CHAEBOLS
The Korean economy is dominated by a roughly two dozen large diversified conglomerates known as chaebols — including Hyundai, Samsung, the LG Group and Lotte — which control about 80 percent of the country's gross domestic product (GDP). Chaebols are huge integrated company groups conglomerates that combine finance, research and manufacturing. The largest chaebols have several dozen affiliates a piece and have tens of thousands, even thousands of thousands of employees. They are a big as many national economies. The largest chaebol, Samsung, alone exports 20 percent of South Korea's goods and services and South Korea is Asia’s fourth largest and the world’s 13th largest economy. Smaller chaebol such as Hanjin specialize in transportation, running airlines (Korean Air) and Hanjin container freight shipping.
Chaebol (pronounced “jayBOL”) are the large, interconnected conglomerates characterized by strong ties with government agencies. They are usually owned by one family or small group of investors and often have their own manufacturing, construction, trading, and financial components. Government and financial regulations are often geared to help the chaebols, squeeze out entrepreneurs, small and medium size businesses and social welfare money. In many other countries the laws to help entrepreneurs, small and medium size businesses and curtail the power and control of big companies. The Federation of Korean Industries is kind of a club for chaebol executives. [Source: Time magazine]
There are over 100 chaebols, worth more than US$4.4 billion by revenue each. The founders of the main chaebols are revered as pioneers who helped power the economy's rise from the ashes of the Korean war. The word chebol comes from the combination of the characters for “rich” and “clan” and means “business association” or “money clan.” Carlos Tejada wrote in the New York Times: Chaebol are generally conglomerates of affiliated companies. LG, for example, makes smartphones, televisions, electronic components, chemicals and fertilizer. It also owns Korean baseball and basketball teams. Hyundai, which makes the Hyundai and Kia cars that are popular in the United States and other countries, also makes elevators, provides logistics services, and runs hotels and department stores. [Source: New York Times, Wikipedia]
Main Chaebols
Family Groups (chaebols controlled by the owner's family or the largest shareholders)
Name— Revenues in US$ — Total Assets — Family Groups
Samsung family group — US$222.5 billion — 348.7 — Shinsegae + CJ + Hansol + JoongAng Groups
Hyundai family group — US$179 billion — 204.4 — Motors + Heavy + insurance + trading
LG family group — US$ 168 billion — 148.4 — LG 115 + GS 49.8 + LS 20.5 + LIG [Source: Wikipedia]
Chaebols Groups (Name — Revenues in US$ — Total Assets — Industries
Samsung Group — US$191 billion — 317.5 — Electronics, insurance, card, construction & shipbuilding
LG Corporation — US$101 billion — 69.5 — Electronics, display, chemicals, telecom & trade
Hyundai Motor Group — US$94.5 billion — 128.7 — Automobiles, steel & trading
SK Group — US$92 billion — 85.9 — Energy, telecom, trading, construction & semiconductors
GS Group — US$44 billion — 39.0 — Energy, retail & construction
Lotte Corporation — US$36.5 billion — 54.9 — Construction, food, energy, hospitality & retail
Hyundai Heavy Industries Group — US$27.6 billion — 42.8 — Heavy industry (including Hyundai Mipo Dockyard)
Hanwha — US$24. billion — 75.7 — Explosives, energy, aerospace, chemicals, & insurance
Hanjin — US$ 23 billion — 29.1 — Aviation & logistics
Kumho Asiana Group US$20.6 billion — 43.9 — Construction, & retail
Doosan — US$18.9 billion — 32.7 — Heavy industry, energy
Main Chaebol Groups and Their Main Affiliates
