By Anna Fifield
http://www.ft.com/cms/s/0/8b04772c-b4bd-11db-b707-0000779e2340.html
Published: February 5 2007 02:00 | Last updated: February 5 2007 02:00

While South Korea has many large business groups, only a few have succeeded in becoming competitive in overseas markets, says Kwon Oh-seung, the head of the Fair Trade Commission, writes Anna Fifield.

That is partly because of the lack of competition at home and the distorted supply chains that favour companies with links to chaebol rather than small and medium enterprises, so called SMEs, without such relationships.

“If you do not belong to a large business group, it is very difficult to do business,” Mr Kwon says. “That is especially true for SMEs: they cannot grow into large companies. I’m very concerned about that and want to correct this situation so that companies can grow in the domestic market and then enter the international market.”

For example, in the electronics market, Samsung and LG belong to business groups with many affiliates, so there is “direct or indirect pressure” to buy products from affiliates and only those companies that have links or relationships to the affiliates get contracts, Mr Kwon says. “That hampers competition in individual markets,” he adds.

Hank Morris, a business consultant, agrees that chaebol are stifling the development of South Korea’s small and innovative businesses.

“Chaebol companies have been known to tell potential customers that if they deal with such-and-such then they won’t get any business from them,” Mr Morris says. “They are essentially trying to corner the market by using unfair tactics. These threats can be very intimidating and they can make it very difficult for small companies to survive.”

By Anna Fifield in Seoul
http://www.ft.com/cms/s/0/00d89e1e-b479-11db-b707-0000779e2340.html
Published: February 4 2007 23:25 | Last updated: February 4 2007 23:25

South Korea’s Fair Trade Commission has pledged to this year take an even tougher line against companies that allegedly abuse their market dominance, focusing on cartels and mergers in particular.

Kwon Oh-seung, the FTC chairman, said companies outside the chaebol conglomerates need a chance to grow. “In the past we have been focusing on unfair practices,” Mr Kwon, who took over leadership of the FTC last year, told the Financial Times. “But from this year we will strengthen our law enforcement on the abuse of market dominance and merger control.”

His vow comes as the National Assembly prepares this month to consider ­government plans to ease restrictions on South Korea’s big businesses, allowing them to invest more in their affiliates. This runs contrary to Mr Kwon’s attempts to impose tougher regulations on cross-investment among chaebol companies such as Samsung and Hyundai, and curtail their ability to control megalithic enterprises with single-digit shareholdings. Instead, Mr Kwon will this year turn to enforcing competition law.

“There is no problem with large companies who have become large through their competitiveness but companies that are dominant in the market should not abuse their dominance. We’re going to strictly regulate or prohibit any anti-competitive practices,” he said.

The watchdog is already active. In the past year it has launched investigations into Qualcomm and Intel, the US technology companies, and forced Microsoft to unbundle the Korean version of its Windows operating system, as well as fining it Won33bn ($31m).

Last month it fined Hyundai Motor Won23bn for violating competition rules by putting excessive pressure on its independent car dealers to promote sales.

Mr Kwon said he saw “some concerning signs” that Hyundai Motor was becoming unfair but the carmaker is already bristling at the FTC’s new-found muscularity.

“These investigations are very intrusive,” said Oles Gadacz, Hyundai spokesman. “How can a government agency decide where we can have distributors?”

Hyundai has been going through a tumultuous period, which will come to a head on Monday when a Seoul court delivers its verdict on chairman Chung Mong-koo, who is charged with embezzlement and breach of trust. Prosecutors are seeking a six-year jail term.

In the 1960s and 1970s, South Korea’s chaebol propelled the then poor country’s explosive growth. Now, South Korea is the world’s 10th largest economy, yet the family-run conglomerates have become what some see as untameable beasts in need of reining in.

Rather than pursue a crackdown on the chaebol, South Korea’s government is pushing a plan to ease the regulations that govern the conglomerates and the often tangled shareholding structures via which their controlling shareholders run vast industrial empires, often with formal shareholdings of 5 per cent or less.

The National Assembly is this month to consider a change that would see the number of companies subject to cross-shareholding restrictions fall from 343 units of 24 chaebol to only 24 companies belonging to seven groups.

The finance ministry says the move is intended to encourage corporate investment, which is forecast to slow sharply because of economic uncertainties caused by the strong won and December’s presidential election.

The view is backed by industry groups. According to the Federation of Korean Industries, the country’s 30 largest business groups expect to invest Won52,000bn this year, only 0.6 per cent more than in 2006.

The finance ministry argues that any efforts to tame the chaebol would potentially halt an already slowing economy. Indeed, within South Korea there is a fear that the country’s GDP would not grow without the chaebol.

But Mr Kwon, whose efforts to push through stricter cross-shareholding limits have been stymied by the government, argues that the new rules will simply help distort the Korean economy further.

