebol executive ranks are almost entirely staffed by Koreans ― perhaps due to HR policies, perhaps due to hierarchical structures or perhaps due to the formidable cultural barriers of the Korean office. And when activist foreign shareholders have attempted to force managerial change, Korea’s ever-present nationalism, and the strong relationships the groups cultivate with national power centers, combined have rallied in defense of management.

But at home, no institution can challenge them.

The press is in the pocket of big business: It is an open secret that chaebol leverage advertising budgets to control print media. The law does not apply to the chairmen and their family members, whose misdemeanors fall under not just corporate crimes: Several chaebol family members have been involved in violent affrays ― including kidnapping and torture ― but manage to evade significant legal sanction. In an echo of the Park years, when economics was the only national priority, the refrain is heard again and again, in judiciary and media: “Justice is important, but we cannot jail top business leaders; to do so would imperil the national economy.”

This supposed indispensability of chairmen flies in the face of responsible management, which delegates tasks and installs processes wherein subordinates can run organizations. Meanwhile, the business acumen of the second- and third-generation family members is questionable, but rarely questioned.

Mixed legacy

Chaebol are, today, a paradox. On one hand, their top quality products, services, sales and marketing, and a stunning record of success, they are top-tier companies. On the other, their opacity, rampant illegalities and power abuse make them unpleasant corporations.

The groups were arguably the critical actors in the national success story and they continue to enrich local coffers and assist national diplomatic initiatives. But their constant parade of unpunished scandals ― which themselves reveal the laxity of Korea’s rule of law ― tarnish Korea’s national brand.

Seoul-based reporter Andrew Salmon is the author of commercial history “American Business and the Korean Miracle” (2002), Korean War battlefield history “To the Last Round” (2009) and the upcoming “Scorched Earth, Black Snow” (2010).

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