Samsung family group — US$222.5 billion — 348.7 — Shinsegae + CJ + Hansol + JoongAng Groups
Name — Revenues in US$ — Total Assets — Industries
Samsung Electronics — US$106.8 billion — 105.3 — Electronics, LCD, TV, mobile phone, semiconductor
Samsung Life — US$22.4 billion — 121.6 — insurance
Samsung C&T Corporation — US$18.1 billion — 15.4 — Trade & construction
CJ Group — US$11 billion — 12.3 — Food & shopping
Samsung Fire billion — US$10.3 — 23.0 — insurance
Shinsegae — US$9.7 billion — 10.7 — Shopping
Samsung Heavy Industries— US$9.5 billion — 26.5 — Shipbuilding
LG family group — US$ 168 billion — 148.4 — LG 115 + GS 49.8 + LS 20.5 + LIG
Name — Revenues in US$ — Total Assets — Industries
LG Holdings — US$79.6 billion — 64.7 — Holding (consolidated result by share rate)
LG Electronics — US$55.8 billion — 42.3 — Electronics, LCD, TV, mobile phone, air conditioner
LG Display — US$14.4 billion — 17.3 — LCD
LG Chem — US$12.9 billion — 9.3 — Chemistry
LG International — US$10 billion — 3.7 — Trade
SK Group — US$92 billion — 85.9 — Energy, telecom, trading, construction & semiconductors
Name — Revenues in US$ — Total Assets — Industries
SK Holdings — US$78.4 billion — 68.9 — Holding (consolidated result by share rate)
SK Networks — US$20 billion — 9.0 — Trade
SK Energy — US$46.8 billion — 24.9 — Energy
SK Telecom — US$12.4 billion — 22.4 — Telecom
Hyundai family group — US$179 billion — 204.4 — Motors + Heavy + insurance + trading
Name — Revenues in US$ — Total Assets — Industries
Hyundai Motor Group — US$94.5 billion — 128.7 — Automobiles, steel & trading, including Hyundai Motors — US$70.4 billion — 103.2 — Motors
Hyundai Heavy Industries Group — US$27.6 billion — 42.8 — Heavy industry (including Hyundai Mipo Dockyard)
Kia Motors — US$19.6 billion — 25.5 — Motors
Hyundai Oil Bank — US$ 13 billion — 4.8 — Energy
Hyundai Mobis — US$12.2 billion — 10.4 — Motor parts
Hyundai Steel — US$9.9 billion — 12.2 — Steel
GS Group — US$44 billion — 39.0 — Energy, retail & construction
GS Caltex — US$30.4 billion — 18.0 — Energy
Lotte Corporation — US$36.5 billion — 54.9 — Construction, food, energy, hospitality & retail
Lotte Shopping — US$11.3 billion — 16.9 — Shopping
Hanwha — US$24. billion — 75.7 — Explosives, energy, aerospace, chemicals, & insurance
Hanjin — US$ 23 billion — 29.1 — Aviation & logistics
Korean Air — US$9.4 billion — 17.7 — Hanjin Group's company
Kumho Asiana Group US$20.6 billion — 43.9 — Construction, & retail
Kumho E&C — US$8.9billion — 18.6 — Construction
Booyoung Group — US$19.2 billion — 15.7 — Construction
Doosan — US$18.9 billion — 32.7 — Heavy industry, energy
Doosan Heavy Industries — US$17 billion — 30.1 — Heavy industry (including Doosan
LS Group — US$18.2 billion — 14.5 — Steel, cable & energy
Infracore)
LS Cable — US$9.2 billion — 7.6 — Cable
Daewoo Shipbuilding — US$10.8 billion — 17.4 — Shipbuilding
POSCO Daewoo — US$10 billion — 3.4 — Trade
Chaebol Units, Ranked in Size
Chaebols Units
Name — Revenues in US$ — Total Assets — Industries
1) Samsung Electronics — US$106.8 billion — 105.3 — Electronics, LCD, TV, mobile phone, semiconductor
2) LG Holdings — US$79.6 billion — 64.7 — Holding (consolidated result by share rate)
3) SK Holdings — US$78.4 billion — 68.9 — Holding (consolidated result by share rate)
4) Hyundai Motors — US$70.4 billion — 103.2 — Motors
5) LG Electronics — US$55.8 billion — 42.3 — Electronics, LCD, TV, mobile phone, air conditioner
6) SK Energy — US$46.8 billion — 24.9 — Energy
7) GS Caltex — US$30.4 billion — 18.0 — Energy
8) Hyundai Heavy Industries Group — US$24.3 billion — 38.3 — Heavy industry (excluding Hyundai Mipo Dockyard)
9) Samsung Life — US$22.4 billion — 121.6 — insurance [Source: Wikipedia]
10) SK Networks — US$20 billion — 9.0 — Trade
11) Kia Motors — US$19.6 billion — 25.5 — Motors
