Asia Pacific Business: Korean Chaebols

Introduction

Chaebol is a South Korean type of business, which in other words means a conglomerate. In Korea, this term signifies a family business or a monopoly. The Chaebol’s were in existence before 1961 but the main state-corporate association began in the era of President Park Chung Hee between that lasted between 1961 and 1979. Chaebols are dominant world wide multinationals that control many international businesses. Overall, the Chaebol Korean family manages many large companies worldwide. (Chaebol nd) The Chaebol had political connections and thus the government contributed a lot in their growth. Through the help of the government, the chaebol have grown to become influential global brand names. Some of these names include Samsung, Hyundai and LG. The Chaebol depend on government support in various company policies especially in issues regarding their future activities and advancement. (Rowley & Warner 2009)

South Korea’s main industrial systems did not come to existence until the early part of the 1960’s. However, the industrial leaders began in the political economy all the way from the 1950s. It is important to note that only a small number of Koreans were able to acquire and run companies in the time of the Japanese colonial period. Once the Japanese left Korea in 1945, Korean entrepreneurs acquired properties from the Japanese industries. Some of these industries participated in facilitating the foundation of the chaebol from 1960s up to date. These companies also had an association with Syngman Rhee’s government, which was between 1948 and 1960. It was reported that these companies got special treatment from the government and in turn, they gave government leaders money. When the military came to power, many leaders who were in Rhee’s administration were arrested and charged with corruption. However, with time the military found that they needed the leaders to industrialize the economy and thus most of them were fined and allowed to work for the new government. (Chen 2004)

Reasons for Success

There are many reasons why the Chaebol became successful in the 1960s. To begin with, the policies of President Park Chung Lee led to swift industrialization through advanced big businesses once he came to power in 1961. The government created an environment that allowed rapid growth for new industries and the chaebol benefited by being given loans from the banks. This allowed them to contribute greatly to the advancement of new businesses, markets as well as export production. In this way, Chaebol helped South Korea to become one of the top economies in East Asia. The association between the government and chaebol became fundamental in the ensuing economic advancement and great success that came about in the 1960s. The government relied on the ideas and the teamwork of the chaebol principals to make drastic changes to the economy. They aimed at changing the economy from specializing in consumer products and small businesses into heavy, chemical and import oriented companies. The government came up with the design for industrial extension while the chaebol took in the plans. The chaebol in turn speeded industrialization through creation of monopolies while at the same time placing all the profits in the hands of a few conglomerates. (Song & Cho 1998, p.10)

Park utilized chaebol as a way to achieve economic advancement. In this way, he had exports increased thus turning around Rhee’s policy of depending on imports while at the same time creating performance quotas. It is important to note that the chaebol advanced fast due to foreign loans and special treatment. They also had the benefit of using foreign technology, which assisted them in their development all the way to the 1980s. The government in the pretext of guided capitalism chose corporations to carry out major projects something that saw them controlling money from foreign loans. The government assured reimbursement in the case where a company was incapable of refunding its foreign creditors. They went further to help assure that extra loans could be acquired easily in the home banks. By the end of 1980, chaebol controlled the manufacturing sector making them rampant in production, trade and heavy machinery industries. (Chen 2004)

Instead of creating new inventions through study and technology, South Korea industries bought rights and technology thus they manufactured similar products finished in other places at cheaper prices. For instance, Hyundai cars utilized the engine created by Mitsubishi Corporation of Japan. The chaebol were influential self-reliant body within the economy and the political arena. However, in certain times they worked together with the government in the sectors of designing and modernization. The government tried to promote competition between the chaebol while at the same time evading monopolies. Their obligations went all the way to the politics of the country. In 1988, one of chaebol characters, Chong Mong-jun, the leader of Hyundai Heavy Industries was elected to the National Assembly. In this way, they continued their dominance and managed to successfully remain at the top since they had the finances. (Rowley & Warner 2009)

The remarkable development and success that chaebol acquired in the early 1960s was mainly due to the extension of South Korean exports. The development came about because of manufacturing multiple ranges of products instead of concentrating on only a few products. Advancement and motivation to create new goods became very fundamental. In the 1950s and the beginning of 1960s, chaebol’s were mainly dealing with manufacturing artificial hair and clothing. In the 1970s and 1980s, they concentrated on intense security and chemical industries within the region. Even though all these sectors played a role in the 1990s, major advancement was realized in electronics and high technology companies. This became a major success for them and the South Korean economy grew at a high rate. By the end of the1980s and in the beginning of the 90s, the chaebol were now financially secure and in this way, they did not depend on the government for any financial help. In the 1990s, South Korea came to be among the biggest NICs thus they managed a standard of living that was similar to that of the developed nations. (El Kahal 2001)

Chaebol’s Downfall

Chaebol faced serious problems in their industries in the wake of the Asian Financial crisis. By the end of 1996, the debt-financed extension was suffering seriously and began to crumble down. Economic development had decreased since too much capacity was beginning to be reported in many industries. Prices of major industrial goods including semi-conductors were declining while at the same time imports increased. The debt setback went further to depreciate in 1997 with the collapse of a major chaebol, Hanbo that was reported to have a debt of six billion dollars. It was apparent that the establishment of the fifth global biggest steel mill in 1993 had come to be the downfall of Hanbo. The production cost of Hanbo was very huge but the chaebol were not able to recover the cost since the demand of steel was low. After the Hanbo had gone down, claims emerged to the effect that the scheme was financed due to demands by the government to the South Korean banks to loan Hanbo. It also became clear that Hanbo principals bribed the government so that it could help them get the funding. (Thompson 1998)

