In the 1960s and 1970s, South Korea’s chaebol propelled the country’s explosive growth, helping to transform it from one of the world’s poorest countries into an Asian tiger.
Now, South Korea is the world’s 10th largest economy yet the family-run conglomerates have become what some see as untameable beasts in need of reining in.
“The chaebol have become too powerful,” argues Kwon Oh-seung, the chairman of the Korean Fair Trade Commission and the anti-trust regulator leading the charge to stop what he sees as the conglomerates’ distortion of the Korean economy.
But rather than pursue a crackdown on the chaebol, South Korea’s government is pushing a plan to ease the regulations that govern the conglomerates and the often tangled shareholding structures via which their controlling shareholders control vast industrial empires, often with formal shareholdings of 5 per cent of less.
The National Assembly is due this month to consider a change that would see the number of companies subject to cross-shareholding restrictions fall from 343 units of 24 chaebol to just 24 companies belonging to seven groups.
Under the current regulations, chaebol affiliates with assets of more than Won2,000bn ($2.14bn, €1.65bn, £1.09bn) belonging to groups with assets of more than Won6,000bn are prohibited from holding more than 25 per cent of shares in an affiliated company.
Under the proposed revision, only chaebol with assets of more than Won10,000bn will be affected. Furthermore, the cross-shareholding limit will be relaxed to allow companies to hold up to 40 per cent in affiliates.
The finance ministry says the move is intended to encourage corporate investment, which is forecast to slow sharply because of economic uncertainties caused by the strong won and December’s presidential election.
The view is backed by industry groups. According to the Federation of Korean Industries, the country’s 30 largest business groups expect to invest Won52,000bn this year, only 0.6 per cent more than in 2006.
The finance ministry argues that any efforts to tame the chaebol would potentially hobble an already slowing economy. Indeed, within South Korea there is a fear that the country’s GDP would not grow without the chaebol.
But Mr Kwon, whose efforts to push through stricter cross-shareholding limits have been stymied by the government, argues the new rules will simply help distort the Korean economy further. Mr Kwon says the current limits can already see affiliates control 40-45 per cent of a chaebol company while owners technically hold just 5 per cent.
“The affiliates of large business groups can survive even if they are not competitive,” he says. “I wanted to make the market function properly so that all those who make quality goods can survive in the market.”
Many analysts say it is time for Korea to wean itself off its dependence on both the chaebol and on manufacturing, for it to start developing the service sector, and to allow small and medium size enterprises – which employ 80 per cent of the working population – to grow.
The huge size of the chaebol is being called into question, especially as Samsung and Hyundai Motor prepare to install third-generation chairmen, a process aided by complex webs of cross-shareholdings.
Mr Kwon argues that in Korea “power is concentrated in too few hands”, singling out Samsung, Hyundai Motor, Hyundai Group, LG, SK and Doosan as the main offenders.
Samsung, the biggest chaebol, now has more than 60 affiliated companies – ranging from hotels and a securities trader to shipbuilding and petrochemicals – and accounts for almost a quarter of the Korean stock market’s capitalisation and more than 20 per cent of total exports.
“When I compare Korea with other countries, like the US, the UK, Germany,– I see that large business groups here have the power to hamper the functioning of markets so I am very concerned,” Mr Kwon says.
The chaebol have vehemently resisted attempts to curb their power. Lee Seung-chol of the FKI chaebol club argues that the restrictions on large business that the FTC wants to pursue are simply “wrong”.
“Even though big companies dominate the domestic market they don’t dominate international markets. In a global, open economy, market share does not equate to market power,” he says.
But analysts see logic in Mr Kwon’s calls for stricter monitoring. “The resources that the chaebol can deploy are massive compared with their potential competitors,” says Hank Morris, a business consultant in Seoul. “So it makes sense for the government to play referee and be on the look-out for dirty tricks.”