12) Booyoung Group — US$19.2 billion — 15.7 — Construction
13) LS Group — US$18.2 billion — 14.5 — Steel, cable & energy
14) Samsung C&T Corporation — US$18.1 billion — 15.4 — Trade & construction
15) Doosan Heavy Industries — US$17 billion — 30.1 — Heavy industry (including Doosan Infracore)
16) LG Display — US$14.4 billion — 17.3 — LCD
17) Hyundai Oil Bank — US$ 13 billion — 4.8 — Energy
18) LG Chem — US$12.9 billion — 9.3 — Chemistry
19) Daelim Group — US$14.5000 billion — 11.0 — MotorCycle, Construction & Petrochemical
20) DB Group — US$12.8 billion — 24.7 — Semiconductor, Steel & insurance
21) SK Telecom — US$12.4 billion — 22.4 — Telecom
22) Hyundai Mobis — US$12.2 billion — 10.4 — Motor parts
23) Kyobo Life — US$ 11.9 billion — 47.8 — insurance (07)
24) Daehan Life — US$11.3 billion — 50.9 — insurance (08) Hanwha Group's company
25) Lotte Shopping — US$11.3 billion — 16.9 — Shopping
26) CJ Group — US$11 billion — 12.3 — Food & shopping
27) Daewoo Shipbuilding — US$10.8 billion — 17.4 — Shipbuilding
28) Samsung Fire billion — US$10.3 — 23.0 — insurance
29) POSCO Daewoo — US$10 billion — 3.4 — Trade
30) LG International — US$10 billion — 3.7 — Trade
31) Hyundai Steel — US$9.9 billion — 12.2 — Steel
32) Shinsegae — US$9.7 billion — 10.7 — Shopping
33) Samsung Heavy Industries— US$9.5 billion — 26.5 — Shipbuilding
34) Korean Air — US$9.4 billion — 17.7 — Hanjin Group's company
35) LS Cable — US$9.2 billion — 7.6 — Cable
36) NH Nonghyup insurance — US$9 billion — 27.8 — Insurance
37) Kumho E&C — US$8.9billion — 18.6 — Construction
Top Chaebol in Years Past
Top Ten Chaebol in Years Past
Rank — 1950's — Mid-1960's — 1974 — 1983 — 1990 — 1995 — 2000
1 — Samsung — Samsung — Samsung — Hyundai — Hyundai — Hyundai — Hyundai
2 — Samho — Samho — LG — Samsung — Daewoo — Samsung — Samsung
3 — Gaepung — LG — Hyundai — Daewoo — Samsung — Daewoo — LG
4 — Daehan — Daehan — Hanjin — LG — LG — LG — SK
5 — LG — Gaepung — Ssangyong — Ssangyong — Ssangyong — SK — Hanjin
6 — Tongyang — Samyang — SK — SK — Hanjin — Ssangyong — Lotte
7 — Keukdong — Ssangyong — Hanhwa — Hanhwa — SK — Hanjin — Daewoo
8 — Hankook Glass — Hwashin — Daenong — Hanjin — Hanhwa — Kia — Kumho
9 — Donglip — Panbon — Dong-Ah Const. — Kukje — Daelim — Hanhwa — Hanhwa
10 — Taechang — Tongyang — HanilSyn. Textile Daelim Lotte Lotte Ssangyong
[Source: Stephan Haggard, et al., (eds.), Economic Crisis and Corporate Restructuring in Korea:
Reforming the Chaebol p. 41]
Top Chaebol in 1997 (Rank): 1) Hyundai; 2) Samsung; 3) LG; 4) Daewoo (experienced financial difficulties after 1997); 5) SK; 6) Ssangyong; 7) Hanjin; 8) Kia; 9) Hanwha; 10) Lotte; 11) Kumho; 12) Halla (experienced financial difficulties after 1997); 13) Dong Ah; 14) Doo San; 15) Daelim; 16) Hansol; 17) Hyosung; 18) Dong Kuk Steel; 19) Jinro; 20) Kolon; 21) Kohap; 22) Dongbu; 23) Haitai; 24) Hanil; 25) Keo Pyung; 26) Miwon (Daesang); 27) Sinho; 28) Kang Won Industries; 29) Saehan; 30) Dong Yang; 31) Cheil Jedang; 32) Shinsegae; 33) Oriental Chemical Industries; 34) Woosung; 35) Byuck San; 36) Shin Won; 37) Tongil; 38) Taihan Electric Wire; 39) Tongkook; 40) Chong Gu; 41) Keumkang; 42) Sam Yang; 43) Hankook Tire Mfg.; 44) Pum Yang; 45) Tae Kwang Industries. [Source: Thayer Watkins, Department of Economics, San José State University]
Chaebols and the Government
Most of the chaebols's are simple, family-run empires whose leaders have traditionally had cozy relationship with top bureaucrats and government-controlled banks that supplied them with limitless credit and drove off competition. This relationships dates back to Park Chung Hee, a military dictator, and his efforts to stimulate the economy. South Korea, like Taiwan and Singapore, "grew rich under highly authoritarian governments."
