Chaebol

Chaebol
Hangul 재벌 Hanja 財閥 Revised Romanization Jaebeol McCune-Reischauer Chaebŏl

Chaebol is a South Korean form of business conglomerates. The English word is a transliteration of the Korean word 재벌, which is now romanized as Jaebeol. The Korean word means business group, trust (as in Standard Oil Trust), and is often used the way "Big Business" is used in English.

Overview

File:Neckarsulm-Hyundai-Zentrale-20060611.JPG

Hyundai Headquaters Germany

Chaebol refers to the several dozen large, family-controlled Korean corporate groups, assisted by government financing, which have played a major role in the South Korean economy since the 1960s. Some have become well-known international brand names, such as Samsung, Hyundai, SK, and LG .

The chaebol were powerful independent entities acting in the economy and politics, but sometimes they cooperated with the government in the areas of planning and innovation. The government worked hard to encourage competition among the chaebol in certain areas to avoid total monopolies.

The role of big business extended to the political arena. In 1988 a member of a chaebol family, Chong Mong-jun, president of Hyundai Heavy Industries, successfully ran for the National Assembly. Other business leaders also were chosen to be members of the National Assembly through the proportional representation system. Hyundai even played a role in the slight thawing of relations between North and South Korea since 2000.

The top 10 largest chaebol in Korea in 2004 by total revenues were Samsung ($89.1 billion), Hyundai Motor Company ($57.2 billion), LG ($50.4 billion), SK ($46.4 billion), Hanjin ($16.2 billion), Hyundai Heavy Industries ($10.5 billion), Lotte ($6.3 billion), Doosan ($4.5 billion), Hanhwa ($4.4 billion), and Kumho Asiana ($2.8 billion).[1]

Management structure

South Korean Chung Ju-yung, founder and honorary chairman of Hyundai Group

Some chaebol are one large corporation, while others have broken up into loosely connected groups of separate companies sharing a common name. Even in the latter case, each is almost always owned, controlled, and/or managed by the same family group.

South Korea's chaebol are often compared with Japan's keiretsu business groupings, the successors to the pre-war zaibatsu. While the "chaebol" are similar to the "zaibatsu" (the two words are Korean and Japanese pronunciations of the same Chinese characters), there are major differences between chaebol and keiretsu:

• Chaebol are still largely controlled by their founding families, while keiretsu are controlled by groups of professional managers.
• Chaebol are centralized in ownership, while keiretsu are more decentralized and connected by cross-shareholdings.
• Chaebol often formed subsidiaries to produce components for exports, while large Japanese corporations often employed outside contractors.
• Chaebol are prohibited from owning private banks, partly in order to increase the government's leverage over the banks in areas such as credit allocation. In 1990, government regulations made it difficult for a chaebol to develop an exclusive banking relationship. Keiretsu have historically worked with an affiliated bank, giving the affiliated companies almost unlimited access to credit, although this is no longer a universal feature of keiretsu.

History

South Korea's economy was small and predominantly agricultural well into the mid-20th century. However, the policies of President Park Chung Hee spurred rapid industrialization by promoting large businesses, following his seizing power in 1961. Government industrial policy set the direction of new investment, and the chaebol were to be guaranteed loans from the banking sector. In this way, the chaebol played a key role in developing new industries, markets, and export production, helping place South Korea as one of the East Asian Tigers.

Although South Korea's major industrial programs did not begin until the early 1960s, the origins of the country's entrepreneurial elite were found in the political economy of the 1950s. Very few Koreans had owned or managed larger corporations during the Japanese colonial period. After the departure of the Japanese in 1945, some Korean businessmen obtained the assets of some of the Japanese firms, a number of which grew into the chaebol of the 1990s. These companies, as well as certain other firms that were formed in the late 1940s and early 1950s, had close links with Syngman Rhee's First Republic, which lasted from 1948 to 1960 (see The Syngman Rhee Era, 1946-60 , ch. 1). It was alleged that many of these companies received special favors from the government in return for kickbacks and other payments.