The situation still worsened some more when Kia, Korea’s biggest car company was out of funds and requested for an emergency loan. Following was Jinaro a leading liquor industry in South Korea that was at the blink of bankruptcy. All these circumstances compelled international credit organizations to commence decreasing the rankings of banks with high contact with the chaebol. In this way, many banks increased the borrowing rates thus lessening the credit and in turn, it became hard for debt-ridden chaebol to loan extra money. Kia did not manage to get any further finances and hence the government had to give the company for public ownership to protect it from financial decline and job losses. This did not improve the situation much and with time, the Korean won declined largely against the American dollar. This was on the other hand increasing the cost of government in assisting the nation’s declining companies and financial sectors. (Sung-Hee 2002)

Things on the chaebol were not getting any better with the financial crisis as the wave of bankruptcy persisted. Haitai, a large business in Korea went down and was headed for bankruptcy. An additional chaebol New Core was also reported to be at the blink of collapse. It was clear that a fifth of the nation’s main businesses were at the blink of collapse and the economy was way down. Many reports indicated that half of the top thirty chaebol would have to file for bankruptcy. International lenders realizing that Korea was at the verge of financial collapse declined to give short-term loans to the country to save its industries. This put Korea at a hundred billion dollars for short term debt thus making things worse for them. Between 1997 and 1999, out of the 30 biggest chaebol, eleven had gone down. This was mainly attributed to the over emphasization on the heavy manufacturing, while at the same time overlooking the domestic market. The chaebol system also revealed the economy to all sorts of decline to the foreign markets. They also concentrated in competing among themselves and in this way they developed invalid congestion. This can be seen as the start of the crisis. South Korea, which does not have a very large population, possessed seven main automobile producers. (Amsden 1997, p.385)

The other major problem that chaebol faced in the Asian financial crisis was the incapability of the industries to achieve returns as well as profitability. This was because the government managed them making them to accumulate more capital investment. In this way, they also accumulated too many debts, which saw many of them collapsing and being taken over. For instance, chaebol’s Kia Motors went down with bankruptcy. In the emergency of the Asian market decline, South Korea credit ranking by Moody went down from A1 all the way to A3. This was also reported towards the end of the year with the rating going down to B2. The shares for the companies were also going down drastically. The Seoul stock exchange went tumbling down by 4% by November 1997 and on the following day it declined by 7% the largest decline recorded in history. On November 24, the stocks declined some more to 7.2% something that called for the intervention of the IMF. (Ghosal 1988, p.70)

In the year 1998, Hyundai Motors obtained Kia Motors to save it from further decline. Samsung Motors five million dollar business endeavor closed because of the ensuing crisis in chaebol. Daewoo Motors another chaebol was finally sold to the American company called General Motors (GM). In the meantime, the South Korean won declined with over 1700 American dollar from about 800. The financial crisis affected the banks where the chaebol were getting money from thus making the situation worse for them. They found themselves suddenly incapable of borrowing funds from anywhere and at the same time with large debts to pay. Many foreign investors did not have confidence in the chaebol as well as the South Korean government to fix the problems. In this way, many of them left the country and this made things much worse for the chaebol. With the chaebol, many industries had to close as the economy was going down drastically. (Lee 2004, p.478)

Conclusion

The chaebol were able to control the economy of South Korea for a long time. They had great leaders and government influence that helped them go a long way. In this way, the South Korean industries depended greatly on debt to expand and develop their firms. The business sector shows that the chaebol avoided at all cost the issue of risk taking. In this way, the industries did not grow through expansion of the primary business but rather from the creation of subsidiaries. This is because a main industry may be in control of shares in a number of subsidiaries by not having to spend the whole capital required to manage the firm. Subsidiaries however offer an efficient way of evading risk while maintaining widespread control. This is what finally caused the collapse of Korean Chaebols.

References

Amsden, A. 1997, ‘South Korea: Enterprising Groups and Entrepreneurial Governments’, pp.338-367. Web.

Chen, M 2004, Asian Management Systems: Chinese, Japanese and Korean Styles of Business, Thomson.

El Kahal, S 2001, Business in Asia Pacific, Texts and Cases, Oxford, Oxford University Press.

Ghosal, S1988, ‘Environmental Scanning in Korean Firms: Organisational Isomorphism in action.’ Journal of International Business Studies, pp.69-86.

Lee, J 2004, ‘Critique and Insight into the Korean Chaebol’, Journal of American Academy of Business, pp.476-480.

Rowley, C. Warner, M (ed.) 2009, Management in South-East Asia: Business Culture, Enterprises and Human Resources, Routledge.

Song, J & Cho, D 1998, ‘Diversification Strategies and the Formation of Korean Big Business Groups (Chaebols): Resource-based and Institutional Perspectives on the Causes of Diversification’, pp.1-19.

Sung-Hee, J 2002, The Evolution of Large Corporations in Korea, Edgar Elgar, Cheltenham, UK.

Thompson, G (ed.) 1998, Economic Dynamism in the Asia-Pacific: The Growth of Integration and Competitiveness, London, Routledge.