This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• Pointing to the fact that large foreign firms are allowed to sell used cars in Korea, domestic carmakers called for an end to restrictions on their participation in this market space.
• The Ministry of SME’s and Startups is reportedly looking into allowing conglomerates to reenter the used car market under specific conditions.
• 51.6% of the public is in favor of allowing conglomerates to participate in this market.

Implications: South Korean policymakers are forced to weigh between the ability of conglomerates to deliver better consumer services and the prerogative of protecting SMEs. The used car market of USD 23 billion could be quickly swallowed up by conglomerates who will likely use price competitiveness to drive out smaller competitors. Moreover, consumers have expressed frustration with the disparate pricing practices of various SME players in the market. As a result, there is widespread expectation that the entry of conglomerates into the market will not only lower prices but also increase standards. However, policymakers worry that this will help further concentrate corporate dominance over the Korean economy with potential long-term consequences on employment.

Context: Six conglomerates make up more than 70% of Korean exports. These vertically-integrated corporations also channel businesses to their subsidiaries, promoting their growth while pushing out smaller competitors. In 2011, the Fair-Trade Commission (FTC) reported that conglomerates composed nearly half of Korea’s manufacturing industry and generated 33.8% of total industry profit. In this environment, SMEs are limited in both domestic and international growth. This lopsided relationship has major consequences for employment as 80% of the labor force is in a SME. In response, the FTC has been regulating corporate expansion since 2013 – but in areas like the used car market, the poor price competitiveness and services by SMEs have led to a consumer backlash.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

Picture from the flickr account of Stephan

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• In the ongoing investigation into whether Samsung manipulated stock prices to facilitate a merger between two subsidiaries, Korean prosecutors faced scrutiny for ignoring independent recommendations against an indictment.
• Domestic pundits now add that continuing the investigation into Samsung may strengthen hedge fund Elliott Management’s legal case against the Korean government.
• This comes amid growing anxiety that legal probe into the conglomerate could harm the broader economy already affected by the pandemic-induced recession.

Implications: Many domestic market influencers see aggressive foreign activist investors as a bigger threat than potential improprieties by domestic conglomerates. Citing international media reports, many Korean market commentators argued that the government’s ongoing probe into Samsung could strengthen Elliott’s lawsuit against Korea’s sovereign wealth fund in a related legal case. These activist investors were initially seen as potential forces that could help discipline perceived improprieties by large companies like Samsung. However, Elliott’s decision to sue the Korean government may have turned that initial enthusiasm into anxiety.

Context: Elliott Management was a minority shareholder of a Samsung subsidiary that were merged to secure Vice Chairman Lee Jae-yong’s controlling share of the conglomerate. The hedge fund claimed that their buyout was underpriced, reportedly incurring losses as high as USD 770 million. It blamed Korea’s National Pension Service, another minority shareholder, for casting the decisive vote sanctioning the merger. This became the basis for the lawsuit against the Korean government at the Investor-State Dispute (ISD) Tribunal. However, the ISD rejected an earlier attempt by Elliott to access government files to bolster their claim.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

Picture from an article published in The Investor on July 10, 2017

This briefing comes from Korea View, a weekly newsletter published by the Korea Economic Institute. Korea View aims to cover developments that reveal trends on the Korean Peninsula but receive little attention in the United States. If you would like to sign up, please find the online form here.

What Happened

• Samsung’s vice chairman Lee Jae-Yong was indicted on charges of engaging in stock price manipulation, unfair trading and other illegal means to tighten his control over the country’s biggest conglomerate.
• However, the court did not issue an arrest warrant, raising doubts on the strength of the prosecution’s case.
• This coincides with Bank of Korea’s recent announcement that the economic decline in 2020 may be deeper than the previously expected contraction. It also lowered growth projections for 2021.

Implications: Adverse economic conditions created by the pandemic may prevent the Korean government from disciplining the country’s conglomerates. Although Samsung has been on the defense since revelations of its involvement in ex-President Park Geun-hye’s influence-peddling scandal, the company has leveraged the economic uncertainty to renew the argument that harm to the company could damage the national economy. More broadly, the COVID-induced recession has allowed conglomerates to justify layoffs without consultation with labor unions.

Context: The belief that disciplining conglomerates could negatively impact the national economy is widely circulated. In response, the Korean government has been highlighting the role of small and medium enterprises (SMEs) in the development and export of testing kits in the ongoing global health crisis. By presenting SMEs as competitive actors on the global market, the government may look to disarm the common argument that companies like Samsung are too important to face legal consequences for its behavior.

