Argument

The Myth of Chaebol Exceptionalism

The Myth of Chaebol Exceptionalism

Corporate South Korea is going through a rough patch.

Samsung Electronics has been forced to recall exploding phones and washing machines. Hyundai Motor Group has been hit with crippling labor strikes and declining profits. The nation’s shipping giants are facing bankruptcy and reorganization. A corruption scandal that goes from the chairman on down is rattling hospitality and retail conglomerate Lotte.

Even the bizarre scandal around President Park Geun-hye is touching the big companies, with Samsung’s headquarters raided by police looking for evidence of ties to the president’s shamanistic confidante.

South Korea’s mighty chaebol are in crisis — which is a problem, because they’re ubiquitous.

These great Korean family-owned conglomerates, such as Samsung, Hyundai, and LG, are the result of 50 years of close government cooperation. The government — for many years, a dictatorship — built a mighty export economy by picking winners and creating national champions with low-interest loans and other forms of favoritism. Today, the chaebol’s presence is inescapable, with even residential buildings branded with their giant logos.

These conglomerates can be made up of dozens of affiliates, not all of them related to their core business. For instance, Samsung — best-known for mobile phones and televisions — also builds ships, bridges, and apartment buildings; runs hotels and department stores; manufactures biologics; and has financial services affiliates. Their sprawl and impact on the Korean economy has no analogue in the United States since the days of Rockefeller, Getty, and Vanderbilt.

It’s tempting to attribute the chaebol’s current problems to their similar heritage, size, and cultural uniqueness — they are, after all, products of a country that is 97 percent ethnically Korean, Confucian in social order, and, until the past 50 years or so, pretty isolated from the rest of the world. But that only gets at the surface of things. Yes, the ethnic homogeneity and supposed cultural conformity of South Korea always make these kinds of easy explanations plausible. Maybe it’s the lack of innovation because of Confucian conformity, some proffer. Or the emphasis on hierarchy that means subordinates don’t challenge bad decisions, others speculate. These quasi-Orientalist answers come too quickly to mind — for both Western and Korean critics. (In truth, Korea is a global leader in patents and has a long history of dissent, protest, and unionism.)

The truth is that it’s not cultural malaise that’s choking the chaebol but market forces. The giant corporations made a series of disastrous decisions that have left them at the mercy of ever-changing markets — just like their Western counterparts from Ford to Nokia.

Much of Hyundai’s rapid sales growth from the mid-2000s to 2012 came from building factories in each of the booming BRICs — Brazil, Russia, India, and China — creating eye-catching designs that excited American consumers, winning consistently high quality rankings, and riding a weaker won, the South Korean currency, that gave Hyundai a leg up on its Japanese competitors in foreign markets.

Now, most of the once hot BRICs economies are either cooling off, like China, or in chaotic recessions, like Brazil. The won is off its lows, reducing Hyundai’s cost advantage. And the company made a strategic misstep: It focused on making better versions of its top-selling Sonata and Elantra sedans as car buyers worldwide, watching gas prices plummet, began buying SUVs. Hyundai was caught flat-footed with only two SUVs in its lineup, while most rivals had five or more. Hyundai is now scrambling to build new SUVs of its own.

Samsung plays in one of the world’s most competitive arenas — smartphones and electronics. It was the company’s rush to beat Apple to the market with the newest, most feature-laden smartphone — not Samsung’s “Koreanness” — that led to the problems with the Galaxy Note 7, now banned from aircraft worldwide for fear of fire.

The success of the Korean shipping industry has been a point of national pride. Even its existence is a testament to chutzpah: Hyundai founder Chung Ju-yung signed his first contract to build a ship before he had built a shipyard. He finished both ahead of schedule.

And, like the automakers who eyed developing countries a decade ago, Korean shipbuilders believed globalization was an irreversible upward arrow and built more and bigger ships. But then the world’s economies crashed in 2008 and 2009. And recovery has been slow if nonexistent in several countries. Consequently, there is less and less need for new ships. Just as importantly, shipping fees are at historic lows.

And although the “national champion” strategy dominated previously, today the Korean government is getting out of the business of picking winners. Last year, the Export-Import Bank of Korea promised $3.8 billion in loans to prop up struggling Daewoo Shipbuilding and Marine Engineering. The move enraged Koreans, who’d paid for previous DSME bailouts in 2001 and 2014, and wanted to know where their money had gone. This year, when Hanjin Shipping collapsed, the government said no to a bailout, forcing the company — like any failing business — to take refuge in bankruptcy.

As for the scandal at Lotte — a pan-Asian food, hospitality, and retail chaebol with holdings in the United States — it’s the kind of sibling rivalry and corruption tale that’s easy to find in any nation when billions of dollars and jealous family members are in play.

The family nature of the chaebol may seem foreign to Westerners, but there are plenty of clannish corporations in the United States and Europe: The New York Times, Rupert Murdoch’s News Corp, Mars, and Bechtel are all family-owned and run. Bechtel’s CEO job has been handed down, father to son, like the chairmanships of Samsung, Hyundai, and LG. That works out great, if the offspring are smart and grounded; less so when they’re incompetent and treat the family business like a personal ATM, which appears to be the case at Lotte. In addition to citing a range of bribing and embezzlement charges, Korean prosecutors say the Lotte chairman used company money to pay salaries to relatives who did no work.

This sort of corruption and opaque ownership structure creates what Western investors call the “Korean discount,” meaning shares of the chaebol trade for less than their actual value. The big companies have been criticized for an imperial management style and poor shareholder accountability. In 2014, Hyundai directors voted to buy a piece of downtown Seoul real estate for a new corporate headquarters without being told its price by the company chairman. This angered investors and gave Hyundai a public relations black eye, but it also led to the company creating Korea’s first-ever board-level shareholder rights committee. As the chaebol soon transition to third- and fourth-generation leaders — many of whom are the first family members to be educated outside of Korea and speak fluent English — the conglomerates likely will conform even more to global corporate norms.

What will happen to the great Korean brands? The Harvard Business Review recently estimated that the Note 7 crisis won’t hurt Samsung’s brand in the long term, at least partly because “geographically identified brands bounce back quickly,” adding that “local customers [in this case, Koreans] are much quicker to forgive and to give the brand a second chance.”

Maybe or maybe not. However much the chaebol want to be the face of Korea, the public has a love-hate relationship with their great brands. They are proud of Samsung’s global No. 1 status, but some feel so resentful of its oversize influence that they call their country “the Republic of Samsung.” For years, Koreans have carped that Hyundai charges Koreans more for their cars than foreign buyers. (Korea’s 10 percent sales tax may have something to do with that.) Further, as historically high Korean trade walls fall, more and more Koreans are buying European, American, and even Japanese cars. Just as with American car owners, patriotism matters less than price.

During the Great Recession, when two of the Big Three U.S. automakers were in bankruptcy (and the other leveraged sky-high), analysts and journalists didn’t ask, “What’s wrong with America?” — as though some native ethno-cultural trait had caused Detroit automakers to build bad cars. The automakers had made poor business decisions, not culturally motivated ones, that led to their problems.

Korean businesses, in good times and bad, should be judged the same way.

Photo credit: ED JONES/AFP/Getty Images