Future of Chaebol: Past Miracle or New Era?
As a first-timer setting foot on Asian ground, depending on where you are, one might be surprised at how modern and industrialized it is. I remember arriving in Seoul and needing a second to take in the modern infrastructure, insanely high buildings and blinding lights, reminding me of an Asian New York City. Even though we do not always realize, economies in Asia are either establishing themselves as big players like China and India, or have amazing potential waiting to be exploited such as in the South-East. A fair share of the largest economic booms have actually emerged in that part of the world: the Japanese Economic Miracle, the Chinese Economic Boom and South Korea’s Miracle on the Han River. In the continuation of this article we will look at South Korea, the large contributor to its miracle and the development into the current state.
South-Korea is the fourth largest economy in Asia and interestingly so, hands full of large conglomerates that collectively go by the name of ‘’Chaebol’’ (pronounce: ‘’tche-bol’’) are essentially responsible for this. While this is a term you might not have heard just yet, the concept however, is quite simple. Originating from a culture vastly imbedded with Confucian beliefs and to this day still strongly hierarchical, the Chaebol structure commenced in the 1960’s. After the Korean War, the country remained in a state of poverty and destructed industries and infrastructure. With a new president, General Park Chung-hee, came a newly found attention to the economy as he stated that ‘’in order for South Korea to become great, a strong economy was necessary’’. A Five-Year Economic Development Plan was implemented that focused on an outward, export-oriented strategy since Korea’s domestic market was small. This resulted in an enormous economic growth, also known as the aforementioned ‘’miracle on the Han River’’, which changed the economy completely. Starting from a GDP per capita of $67 in 1953 and rising to $27,970.5 in 2014, we can claim this to be quite a miracle indeed (image 1).
Image 1: growth in GDP & Per-capita GNI since 1970’s
Key players in the development and industrialization of the country were the Chaebol. Today they are large global multinationals, continuously controlled by the same family dynasty and with a chairman who exercises control over all operations. The word itself translates into many things but the bottom line is clear; ‘’business family’’, ‘’wealth clan’’ or even ‘’monopoly’’. This can be one large company, usually owning numerous international enterprises or a group of companies. In South Korea, the chairman and his family members are treated practically like celebrity and quite regularly even make headlines for scandals and family feuds. Their power does not limit itself to the economy; even in politics Chaebol family members sometimes play a significant role. Even though the Chaebol have benefited the Korean economy tremendously, there are some concerns about the way they operate and the occasional negative publicity. Problems of mismanagement within the families and inheritance scandals are no secret and many politicians and investors wonder whether the current system is suited for the 21st century. Nevertheless, the Chaebol structure continues to be deeply rooted in today’s South Korea.
One might find out about numerous Chaebol but you might be surprised that the four biggest in the country are Hyundai Motor Company, SK Group (wireless mobile phone service provider), LG and the big number one: Samsung. While in the west we typically think of Samsung as just mobile phones and other gadgets, in Korea the Samsung Group is a collection of more than 60 divisions and is incredibly crucial to the economy. Focusing on everything from electronics to defence industries and finance to advertising, it is the largest South Korean conglomerate and produces about 1/5th of the country’s total exports.
As for Samsung, the company has remained in the hands of the founders (see image 2), the Lee family. At this point the reign is in the process of being transferred to the third generation of Lee’s and this does not stay unnoticed in the news. In the summer of 2015, the expected heir Lee Jae-Yong, made an investment of $8 billion in a merger of two Samsung affiliate companies while his father Lee Kun-Hee was ill. Jae-Yong’s investment clearly indicated his willingness to increase his grip on Samsung Electronics Co, the conglomerates crown jewel. Such stories make headlines not only in Korea but around the world, showing a clear indication of the power and influence of Chaebol. While they are the pillars of Korea’s high-tech and industrialized economy, the dominance of these exact chaebol could become a long-term challeng
Image 2: Samsung Lee Family investment structure
The Chaebol used to stand as powerful as they were respected. Respect being quite a ‘’big thing’’ in Korea, people felt like the success of the Chaebol equalled the success of their country and working for the conglomerates meant you complimented the process. Not everyone is as proud these days as they were when South Korea was underdeveloped and in need. The current power of the Chaebol could be holding the country back from developing into a more innovative, service oriented economy that is built on smaller companies. These small and medium sized companies employ about 90% of South Korean workers, yet are unproductive and failing to expand while the conglomerates keep taking and growing. The government’s close relationship to the Chaebol enables them to maintain their grip on the economy; corporate taxes are kept remarkably low and some chaebol leaders that have acted in criminal activity, somehow manage to be pardoned. The result of Chaebol failing in Korea would have horrific results, therefore it is not too hard to imagine the government’s dependency and vice versa. What also worries the general population is the new generation of Chaebol leaders, these young heirs have grown up in wealth and executive positions in the company are simply handed to them. This makes you wonder how long the Chaebol structure will even manage to continue operating the way it does.
Whether South Korea will be able to shift from this economy dominated by large conglomerates to one allowing SME’s to operate and flourish, remains a difficult question. The question that follows: should they make that shift? The influence and benefit of Chaebol in the country’s development will always be recognized and appreciated by many, making it even harder to take on a new path. Be that as it may, some government regulations are starting to be put in place, restricting power of the Chaebol. If these restrictions work out in addition to a proper corporate tax, perhaps in the future, the Chaebol might take on a less dominant role and allow some space for SME’s. Nonetheless, South Korea’s growth and development has certainly been miraculous and will hopefully continue growing into a direction suited for today’s global business environment.