When the military took over the government in 1961, military leaders announced that they would eradicate the corruption that had plagued the Rhee administration and eliminate injustice from society. Some leading industrialists were arrested and charged with corruption, but the new government realized that it would need the help of the entrepreneurs if the government's ambitious plans to modernize the economy were to be fulfilled. A compromise was reached, under which many of the accused corporate leaders paid fines to the government. Subsequently, there was increased cooperation between corporate and government leaders in modernizing the economy.

Government-chaebol cooperation was essential to the subsequent economic growth and astounding successes that began in the early 1960s. Driven by the urgent need to turn the economy away from consumer goods and light industries toward heavy, chemical, and import-substitution industries, political leaders and government planners relied on the ideas and cooperation of the chaebol leaders. The government provided the blueprints for industrial expansion; the chaebol realized the plans. However, the chaebol-led industrialization accelerated the monopolistic and oligopolistic concentration of capital and economically profitable activities in the hands of a limited number of conglomerates.

Park used the chaebol as a means towards economic growth. Exports were encouraged, reversing Rhee's policy of reliance on imports. Performance quotas were established.

The chaebol were able to grow because of two factors—foreign loans and special favors. Access to foreign technology also was critical to the growth of the chaebol through the 1980s. Under the guise of "guided capitalism," the government selected companies to undertake projects and channeled funds from foreign loans. The government guaranteed repayment should a company be unable to repay its foreign creditors. Additional loans were made available from domestic banks. In the late 1980s, the chaebol dominated the industrial sector and were especially prevalent in manufacturing, trading, and heavy industries.

The tremendous growth that the chaebol experienced, beginning in the early 1960s, was closely tied to the expansion of South Korean exports. Growth resulted from the production of a diversity of goods rather than just one or two products. Innovation and the willingness to develop new product lines were critical. In the 1950s and early 1960s, chaebol concentrated on wigs and textiles; by the mid-1970s and 1980s, heavy, defense, and chemical industries had become predominant. While these activities were important in the early 1990s, real growth was occurring in the electronics and high-technology industries. The chaebol also were responsible for turning the trade deficit in 1985 to a trade surplus in 1986. The current account balance, however, fell from more than US$14 billion in 1988 to US$5 billion in 1989.

The chaebol continued their explosive growth in export markets in the 1980s. By the late 1980s, the chaebol had become financially independent and secure—thereby eliminating the need for further government-sponsored credit and assistance.

By the 1990s, South Korea was one of the largest NIEs, and boasted a standard of living comparable to industrialized countries.

President Kim Young-sam began to challenge the chaebol, but it was not until the Asian financial crisis in 1997 that the weaknesses of the system were widely understood. Of the 30 largest chaebol, 11 collapsed between July 1997 and June 1999. The chaebol were heavily invested in export-oriented manufacturing, neglecting the domestic market, and exposing the economy to any downturns in overseas markets. In competing with each other, they had built up unsustainable overcapacity—on the eve of the crisis South Korea, with a population only ranked at #26 in the world, had seven major automobile manufacturers.

Many of the chaebol had become severely indebted to finance their expansion, not only to state industrial banks, but to independent banks and their own financial services subsidiaries. In the aftermath of the crisis when they could not service their debt, banks could neither foreclose nor write off bad loans without themselves collapsing. The most spectacular example came in mid-1999 with the collapse of the Daewoo Group, which had some US$80 billion in unpaid debt. At the time, it was the largest corporate bankruptcy in history.

Investigations also exposed widespread corruption in the chaebol, particularly fraudulent accounting and bribery.

Reforms

Under President Kim Dae-jung, elected in the wake of the crisis, the government made several efforts to reform the economy.

• Instead of competing in every industry, the chaebol were pressured to focus on core businesses and spin off unrelated enterprises.
• The chaebol were to decentralize their management and encourage the hiring of professional managers.
• Accounting regulations were strengthened to limit the ability of chaebol to hide losses and debt at under performing subsidiaries.
• A crackdown on antitrust laws and inheritance taxes would impede the ability of families to retain control over their chaebol.

Both Kim and his successor, Roh Moo-hyun, have had mixed success. The chaebol continue to dominate South Korea's economy. Hyundai and SK Group have been implicated in separate scandals involving both presidents.