One Korean businessman told the Washington Post, "For 30 years the military regime was possible because of the support and money they got from the chaebols. And the chaebols grew, because of the support of the military." Growth was helped by protectionism, continuous borrowing and help from the government. What began as an assistance program turned in to a hostage crisis. The chaebols built up huge debts and told the government that they needed to give them soft loans and easy credit or they would lay off workers
Carlos Tejada wrote in the New York Times: South Korea’s recipe for growth also fostered tight ties between the government and businesses. Park Chung-hee, a general who took power in South Korea after a 1961 coup, led an effort to rev up the South Korean economy — and he used many of the companies that became chaebol to do it. His government steered money to companies that chased his economic goals, such as emphasizing exports. The dynamic shifted somewhat as South Korea transitioned to a democracy in the 1980s. By then, the chaebol had become so economically powerful that they held considerable political sway. Politicians began to rely on the companies’ political and financial support to get elected. [Source: Carlos Tejada, New York Times, February 17, 2017]
Role of Chaebol in Public Enterprise
A government-led economic development policy during the 1960s was necessary because the less experienced and capital-poor private entrepreneurs lacked the wherewithal to develop several critical industries that were necessary to the nation's economic growth. The government determined that establishing public corporations to develop and manage these highly strategic industries was the fastest and most efficient way to foster growth in a variety of key areas. [Source: Andrea Matles Savada and William Shaw, Library of Congress, 1990 *]
During the 1960s, public enterprises were concentrated in such areas as electrification, banking, communications, and manufacturing. In 1990 these enterprises were, in many cases, efficient revenue-producing concerns that produced essential goods and services at low costs, but which also produced profits that were used for new capital investments or to produce funds for public use elsewhere. In the 1980s, Seoul was slowly privatizing a number of these firms by selling stocks, but the government remained the principal stockholder in each company. In the 1980s, an important function of public enterprises was the introduction of new and expensive technology ventures.*
In 1985 the public enterprise sector consisted of about 90 enterprises employing 305,000 workers, or 2.7 percent of total employment in the nonagricultural sector. There were four categories of public enterprises: government enterprises (staffed and run by government officials), government-invested enterprises (with at least 50 percent government ownership), subsidiaries of government-invested enterprises (usually having indirect government funding), and other government-backed enterprises. Government-invested public enterprises, such as the Korea Electric Power Corporation (KEPCO) and the Pohang Iron and Steel Company (POSCO), represented the core of the new enterprises established during Park's regime. In the late 1980s, roughly 30 percent of the revenues produced by public enterprises came from the manufacturing sector and the other 70 percent from such service sectors as the electrical, communications, and financial industries.*
Chaebols as Family-Owned Businesses
Devin DeCiantis and Ivan Lansberg wrote in the Atlantic: Based on our experience studying and advising family businesses around the world, the evidence is strongly affirmative. Large family-run enterprises have fueled economic development in countries like India, Colombia, and Lebanon in the absence of explicit state support. Perhaps more telling, they are often able to survive and even thrive in the face of intense political and economic pressure in places like Venezuela, Libya, and Syria. [Source: Devin DeCiantis and Ivan Lansberg, The Atlantic, March 13, 2015]
“Family-controlled companies can outperform their non-family counterparts for many of the same reasons that South Korea was able to outmaneuver its regional peers during the first 40 years of chaebol-driven growth. They are more likely to pursue longer-term strategies that go well beyond the bottom line — often, for example, providing their communities with new roads, bridges, schools, affordable housing, hospitals, and even telecommunications networks. South Korea was able to outmaneuver its regional peers during the first 40 years of chaebol-driven growth.
“These companies are also associated with higher standards of quality, since the products and services they generate are a reflection of their owners’ familial identity. As Toyota’s Akio Toyoda said when testifying in Congress over his own company’s recent public safety debacle: “My name is on every car. You have my personal commitment that Toyota will work vigorously and unceasingly to restore the trust of our customers.” Heather Cho's father echoed this sense of personal responsibility in the wake of her arrest: "I apologize to the people of [South Korea] as chairman of Korean Air and as a father for the trouble caused by my daughter's foolish conduct. Please blame me; it's my fault. I failed to raise her properly."
“In short, while the evidence from South Korea and other emerging markets suggests that explicit state support of family companies can be helpful in advancing a development agenda, it is by no means essential. In fact, these firms are often more resilient than their peers. Survival — and community — is in their DNA. Perhaps it’s not surprising that McKinsey now expects family-controlled businesses in emerging markets to “represent nearly 40 percent of the world’s large enterprises by 2025, up from roughly 15 percent in 2010.” As such, these firms are destined to be among the principal drivers of economic growth and wealth accumulation over the next decade, and likely beyond.
“South Korea still needs its manufacturing heavyweights as well as its small- and medium-sized businesses, and family-controlled companies will continue to help drive South Korea’s development just as they have since the elder Park’s administration. For several years the South Korean government has supported training workshops for family-owned companies organized by multilateral agencies. Core to these efforts has been instilling the sense of institutional stewardship and accountability that seems to be so lacking among the chaebol and yet so vital to their international peers. Critically, programs like these emphasize educating the next generation to become more enlightened owners and assume the profound responsibilities that come with great wealth and privilege.
