South Korea and its conglomerates

South Korea and its conglomerates

 

The wages of atonement

 

Apr 20th 2006 | SEOUL
From The Economist print edition

 

Saying sorry is a delicate business?and an expensive one

 

IN NO capitalist country is economic power so concentrated as in South Korea?and you would probably have to look to North Korea for a greater concentration in Communist ones. Industrial production, in particular, is dominated by a handful of family-controlled conglomerates, called chaebol. The Samsung group, the biggest of the lot, alone employs more than 130,000 workers. It accounts for a fifth of South Korean exports and a significant chunk of government revenues. The second-biggest, the Hyundai-Kia group, makes nearly three out of four of the vehicles on Korean roads and, with new factories planned in America, the Czech Republic and China, is now the world's seventh-biggest carmaker. And Hyundai cars these days are pretty good?certainly not the tinny contraptions of yesteryear.

 

Until the Asian financial crisis of 1997-98 and South Korea's IMF bail-out, the family-run chaebol were useful tools of government policy. In return for providing lots of jobs and driving economic growth through exports, they received cheap financial backing and the freedom to expand into practically any business that took their fancy. After the crisis, however, plenty of observers predicted their demise: their version of crony capitalism was blamed for all South Korea's woes.
Many groups were indeed forcibly broken up by the government, or allowed to fail under their weight of debt. But some chaebol-linked firms, notably Samsung Electronics (the most successful bit of the Samsung empire) and Hyundai Motor, emerged fitter and better able to compete on a global scale. Samsung Electronics, for instance, leads the world in memory chips and, among Asian manufacturers, is second only to Toyota in stockmarket capitalisation, having recently overtaken Japan's best-known electronics brand, Sony?for which, incidentally, it makes all its large flat-panel televisions. And the dominance of the chaebol does not persist only in the economic field. The comings and goings of chaebol-family offspring play the role of minor royalty in the soap opera of national life. Samsung sponsors not only almost every sports team in the country but also the sporting leagues.

 

Now, however, the global ambitions of both the Samsung and Hyundai groups are, by their own admissions, in jeopardy as a result of miscalculations by the groups' respective founding families. Their mistake was a failure to notice in time that public expectations about business ethics have been rising?and how readily the authorities are now willing to punish improprieties that used to be overlooked.

 

Last autumn, the Samsung patriarch, Lee Kun-hee, left South Korea for America, ostensibly for medical attention but seemingly also to escape indictment over alleged illegal political donations during the 1997 presidential campaign. He returned in February, after the statute of limitations had expired, but prosecutors are still looking into the controversial transfer to his children of control of the family holding company through the issue of tax-dodging convertible bonds.

 

Then, in late March, prosecutors raided Hyundai's offices. In an investigation that is likely to come to a head over the next few days, they have been looking at allegations of slush funds to bribe government officials. They have also been looking at a deal similar to the Lee family's, whereby corporate control of the Hyundai group was quietly passed from the father, Chung Mong-koo, to his 35-year-old son.

 

These alleged misdemeanours have created public uproar and a national debate that the founding families have found impossible to ignore. When Mr Lee returned to Seoul from the United States, he asked his countrymen, at the airport, for forgiveness. A couple of days later, Samsung said that the Lee family was giving 800 billion won ($830m) “to society”. Not to be outdone, on April 19th, when Hyundai's Mr Chung returned from a ground-breaking ceremony for a new factory in China that he was nearly forced to miss because of the investigation, the company apologised for “causing the public concern and for not taking our full social responsibility as a company that should have been a role model.” Mr Chung and his son, Chung Eui-sun, it was further announced, will also donate to “society” their 60% stake, worth about 1 trillion won, in Glovis, a Hyundai affiliate company that investigators first raided.

 

Such contrition fees seem to be becoming the rage. Even foreigners are getting in on the act. Recently, Lone Star, an American buy-out fund under investigation for embezzlement and tax evasion by one of its employees, faxed the finance ministry an offer to pay 100 billion won to “society”. Though President Roh Moo-hyun appears to welcome such contributions, at least from the chaebol, other South Koreans harbour reservations. one senior official calls Lone Star's offer “skin-deep”, part of a “shameful tradition” that “reinforces the notion that government can be bought off every time something goes wrong.” Jang Hasung, dean of the Korea University Business School, calls such payments an “insult to the public”.

 

All this may mean that the chaebol's founding families are in danger of misjudging the public mood for a second time. Just as they learnt too late of the public's growing intolerance?as well as scrutiny?of the former sleazy links between business and government, so now they risk underestimating the price of contrition. on the other hand, Mr Jang is possibly right when he calls these latest scandals a “turning-point”. As such big fish in a small pond, one family member says, the chaebol need the public's trust at home if they are not to be held back abroad. And there is still a lot more trust to be won.