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Chaebols: Kings of the conglomerates

South Korea’s chaebols are the foundation of the country’s economic success story. But have these businesses turned into monsters?

Imagine you are the fantastically wealthy owner of a vast South Korean conglomerate with a young daughter who doesn’t know what she wants to do with her life. She needs a hobby. What do you do? Give her a bakery, of course. Sounds harmless? Not so.

Early in 2012 there was a vast public blowback against the swanky bakeries owned by the daughters of South Korean moguls, which were accused of putting traditional small Korean bun-sellers out of business. The outcry was so great that even politicians leapt on to the bandwagon.

One government MP said: “It’s like Park Ji-sung [ex-Manchester United player] trying to win at street football in the back alleys.” The prime minister stormed: “The children or grandchildren of chaebol families might think opening up a bakery is a fun hobby, but it’s a threat to the livelihoods of small bakery store owners.”

It was a PR battle too far for the country’s vast, multinational conglomerates, called chaebols. Lee Bu-jin, the eldest daughter of Samsung Electronics chairman Lee Kun-hee, quickly sold off her bakery brand, Artisee. Chung Sung-yi, the eldest daughter of Hyundai Motor Group’s chairman, also closed her café, Ozen, and the group later offloaded its Vezzly brand too. And Chang Seon-yoon, granddaughter of the Lotte Group’s boss, also sold her bakery stores.

This might seem like a trivial story, but it beautifully illustrates growing scepticism – even loathing – of the behemoth family businesses of South Korea, the chaebols.

Big family businesses exist almost everywhere, but in Korea they are sprawling giants with dozens of subsidiaries and spin-offs. Family-controlled mega-corporations such as Samsung, Hyundai, LG, Lotte, SK Group, Hanjin, Hanwha and Doosan dominate the country’s economy. The 10 biggest chaebols account for over half the value of the almost 2,000 companies listed on the country’s stock exchange, and the 30 biggest accounted for more than four-fifths of exports in 2010.

It seems that their strength is only growing. In the past four years the number of companies controlled by the top 35 chaebols has doubled to 600, says the country’s Fair Trade Commission. Samsung alone accounts for a fifth of the country’s exports. The five biggest chaebols’ sales are equivalent to more than half of South Korea’s gross domestic product.

Although they began in heavy industry, such as shipping, power generation or construction, telecoms or car-making, the chaebols’ sub-businesses now also reach into every corner of life. Among SK Group’s 92 subsidiaries are firms that make superconductors, refine oil and sell e-learning services. The group even owns a baseball team. Lotte’s 60 businesses make sweets, run hotels and carry out petrochemicals research. Chaebol-owned hypermarkets are everywhere.

These days they are both loved and loathed. “There’s two perceptions,” says Professor Kim Woo-chan of Korea University Business School. “Koreans are very proud of our chaebols, especially when we go to the airport and see the logos of the companies, but we are not really proud of the families that control them.” One young South Korean I spoke to – who wanted to remain anonymous – bluntly said that “everybody hates the chaebols”.

There are two main ways that the chaebols are said to damage the South Korean economy. First, they make life hard for the small and medium-sized enterprises that employ nine-tenths of South Koreans. There was an outcry in 2011 when Lotte started selling buckets of roast chicken nuggets for a knock-down price that smaller sellers couldn’t hope to match. Lotte caved in and stopped the deal after just a week.

It was part of what’s called “the tofu wars”, because tofu-making is one of the industries that chaebols are prevented by law from engaging in. This might seem a crazy piece of regulation, but in 2011 they were also banned from making bottles, sunglasses, toys, light-bulbs and soap. “In recent decades, small companies in Korea have not been able to grow,” said Jeong Yeong-tae, secretary-general of the commission that oversaw the regulations.

“They are extinguished by the chaebols that encroach on their business areas. We need to secure a diversity of number of players.” The chaebols’ trade body called it “overprotection”, which would prevent SMEs from being strong enough to stand on their own two feet, although it’s hard to see that the chaebols really have too much to fear from the lightbulb-makers of Daegu. But it’s easy to see that the light bulb-makers have a lot to fear from the cheabols.

Secondly, the chaebols are accused of stifling entrepreneurship. “It’s very hard to find a business that is big, and used to be an SME,” says Professor Kim. It’s almost impossible for a small Korean business to take on a cheabol subsidiary – and everything is a chaebol subsidiary. The problem is not so much anything that the chaebols do, just that they exist. They are so engrained in South Korean life and are a byword for stability and respectability that children are encouraged to work for them. Ahn Chul-soo, the founder of an antivirus software company who at one point was standing for president in December’s elections, says that chaebols stifle creativity and treat employees like “caged animals in a zoo”.