Problems with the Chaebols
The chaebols were very inefficient, overstaffed and wasteful. Positions of authority are often passed down along family lines and often based more on connections than merit. Chaebols were allowed to build up mountains of debt. The had cozy relationship with banks that extended almost unlimited credit. If one subsidiary went into debts it could borrow money from another and if that one went into debt too it could borrow from yet another. Some chaebols were built on a web of bad debts and loans that could never be paid back. Chaebols borrowed instead sold stock so they wouldn’t dilute family control. They relied on government-backed loans which were given on the basis of political connections not credit worthiness.
Carlos Tejada wrote in the New York Times: “But the recipe also created imbalances, a number of economists have argued. Money meant for the common people often ended up in the hands of the wealthy families, creating resentment that lingers to this day. And government protection and crackdowns on the labor movement allowed these families to expand their business empires into new areas with little to fear from potential foreign competition or costly failures. As a result, chaebol became sprawling businesses that held a nearly two-thirds market share in South Korean manufacturing by the end of the 1990s, according to the World Trade Organization. But there is a deep-seated belief among many South Koreans that their immense wealth was accumulated at the expense of the public. To those people, recurring chaebol scandals are particularly galling. [Source: Carlos Tejada, New York Times, February 17, 2017]
Devin DeCiantis and Ivan Lansberg wrote in The Atlantic: It wasn’t until the 1990s that critics began to point out some of the trade-offs associated with the country’s unflinching commitment to the chaebol. The most forceful claims focused on inequality — in terms of rising wealth differentials as well as unfair competition between traditional small businesses and family-run conglomerates. In financial markets, foreign investors also began to take notice. The term “Korea discount” was coined to describe the phenomenon of South Korean companies trading at roughly half the price of their Japanese peers. Market analysts have identified several possible reasons for this, many of which are a direct commentary on the chaebol: opaque governance, higher leverage, flagrant self-dealing (the use of privilege for profit), and rampant nepotism. [Source: Devin DeCiantis and Ivan Lansberg, The Atlantic, March 13, 2015]
“The 1997 Asian financial crisis only compounded fears that these closely held oligopolies had borrowed too much, expanded too quickly, operated too esoterically, and were now “too big to fail.” But chaebol policy remained firmly entrenched, and it would take more than a decade, a global financial crisis, and a string of high-profile corruption scandals for politicians to finally revisit the state’s unconditional support for its national champions.”
Problems Created by Chaebols
Critics contend that the large companies and high government officials exert too much of an influence on economic decision making. The chaebols make it difficult for new businesses to starts up in key industries. Many analyst believe the chaebols focus on strategic industries and leaving only crumbs like retailing and food stands to small businesses and entrepreneurs. Some groups such as farmers and labor organizations feel left out of the Korean economy.
Chaebols may be too large and cumbersome to compete in the rapidly changing international market. Some economist argue that if some of the chaebols were allowed to close, then it free up capital for new business and force the others to get their act together.
William Pesek of Bloomberg wrote: “ The chaebol are major advertisers with deep pockets and, like Japan's vast power industry or America's military-industrial complex, they are adept at using their brawn to muzzle criticism. In his explosive 2010 book "Think Samsung," that company's former in-house counsel Kim Yong-chul detailed how family-owned conglomerates allegedly used bribes and intimidation to "lord over" the government and the media. Kim says that when he first approached local news outlets with the story, he found no takers. [Source: William Pesek, Bloomberg, January 8, 2015]
Chaebol Cross-Shareholding Keeps Power in the Family
Chico Harlan wrote in the Washington Post: “The conglomerates, Samsung included, weave their various companies together in what’s known here as “cross-shareholding,” a controversial ownership structure in which a family concentrates its shares in a few core companies, then passes investment to other affiliates within the group. The arrangement allows families to control a broad range of businesses, even those in which they hold few, if any, shares. [Source: Chico Harlan, Washington Post, December 11, 2012]
Donald Green wrote in the New York Times: “South Korea's Fair Trade Commission released a report showing an imbalance between direct ownership by founding families in the chaebol and the level of voting rights they exercise. Within South Korea's 55 top chaebol and their 968 affiliates, founding families on average own just 5 percent of the shares but exercise 51.2 percent of the voting rights, according to the commission. The Lee family, with an average of 4.4 percent ownership of Samsung companies, exercised 31 percent of the voting rights. [Source: Donald Green, New York Times, August 18, 2005]
Chaebol or Nothing: for South Korean Job Seekers
Chaebol’s dominate the new job market as they dominate the economy. Isabella Steger wrote in Quartz: “Korea’s young jobseekers “are the product of an extremely unequal and unstable society that has concentrated all of its wealth and resources in the chaebol,” wrote Kim Dong-chun, a sociology professor at Sungkonghoe University in Seoul. [Source: Isabella Steger, Quartz, October 17, 2016]
“And as Korea’s economy weakens, these companies are cutting back too. According to one survey, almost half of 500 of Korea’s biggest companies, which typically conduct two rounds of hiring a year, said that they would reduce their hiring this year. “That’s the problem, when I write my essays I’m just thinking about what these companies did wrong, and then I can’t focus on writing my essays,” said Moon, who recently took an almost six-hour-long Hyundai test. “Those stories just kept coming to my mind.”