The Federation of Korean Industries, a consortium of chaebol, has taken a leading role in resisting changes.

List of chaebol

According to KFTC, there are 59 companies in Korea whose total assets in Korea exceeds 2 trillion won. (As of April 2006) The top 20 is:

Rank	Name	# of subsidiaries	Non-financial subsidiaries	Financial&insurance subsidiaries	Asset(billion won)
1	Samsung Group	59	49	10	115,924
2	Korea Electric Power Corporation (KEPCO)	11	11	0	102,932
3	Hyundai Automotive Group	40	38	2	62,235
4	SK Group	56	54	2	54,808
5	LG Group	30	30	0	54,432
6	Korea Highway Corporation	3	3	0	34,638
7	Lotte	43	41	2	32,961
8	Korea National Housing Corporation	2	2	0	30,834
9	POSCO	21	20	1	30,183
10	KT	12	12	0	27,520
11	GS Group	50	50	0	21,827
12	Hanjin	22	21	1	20,702
13	Korea Land Corporation	2	1	1	17,592
14	Hyundai Heavy Industries	7	4	3	17,267
15	Hanwha	31	24	7	16,526
16	Korea Railroad	12	12	0	14,270
17	Doosan Group	18	16	2	13,659
18	Kumho Asiana	23	21	2	12,982
19	Korea Gas Corporation(KOGAS)	2	2	0	11,371
20	Hynix	5	5	0	10,358

The rest are: Dongbu Group, Hyundai, Shinsegae, CJ, LS, Daelim, GM Daewoo, Hite Brewery Company, Daewoo Construction, Dong Kuk Steel Mill, Daewoo Shipbuilding and Marine Engineering(DSME), stx, Korea Agricultural & Rural Infrastructure Corporation, Tong Yang, KT&G, Hyosung, Hyundai Oilbank, Hyundai Department Store, Kolon, Hyundai Development Company, KCC, Hanjin Heavy Industries, Seah, Young Poong, Taekwang, Booyoung, Hanaro Telecom, Taihan Electric Wire, Ssangyong, Hansol, Nong Shim, Daesung, E-Land, Dong Yang Chemical, Samyang, Munhwa Broadcasting Corporation(MBC), Taeyoung, Hankook Tire, JoongAng Ilbo Corp.

Note that some of these are not considered a chaebol in the strictest sense.

See also

• Economy of South Korea
• Keiretsu, reorganized zaibatsu after WWII
• List of Korea-related topics

References

ISBN links support NWE through referral fees

• Beck, Peter M. "Are Korea's Chaebol Serious About Restructuring?" Presentation at the Korea 2000 conference, May 30, 2000. Korea Economic Institute of America
• Chwa, Sŭng-hŭi. 2002. The evolution of large corporations in Korea a new institutional economics perspective of the chaebol. Cheltenham: E. Elgar. ISBN 9781840648836
• "KOREA: CHAEBOL - Daewoo's bankruptcy-and that of other chaebol - could kill legions of small and midsize suppliers". 2000. Business Week. 22. OCLC: 94607727
• Oh, Ingyu. 1996. Making an octopus the rise and development of the South Korean chaebol and the Japanese keiretsu. Thesis (Ph. D.)—University of Oregon, 1996. OCLC: 37980245
• Whitmore, Stuart and Nakarmi, Laxmi. "Guide to the Groups: The pecking order of the top 20 chaebol," Asiaweek, October 10, 1997.

This article contains material from the Library of Congress Country Studies, which are United States government publications in the public domain.

External Links

• Unfinished Business: The Economist, April 17, 2003
• Web site: South Korean conglomerates: The Economist, December 11, 1997
• Asian Development Bank: Republic of Korea, Economic performance. Retrieved October 9, 2007.
• The Chaebol of South Korea. Retrieved October 9, 2007.
• Online Asia Times: Chaebol justice in South Korea, By Donald Kirk. Retrieved October 9, 2007.
• The Future of the Chaebol System, Su Chan Chae. Retrieved October 9, 2007.
• Economic Crisis and Chaebol Reform in Korea, Phil-Sang Lee. Retrieved October 9, 2007.

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