Some even blame the chaebols for the general misery of South Korean life. The country has the second-highest number of suicides in the world, and also the longest working hours of developed countries: people work for more than 50 days over the OECD average. Hours at the low levels of chaebols are notoriously long.

The gap between rich and poor is also large, and getting bigger, something that’s well-known to make for a miserable population, and is often blamed on the rigid social hierarchy the chaebols arguably create – it was the gap between the wealthy chaebolites and the rest that was behind the YouTube hit Gangnam Style (singer Psy pictured, left), a satire on the playboys of the flashy Gangnam district in Seoul, which is largely populated by the wealthy offspring of cheabol plutocrats.

The chaebols sit at the centre of South Korean life, immovable and implacable. It all leads to a deep fatalism. “In South Korea, they say no matter what you do, the winner is already decided and he takes it all,” an economist was recently quoted as saying.

To understand how all this happened you have to go back to 1961. That was the year the military seized power in South Korea and decided that it had to industrialise, and quickly. The generals encouraged entrepreneurs under a policy that became known as “guided capitalism”. (The word “chaebol”, formed by the words for “wealth” and “clan”, was coined in 1984.)

The government threw money at their pet businesses, gave them massive contracts and helped them to export. The government ensured the chaebols moved with the times, and in the 1970s and 1980s ensured that they moved into high-tech industries. (Moving with the times is a chaebol trait: Samsung boss Lee Kun-hee famously once said you should be willing to “change everything except your wife and children”.)

When South Korea became a democracy in 1987 a cheabol leader became president and the cosy relationship continued. The fragility of the system was exposed in the Asian financial crisis of 1997, however, when export demand collapsed and 11 of the 30 biggest chaebols bit the dust. In 1999 the Daewoo group gave up the ghost, leaving $80 billion (€61 billion) of unpaid debt, at the time the biggest corporate collapse in history. Despite this making it obvious that it’s daft and dangerous to base your economy on a handful of unaccountable mega-corporations, the chaebols have proved immovable and the country is often called the Chaebol Republic. Ahn has accused them of turning South Korea into “a realm of predators and lawlessness”.

Goldman Sachs was famously compared to a “giant vampire squid”. The chaebols are more like the gigantic lizards from cult 1960s monster films, like Godzilla or his rubbery Korean cousin Yongary, who lumbered and stomped its way around the country, smashing up buildings, breathing fire and zapping jeeps with lasers from its nose.

Just as Yongary was a mutant lizard, so the chaebols are mutant family businesses. All of the good things about family businesses – the strong contacts, the embedded business knowledge, the entrepreneurial ability to adapt to new circumstances and diversify – have been grotesquely enlarged in the chaebols, and have turned them into monsters that trample on everything in their path. The question is (as they love to say in those monster movies) can they be stopped?

In August 2012 60-year-old Kim Seung-youn (pictured, right), head of South Korean conglomerate Hanwha, was jailed for four years after being found guilty of embezzlement. In 2007 Kim, who took over the business from his father in 1981, was jailed for hitting a man with a steel bar in a bar-brawl, before being pardoned. He has also been convicted for illegally funding a political campaign, and for illegally taking money overseas to buy property. Every time, he has been pardoned and returned to senior jobs at Hanwha. In 2012, however, things were different and the sentence was very real. There has been no pardon. This is a revolution.

It is, incredibly, standard practice for the heads of chaebols to be given lenient sentences followed by presidential pardons when they are found guilty of crimes. Since 1990 the heads of seven of the 10 biggest chaebols have been convicted for bribery, tax-evasion or embezzlement. All got presidential pardons, and all returned to management positions. “When the courts are deciding on the sentences they actually look at whether they have contributed to the Korean economy,” says Professor Kim. “The president takes into consideration what sort of job they do and how many jobs they can create, for example.”

Samsung’s Lee (pictured, left) was found guilty of bribing officials and fined $100 million in 2008. He was given a prison sentence, but was pardoned because he was an International Olympic Committee member and was central to Seoul’s successful 2018 Winter Olympics bid. That might seem jaw dropping in most countries. But not in the warped world of the chaebols.

Indeed, following Kim Seung-youn’s sentencing last year Hanwha’s official statement was: “It’s not appropriate to imprison Kim given his social status and because he has a lot of work to do as chairman of one of the country’s largest firms.” Just to get this straight – the heads of chaebols are effectively immune to prosecution because they are the sons of men who were hand-picked by the military dictatorship to run businesses in the 1960s.

So one major problem with the chaebols is that they have long been above the law. Obviously, one way to rein in their excesses is to start prosecuting them properly, and the Hanwha verdict was symbolic of a determination to hold the chaebols to account.