“Still, everyone wants a job at the same handful of companies — 200,000 people took Samsung’s test in 2014, competing for 14,000 jobs. After a lifetime of cram schools and testing, the pressure to get into a prestigious Korean company remains high, and is expected. Alternatives like working at a small or medium enterprise or a startup are scant, or simply discouraged.
““You will work overtime in every company anyway, so it’s better to stick with ones that actually pay you for overtime,” said Hong Seung-min, another recent SNU graduate whose dream job is to work at a design consultancy, though she will take the exams for Samsung and LG. One estimate by McKinsey in 2013 said that SMEs pay just 62 percent of what chaebols pay. “I don’t want Samsung and LG to do badly, because it’s my country and I want them to do well,” said Regina Yoo, the co-founder of a salad delivery startup in Seoul called FreshCode. “But they need to change. Korea needs new blood.”
Nut Rage and the Chaebols
Devin DeCiantis and Ivan Lansberg wrote in The Atlantic: In December 2014, “in an episode since immortalized as “Nut Rage,” a Korean Air executive brutally berated an unsuspecting flight attendant for daring to serve macadamia nuts from the bag instead of a porcelain dish during pre-flight snack in the first-class cabin. According to witnesses, the executive “snarled like a ‘wild beast’” and struck him with a tablet computer before ordering the pilots to return to the gate at JFK Airport in New York so he could be forcibly deplaned. The fallout continued months later. Just this week, the flight attendant sued the company and the offending executive, Cho (“Heather”) Hyun-ah, who is already serving a yearlong prison term over the incident. [Source: Devin DeCiantis and Ivan Lansberg, The Atlantic, March 13, 2015]
Cho, 40 at the time, is the heiress of the Hanjin Group, which owns Korean Air and is one of South Korea's chaebol. “The scion’s bad behavior not only flouted the country’s aviation laws by “threatening the safety of the flight and causing confusion in law and order,” but also fed into the worst stereotypes of capitalist privilege.”
“Still, her prison sentence and the retaliatory lawsuit would have been unthinkable even a few short years ago. For most of the last half-century, the families controlling South Korea’s 100 or so chaebol were broadly respected or at the very least tolerated for the role they played in the country’s economic development. Recently, though, public opinion has become increasingly critical, and a bill to deal with gabjil or “high-handedness” among the rich and powerful is now gaining momentum in the National Assembly. If passed, it would ban members of South Korea’s elite families from returning to work at their companies within five years of being convicted of a crime.
When viewed through a contemporary lens, South Koreans’ hostility toward the chaebol may seem justified. In a year when Thomas Piketty’s textbook on the economics of inequality became an unlikely bestseller, perhaps it wasn’t surprising to hear indignation over stories about “high-handed” South Korean shoppers slapping lowly sales clerks and chaebol billionaires receiving presidential pardons for embezzlement convictions, or to see references to chaebol elitists invade popular culture and spawn bestselling exposes. However, if the discontent turns into a movement to break up the chaebol entirely, this latest corporate scandal could threaten the future of South Korea’s wildly successful economic model.
In response to the “nut rage” backlash, the head of a leading South Korean investment bank summarized the country’s intractable economic dilemma: "People have always felt this frustration, but the previous perspective was you can't discipline the chaebol because we can't survive and thrive without them." A professor at Pusan University captured the zeitgeist with far less reserve: “The chaebol are rapacious, politics-corrupting, consumer-punishing, reverse-engineering oligopolists who’d have been broken up long ago anywhere in the West.” While dramatic structural change may not be likely in the near term, Koreans and their lawmakers are now openly debating a shift in the historically symbiotic relationship between the state and the chaebol’s controlling owners.
