Blitz on Korea's chaebol
By Jennifer Veale, Seoul
In a bid to light a fire under reform-shy conglomerates, South Korea
this week slapped top firms with fines totalling 72.2 billion won ($93
million) for illegally funnelling money to cash-poor subsidiaries.
A six-week investigation by the Fair Trade Commission, a corporate
watchdog, revealed that the top five conglomerates - Hyundai, SK,
Daewoo, LG and Samsung - had funnelled 4.03 trillion won ($5.2 billion)
to 35 affiliates between April 1 last year and March 31 this year.
The unprecedented step followed months of cajoling by the reform-minded
government of the industrial powerhouses, which for decades drove the
country's economic growth. But the conglomerates, known as chaebol, have
resisted government efforts to enforce swaps of affiliates - so-called
"big-deal" reforms - to trim their vast empires.
"It's part of the Government's efforts to put more pressure on the
chaebol to restructure," said Mr Namuh Rhee, research head at Samsung
Securities in Seoul. "The Government is using the carrot-and-stick
approach to corporate restructuring." The commission initially probed 18
units of the top five chaebol, but at the end of its investigation had
uncovered unfair trade practices at 115 companies.
The top conglomerates have agreed only in theory to big deal reforms,
which would involve companies swapping business lines to build on each
other's strengths and cut over-capacity in sectors such as the car
industry. Most of the top 10 chaebol have continued to run dozens of
unprofitable business lines, manufacturing everything from mobile phones
to oil tankers, despite a deepening recession.
President Kim Dae-jung has been assiduously wooing the conglomerates,
and this week received some encouragement from the Federation of Korean
Industries - a chaebol lobby group - which agreed to undertake swaps
without committing to any deals.
Most chaebol had extended support to weaker sister companies, but
Hyundai, the largest conglomerate, funnelled the most money - 770.60
billion won - to 11 ailing affiliates.
The corporate giant was slapped with the largest fine, 22.6 billion won
($28 million).
SK, the fifth-largest conglomerate, was fined 19 billion won. Samsung,
the leading electronics manufacturer and second-ranked chaebol, was hit
with a fine of 11.2 billion won, while third-ranked LG was penalised
10.2 billion won. Daewoo was fined 8.8 billion won.
President Kim's battle against the chaebol is far from over, and some
analysts are not taking too much heart from this week's rapprochement.
Like many South Koreans, he lays a large share of blame for last year's
financial crisis at the feet of the chaebol, whose profligate borrowing
pitched the economy close to a foreign exchange meltdown. "It is going
to be an ongoing struggle," said Mr Paulo Rhee, a banking analyst at
HSBC Warburg in Seoul. "And President Kim has the world's entire capital
market behind him." The FTC said it would expand its investigation in
September to include chaebol ranked from six to 30.
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