Secondly, regulation is needed to rein in the chaebols. The controlling families go to amazing lengths to keep control of their groups’ businesses, and diagrams showing the way chaebols are put together resemble something from the Starship Enterprise’s user manual. Take, for example, Samsung. Lee Kun-hee, its chairman, owns 3.4% of Samsung Electronics’ common stock and 0.1% of its preferred shares, yet controls 84 companies joined by a bizarre tangle of shareholdings. In a surreally circular example, Samsung Life (of which Lee is the biggest shareholder) owns 7.5% of Samsung Electronics, which holds 35% of Samsung Card, which controls 5% of theme-park firm Samsung Everland, which – taking us back to the start – owns 19% of Samsung Life. Hyundai and SK Group are also notorious for creating subsidiaries, which then buy stakes in other businesses in the group. This is all, of course, bad for other shareholders. Politicians have promised to address this.

“In the presidential elections all the candidates have come up with how they are going to change things. Whoever wins, there will be major changes,” says Professor Kim. History doesn’t augur well, however. “Lots of regulation came in after the Asian crisis,” he continues, “but the chaebols leveraged their power and lobbied the politicians, and the bureaucrats and many of the regulations became a lot more relaxed.”

Many politicians have close links to chaebols. For example, one candidate in the recent election, Park Geun-hye (pictured, right), is the daughter of Park Chung-hee, who seized power in 1961 and ruled the country until assassinated in 1979, and seriously boosted chaebol power. Chaebol influence won’t vanish overnight. People just hope that this time popular will can trump vested interests.

But regulation needs to respect the chaebols, however distasteful they might be. A recent suggestion to redistribute profits from chaebols to SMEs smacks of desperation, and could have been designed to rile them. Samsung’s ever-quotable Lee Kun-hee said he was baffled by the idea and said he did not know “whether it’s used in a socialist, capitalist or communist country”.

The Federation of Korean Industries, the chaebols’ trade body, says it was equally puzzled by the (admittedly puzzling) talk of “economic democratisation”. One reason that chaebols act as they do is that there is a 50% inheritance tax in South Korea, which encourages all these complex ownership structures. They might not be saints, but chaebol owners have rights too; lawmakers will have to hold their noses and negotiate with them.

Lastly, the chaebols need to change their attitude and culture. Those madly involved shareholding shenanigans smack of control freakery, if not plain greed. It will always be possible, with expensive lawyers and enough will, to find a way to restructure things to keep control but is that really a good use of energy?

Rather than worrying about keeping their hands on the loot, the chaebols should worry more that people hate them so much. Increasingly in the 21st century customers, shareholders and employees are turning against rapacious businesses and demanding that they behave better. Walmart and Unilver, for example, are responding to this with massive sustainability drives – they think they can improve society, while making more profit.

The first rumblings of the coming revolution came to South Korea early last year when shoppers boycotted products made by Lotte, which they accused of profiteering by charging customers high charges to buy its products with credit cards in small stores, while keeping costs lower in its own shops. If boycotts catch on, it could spell trouble.

Most family businesses pride themselves on being founded on solid, ethical principles. It seems that it’s in the chaebols’ nature to be cutthroat. But no doubt Yongary would have said that he was just obeying his instincts too. The chaebols should remember that things rarely end well for giant lizards.

JAIL BIRDS FLY FREE
Lee Kun-hee, third son of Samsung founder Lee Byung-chull, is responsible for turning the business from a manufacturer of low-quality goods in the 1990s to a producer of world-beating products, especially in electronics. He was convicted in 1996 of bribing two former presidents and again in 2008 for running a vast slush fund to bribe officials, for which he was sentenced to seven years and fined almost half a billion dollars. He was pardoned by the president in 2009 and returned to the top job.

Chey Tae-won, the chairman of the third-biggest chaebol, SK Group, until he resigned in July over corruption charges, exemplifies the links between chaebols and politics. He is married to the daughter of former president Roh Tae-woo, and when he was convicted of a $1.2 million accounting fraud in 2003 his conviction was overturned in 2008 by then-president Lee Myung-bak – a former CEO of Hyundai – and Chey returned to the chairmanship. Chey is currently awaiting trial for embezzlement, along with his brother, for allegedly funnelling $170 million of company money into personal investments.

Chung Mong-koo (pictured, right), chairman of Hyundai Motor Group, the second-largest chaebol, was arrested in 2006 and charged with directing $100 million into slush funds and sentenced to a three-year jail-term in 2007, although it was suspended on appeal. He was granted a presidential pardon in 2008 (on the same day as Hanwha Group’s CEO Kim Seung-youn, who had been convicted of assault, and SK boss Chey Tae-won, who had been convicted of accounting
fraud).

The president said that they all needed to continue their work to boost South Korea’s flagging economy. Chung returned to his old job.

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