Contempt Towards Chaebols
Don Lee wrote in the Los Angeles Times: “Small firms in South Korea have been unhappy about chaebol for decades. When former President Park Chung Hee took power in 1961, he used chaebol to carry out his economic development plans. Park got chaebol to build South Korea's bridges, highways and ships. And chaebol got access to government contracts and easy credit. South Korea's economic miracle was born. But when the 1997-98 Asian financial crisis crushed South Korea's economy, many analysts blamed the chaebol system. [Source: Don Lee, Los Angeles Times, September 25, 2005]
Isabella Steger wrote in Quartz: “Many dislike the chaebols for their disproportionate dominance of the Korean economy, and of everyday life. By one estimate, Samsung, LG, Hyundai, and SK make up almost half of the economy. Corruption remains a huge problem at the top levels of management in these companies. This year, Lotte Group’s chairman is being investigated for embezzlement, while its No. 2 executive committed suicide; Hanjin, one of the world’s biggest shipping companies, declared bankruptcy in August and its former chairwoman is being investigated for insider trading; and Samsung, arguably the most desirable of Korean employers, is grappling with an exploding-phone problem that increasingly looks like a poor management problem. [Source: Isabella Steger, Quartz, October 17, 2016]
Carlos Tejada wrote in the New York Times: “Public support of chaebol has gradually waned. The Asian financial crisis of the late 1990s stirred worries that the cozy relationship between chaebol member companies could lead to severe damage across multiple businesses if one failed. As the economy has matured and created a nation of consumers, an increasing number of South Koreans worry about the political power and corruption of the chaebol, with many now saying white-collar crime is a major issue. Despite those concerns, chaebol executives are widely believed to be treated with kid gloves. The elder Mr. Lee, Samsung’s chairman, has been pardoned twice after being convicted of white-collar crimes, with the potential impact to South Korea’s economy given as the reason. [Source: Carlos Tejada, New York Times, February 17, 2017]
Chaebol Power: a Political Issue
Roh Moo Hyun, President of South Korea from 2003 to 2008, campaigned against the chaebols and promised to reform them but in the end didn’t achieve much. Devin DeCiantis and Ivan Lansberg wrote in The Atlantic: During presidential elections in 2012, the chaebol and their controlling families were targeted for their starring role in the country’s latest economic drama: twin plagues of slower growth and rising inequality. Voters produced popular bumper stickers claiming, “It’s the chaebol, stupid.” Media outlets fanned the flames with talk of “economic democratization” and “chaebol-bashing.” [Source: Devin DeCiantis and Ivan Lansberg, The Atlantic, March 13, 2015]
Chico Harlan wrote in the Washington Post: “ Debate over how to curb the size and power of Samsung and other family-run conglomerates has turned into the key issue in South Korea’s” December 2012 “presidential election, with polls showing that about three in four voters say they feel negatively about the country’s few behemoth businesses, and candidates sparring over how far to go to constrain them. [Source: Chico Harlan, Washington Post, December 11, 2012]
“South Korea’s leading presidential candidates say the country has been far too lenient in how it treats its richest men. Chaebol executives who commit crimes should be punished harshly, they all say, with no chance for such redemption The leading candidates say South Korea should prevent conglomerates, Samsung included, from weaving their various companies together in what’s known here as “cross-shareholding,” a controversial ownership structure in which a family concentrates its shares in a few core companies, then passes investment to other affiliates within the group. The arrangement allows families to control a broad range of businesses, even those in which they hold few, if any, shares.
“Though there is broad agreement about some reforms, the level of concern about chaebol differs across party lines. The position of conservative candidate Park Geun-hye is that the conglomerates are merely unruly — a notable view in itself, given that Park belongs to Lee Myung-bak’s pro-business ruling party, and that her father — dictator Park Chung-hee — built the chaebol system after taking power in a military coup in 1961. Park said recently that chaebols often steal technology from smaller innovators and force unfair pricing on suppliers. “In the economic area, we have emphasized the concept of efficiency, and in some sense we haven’t paid enough attention to the concept of fairness,” she said.
“But the opinion on the far left is that chaebols, particularly Samsung, hold a dangerous level of influence. That viewpoint caught traction after a former Samsung counsel, in 2007, accused the conglomerate of systematically distributing money from a slush fund to influential figures. In the ensuing investigation, a special investigator found no evidence of bribery but did uncover the financial crimes for which Lee, the chairman, was later pardoned. “Samsung has the government in its hands,” Lee Jung-hee, a liberal presidential candidate with virtually no chance of winning, said in a nationally televised debate last week. “Samsung manages the legal world, the press, the academics and bureaucracy.”