Many analysts say it is time for Korea to wean itself off its dependence on both the chaebol and on manufacturing, for it to start developing the service sector, and to allow small- and medium- size enterprises – which employ 80 per cent of the working population – to grow.

Mr Kwon argues that in Korea “power is concentrated in too few hands”, singling out Samsung, Hyundai Motor, Hyundai Group, LG, SK and Doosan as the main offenders.

“When I compare Korea with other countries, like the US, the UK, Germany, I see that large business groups here have the power to hamper the functioning of markets so I am very concerned,” Mr Kwon says.

The chaebol have vehemently resisted attempts to curb their power. Lee Seung-chol of the FKI chaebol club argues that the restrictions on large business that the FTC wants to pursue are simply “wrong”.

“Even though big companies dominate the domestic market they don’t dominate international markets. In a global, open economy, market share does not equate to market power,” he says.

By Anna Fifield in Seoul
http://www.ft.com/cms/s/0/708700b0-b4a7-11db-b707-0000779e2340.html
Published: February 4 2007 23:43 | Last updated: February 4 2007 23:43

In the 1960s and 1970s, South Korea’s chaebol propelled the country’s explosive growth, helping to transform it from one of the world’s poorest countries into an Asian tiger.

Now, South Korea is the world’s 10th largest economy yet the family-run conglomerates have become what some see as untameable beasts in need of reining in.

“The chaebol have become too powerful,” argues Kwon Oh-seung, the chairman of the Korean Fair Trade Commission and the anti-trust regulator leading the charge to stop what he sees as the conglomerates’ distortion of the Korean economy.

But rather than pursue a crackdown on the chaebol, South Korea’s government is pushing a plan to ease the regulations that govern the conglomerates and the often tangled shareholding structures via which their controlling shareholders control vast industrial empires, often with formal shareholdings of 5 per cent of less.

The National Assembly is due this month to consider a change that would see the number of companies subject to cross-shareholding restrictions fall from 343 units of 24 chaebol to just 24 companies belonging to seven groups.

Under the current regulations, chaebol affiliates with assets of more than Won2,000bn ($2.14bn, €1.65bn, £1.09bn) belonging to groups with assets of more than Won6,000bn are prohibited from holding more than 25 per cent of shares in an affiliated company.

Under the proposed revision, only chaebol with assets of more than Won10,000bn will be affected. Furthermore, the cross-shareholding limit will be relaxed to allow companies to hold up to 40 per cent in affiliates.

The finance ministry says the move is intended to encourage corporate investment, which is forecast to slow sharply because of economic uncertainties caused by the strong won and December’s presidential election.

The view is backed by industry groups. According to the Federation of Korean Industries, the country’s 30 largest business groups expect to invest Won52,000bn this year, only 0.6 per cent more than in 2006.

The finance ministry argues that any efforts to tame the chaebol would potentially hobble an already slowing economy. Indeed, within South Korea there is a fear that the country’s GDP would not grow without the chaebol.

But Mr Kwon, whose efforts to push through stricter cross-shareholding limits have been stymied by the government, argues the new rules will simply help distort the Korean economy further. Mr Kwon says the current limits can already see affiliates control 40-45 per cent of a chaebol company while owners technically hold just 5 per cent.

“The affiliates of large business groups can survive even if they are not competitive,” he says. “I wanted to make the market function properly so that all those who make quality goods can survive in the market.”

Many analysts say it is time for Korea to wean itself off its dependence on both the chaebol and on manufacturing, for it to start developing the service sector, and to allow small and medium size enterprises – which employ 80 per cent of the working population – to grow.

The huge size of the chaebol is being called into question, especially as Samsung and Hyundai Motor prepare to install third-generation chairmen, a process aided by complex webs of cross-shareholdings.

Mr Kwon argues that in Korea “power is concentrated in too few hands”, singling out Samsung, Hyundai Motor, Hyundai Group, LG, SK and Doosan as the main offenders.

Samsung, the biggest chaebol, now has more than 60 affiliated companies – ranging from hotels and a securities trader to shipbuilding and petrochemicals – and accounts for almost a quarter of the Korean stock market’s capitalisation and more than 20 per cent of total exports.

“When I compare Korea with other countries, like the US, the UK, Germany,– I see that large business groups here have the power to hamper the functioning of markets so I am very concerned,” Mr Kwon says.

The chaebol have vehemently resisted attempts to curb their power. Lee Seung-chol of the FKI chaebol club argues that the restrictions on large business that the FTC wants to pursue are simply “wrong”.

“Even though big companies dominate the domestic market they don’t dominate international markets. In a global, open economy, market share does not equate to market power,” he says.

But analysts see logic in Mr Kwon’s calls for stricter monitoring. “The resources that the chaebol can deploy are massive compared with their potential competitors,” says Hank Morris, a business consultant in Seoul. “So it makes sense for the government to play referee and be on the look-out for dirty tricks.”