Korea View was edited by Yong Kwon with the help of Sophie Joo, Sonia Kim, and Chris Lee.

From the flickr account of juan nuñez parilli

By Nathaniel Curran

The future of Korea’s economy may depend on SMEs (Small and Medium sized Enterprises) just as much as it does on the large traditional companies, the chaebol.

The Moon administration has already announced plans to boost support for SMEs, and while the success of the initiative remains to be seen, it raises important questions about the future of Korea’s economy.

Korea’s economy today is almost synonymous with the chaebol, the enormous, family owned and vertically integrated conglomerates that possess large market share in major global industries like shipping, electronics, and automobiles. In 2015, sales revenue from the five largest chaebol accounted for almost 60% of Korea’s GDP. Samsung and its subsidiaries alone account for roughly 20% of Korea’s economy.

It’s easy to understand the public and media fascination with the chaebol; they have been hailed as an important driver in South Korea’s rapid economic development, known as the “Miracle on the Han.” The seemingly symbiotic relationship between the chaebol and the government has been hailed as both dirigisme par excellence, and as crony capitalism. But regardless of one’s opinion of the chaebol, it’s undeniable that from their humble beginnings under Japanese colonial rule, the chaebol have shown remarkable resilience as the world has changed around them.

Perhaps the greatest threat to the chaebol’s survival came in 1997 during the Asian Financial crisis, during which 97% of chaebol went into bankruptcy. Despite the blame they attracted for causing the crisis, the chaebol emerged from the 1997 crisis largely unscathed. Although the subsequent IMF bailout led to significant restructuring, the chaebols’ modus operandi of family control, high debt ratio, and opaque operating structure remained largely intact. In fact, the chaebol were able to take advantage of IMF mandated restructuring to fire approximately 40% of their employees, who could then be rehired as part-time employees.

In the shadow of the Chaebol

However, the Western media’s focus on the power of the chaebol has served to obfuscate another important facet of Korea’s economy/economic development: SME’s (Small and Medium-sized Enterprises). While the chaebol have captured the lion’s share of attention -and treasure- in Korea, SMEs played, and continue to play, a vital role in Korea’s economic narrative.

Korea today boasts 3 million micro-enterprises (businesses that have fewer than 10 employees). Furthermore, SMEs account for roughly 37% of exports, which is especially impressive when one considers that fact that Samsung alone accounts for a whopping 30% of exports. Furthermore, employment continues to rise at SMEs, all the while accompanied by a growing popular sentiment that the interests of the Korean people are not being well served by the chaebol’s business activities.

The future of SMEs

SMEs may have found a champion in President Moon, who has repeatedly pledged to help spur entrepreneurship.  In this vein, the administration has already created a ministry for SMEs and startups. This is a promising sign, as the best way to deal with the chaebols’ stranglehold on the Korean economy might be less to attempt to reign them in than to directly support SMEs. After all, attempts to impose restraints on the chaebol have repeatedly failed, and despite Korea’s overreliance on exports, the chaebol likely will remain vital to a healthy Korean economy well into the future.

It in the present, it seems unlikely that Korea will be able to completely emulate Germany’s mittelstand (Germany’s innovative, tight-knit, and highly focused SMEs that play a leading role in the economy). That being said, diversification away from the chaebol would still be useful. For decades the chaebol enjoyed privileges and government support that make it difficult for SMEs to compete in today’s neoliberal environment of unregulated markets. Putting investment into SMEs would help spur innovation and much needed domestic competition. There is certainly widespread support for such measures, as the chaebols’ interests seem decreasingly to parallel state economic and social objectives.

It won’t be easy to steer Korea away from over-dependence on the chaebol, especially when the idea of working at a chaebol has become such a deeply ingrained dream for most young Koreans. Wages at the chaebol continue to outpace their SME counterparts. There are promising signs, however: not just the Moon administration’s investment plans, but also a burgeoning startup scene that may succeed in attracting more young talent away from traditional salary-man jobs at chaebol firms.

An SME revolution could be just what Korea needs to maintain its competitive edge in the global marketplace in the coming decades.

Nathaniel Curran is a PhD student at USC’s Annenberg School of Communication and a 2017 COMPASS Summer Fellow. The views expressed here are the author’s alone.

Photo from Yeseul Ko’s photostream on flickr Creative Commons.