Reforming the Chaebols
Don Lee wrote in the Los Angeles Times: “Small firms in South Korea have been unhappy about chaebol for decades. When the 1997-98 Asian financial crisis crushed South Korea's economy, many analysts blamed the chaebol system. Politicians launched an array of measures to abolish backroom dealings and cronyism by chaebol and create a Western-style, market-oriented system. New rules made money harder to secure and forced chaebol to improve transparency and corporate accountability.” [Source: Don Lee, Los Angeles Times, September 25, 2005]
Devin DeCiantis and Ivan Lansberg wrote in The Atlantic: During presidential elections in 2012, each of the three leading candidates formulated anti-chaebol platforms, including harsher sentences for convicted executives and new restrictions on the convoluted legal structures that families used to maintain control of their companies. Park Geun-hye, the new president said "the management goal of conglomerates should not remain maximizing profit but should involve pursuing coexistence with the larger community." [Source: Devin DeCiantis and Ivan Lansberg, The Atlantic, March 13, 2015]
“A renegotiation of the fundamental relationship between the chaebol and South Korean society now seems inevitable, particularly in light of the Korean Air” Nut’s Rage “incident. But it’s difficult to see Park as a bona fide agent of change, given that her father Park Chung Hee was the progenitor of chaebol policy in the first place. Her earliest efforts to promote smaller businesses and jumpstart a “creative economy” were broadly praised, though largely ineffective. It is also difficult for policymakers to conceive of growing the country’s economy and its global influence without their franchise players.
“Which raises the question: Is it even possible to achieve lofty development goals without explicit state sponsorship for a privileged class of entrepreneurs? Curiously, as the developing world rushes to create this new class of family-run economic champions, Korean policymakers seem to be drifting in the opposite direction. Greater regulation, prosecution, and competition might help avoid embarrassing outbursts from spoiled princelings, but should reforms go too far, the country risks throwing the kimchi out with the brine-water. Vitriolic comments from opposition leaders describing the chaebol as "the poison in the Korean economy" are not particularly constructive, though neither are insensitive outbursts by petulant family heirs or violent attacks with metal pipes by chaebol chairmen.
“The words of former South Korean Prime Minister Chung Woon-chan continue to resonate in both political and social circles in his country: “No matter how huge the chaebol profits become, those profits do not trickle down to small- and medium-sized enterprises or the public. ... The economic concentration of chaebol results in a serious polarization." He made this observation in 2012, long before the nut-rage backlash. But as the inequality narrative has continued to gain momentum in the years since, Korea’s economic model now looks more vulnerable than ever.
Are the Chaebols A Model for China?
China sends representatives to South Korea to study the chaebols.According to The Economist: It is easy to see why China might like the chaebol model. South Korea's industrial titans first prospered in part thanks to their close ties with an authoritarian government (though Samsung was not loved by all the generals). Banks were pressured to pump cheap credit into the chaebol, which were encouraged to enter dozens of new businesses—typically macho ones such as shipbuilding and heavy industry. Ordinary Koreans were chivvied to save, not consume. South Korea grew into an exporting powerhouse. Does this sound familiar? [Source: The Economist, October 1, 2011]
“In China, too, the state draws up long-term plans, funnels cash to industries it deems strategic and works hand-in-glove with national champions, like Huawei and Haier (see article). Some of Beijing's planners would love to think that state intervention is the route to world-beating innovation. No doubt inadvertently, Samsung feeds this delusion.
“For delusion it is, on three levels. Most broadly, South Korea's prosperity owes less to dirigisme than China's dirigistes believe, and nothing to dictatorship—South Korea is now a democracy, and much happier for it. Second, the chaebol system has been less beneficial for South Korea than Samsung's success might imply. Some of the state-directed cheap credit that powered the chaebol produced superb companies, such as Samsung Electronics and Hyundai Motors. But it yielded some costly failures, too. During the Asian financial crisis of 1997-98, half of the top 30 chaebol went bust because they had expanded recklessly. Daewoo, the Great Universe, is no more.”
Image Sources: Wikimedia Commons.
Text Sources: South Korean government websites, Korea Tourism Organization, Cultural Heritage Administration, Republic of Korea, UNESCO, Wikipedia, Library of Congress, CIA World Factbook, World Bank, Lonely Planet guides, New York Times, Washington Post, Los Angeles Times, National Geographic, Smithsonian magazine, The New Yorker, “Culture and Customs of Korea” by Donald N. Clark, Chunghee Sarah Soh in “Countries and Their Cultures”, “Columbia Encyclopedia”, Korea Times, Korea Herald, The Hankyoreh, JoongAng Daily, Radio Free Asia, Bloomberg, Reuters, Associated Press, BBC, AFP, The Atlantic, The Guardian, Yomiuri Shimbun and various books and other publications.
Updated in July 2021