Thursday, December 20, 2012

Business as usual for South Korea's chaebol under Park

By Ju-min Park
Reuters, Seoul

A Park will be back in South Korea's presidential mansion come February, and the big businesses, or chaebol, that dominate the country's economy will be breathing a sigh of relief that her left-wing challenger did not win Wednesday's presidential vote.

Victory for Park Geun-hye, the 60-year old daughter of South Korea's former military ruler, in the election means the top chaebol - five of whom control assets worth 57 percent of gross domestic product in the world's 14th largest economy - can get back to the business of making money.

Park's left-wing challenger had threatened to end the complex web of shareholdings that enable families to control sprawling conglomerates like Samsung Group and Hyundai Motor Co..

The election came at a sensitive time for Samsung and Hyundai as both are in the process of passing power to a third generation of their family owners, a process that left-wing candidate Moon Jae-in could have complicated with an attack on their shareholdings, had he won.

"She doesn't have any plans to alter the structures of the chaebol ownership and their concentration of economic power," said Kim Sang-jo, an economist at Hansung University and executive director of a group urging reform of South Korea's economy.

Seoul shares rallied on Thursday after Park's win adding 0.32 percentage points, in part on relief that Moon lost.

"The election results have eased policy uncertainty, and raised hopes of economic stimulus," said Cho Young-hyun, an analyst at Hana Daetoo Securities.


Park's father, Park Chung-hee, is the person responsible for building the chaebol during the 1960s and 1970s.

With a mix of threats and inducements for the top chaebol bosses, the founders of Samsung and Hyundai emerged from the ruins of the 1950-53 Korean War to help build a modern industrial state that has been dubbed "The Miracle on the Han".

At one stage, Park the father threatened to imprison Lee Byung-chull, the founder of Samsung.

At another, in early 1970s, Park yelled at Hyundai founder Chung Ju-yung telling him he was incapable of building a shipyard and would cut all ties with Hyundai, according to Chung's memoirs.

"Chairman Chung, we must do this!" Park, after a long silence and a cigarette, said of the plan to build a shipyard, according to the memoir.

Chung said "Yes Sir" and the shipyard was built and became the world's largest shipbuilder, Hyundai Heavy Industries Co Ltd. .

Park Geun-hye is not likely to be as irascible as her father and her policies remain sketchy.

She has promised to share wealth more widely but said no new taxes on individuals or companies, and no attack on the chaebol.

"It is not my aim to dismantle or bash the chaebol," Park said in July.

"The main aim is to fix negative parts such as abuse of economic power and to save the positive part the chaebol have such as job creation."

Yet, Park can't be too aggressive when high-income conservative earners make up a large part of her support and her party isn't willing to abandon its pro-business stances, analysts said.

Tax revenues in South Korea are just 19.3 percent of gross domestic product (GDP), according to investment bank Nomura, compared with more than 30 percent of GDP in most advanced economies, effectively limiting Park's room to increase spending if she keeps her pledge not to raise taxes.

Park, who came into politics at the time of the 1997-98 Asian financial crisis to "save" her country, also looks unlikely to tinker with South Korea's export-driven model. If anything, she looks set to be risk-averse.

"We believe that, in light of the painful memory of the 1997 currency crisis, the top priority of policymakers, regardless of political ideology, is to reduce Korea's external vulnerability," Nomura said in a report issued on election day.

The chaebol themselves appeared to be happy with Wednesday's outcome and the prospect of being left alone.

"We want (the president-elect) to undertake lots of economic policies that help investments and job creation so that our companies can focus on reviving the economy," chaebol lobby group the Federation of Korean Industries said in a congratulatory message.


Wednesday, December 19, 2012

Picture: First Female President Elected in South Korea



Thursday, November 29, 2012

As South Korea Tackles Drinking Culture, Samsung Sets Guidelines

By Jeyup S Kwaak

Like many office workers in South Korea, Cho Sung-joon went out drinking with his colleagues most weeks during his five-year stint at Samsung Electronics Co.

Bloomberg News
Bottles of soju, a rice-based liquor.

After kicking off the night guzzling soju, a rice-based liquor, over grilled pork or raw fish, he and his co-workers would move on to a pub or karaoke lounge, occasionally past midnight.

“We did drink a lot to blow off steam,” said Mr. Cho.

It’s a hierarchical bonding experience known as hoesik — literally “staff dinner.” Deeply ingrained in South Korean business culture, hoesik usually involves free-flowing alcohol, often forced upon lower-ranked staff who are expected to serve and entertain their superiors. Not playing the rules is a shortcut to soured relations and poor performance reviews.

Current and former Samsung Electronics staff say Samsung’s hoesik weren’t particularly excessive, but in September the parent company, Samsung Group, implemented a strict code of conduct for staff dinners. The rules banned rituals like beolju, or forcing drinks on others, and sabalju — the mixing of several different beverages to make a potent punch.

A Samsung Group employee of nine years who asked not to be named said the company had implemented a rule known as “1-1-9″, which restricts hoesik to one sitting, one type of alcohol and a cut-off point of 9 p.m in order to prevent excessive drinking.

Spokespeople for Samsung Group and its subsidiaries declined to comment for this article.

Samsung’s move to manage its own drinking culture comes as South Korea has more broadly made some steps this year towards tackling excessive alcohol consumption and drink-induced violence.

South Koreans are by far the heaviest drinkers in Asia and the biggest consumers of spirits in the world, according to the World Health Organization. Drink is valued as a social glue that has long been a part of the collective identity. With minimal laws against public intoxication, drunks dot the streets of the largest cities after dark. Convenience stores sell cheap hard liquor around the clock.

Alcohol-induced violence has also long been tolerated as a side-effect of the nation’s love of the bottle. Arrests have been rare and judges have lowered sentences for criminals if they were found to have acted under the influence of alcohol.

In 2008, a seven-year old girl was raped by a man in suburban Seoul. Prosecutors sought life imprisonment, but the court ruled that the man was too drunk to know what he was doing and sentenced him to 12 years in prison.

A campaign this summer led by one of the nation’s major newspapers in coordination with the Seoul Metropolitan Police Agency has sought to change attitudes about drunken violence. More than 500 repeat offenders were arrested.

“Individual incidents involving alcohol weren’t considered newsworthy,” said Lee In-yul, assistant editor at the Chosun Ilbo newspaper, which ran a high-profile series on alcohol-related violence, or jupok. “We didn’t see that some of them were part of a bigger picture.”

A mixing glass for “bombshot” cocktails of soju and beer, common at company drinking parties. The lines show recommended ratios of soju and beer and the likely levels of intoxication.

Away from the extremes, companies are finding that attitudes towards drinking are changing among younger staff. Many keep their hoesik attendance to a minimum, puzzling their superiors.

For previous generations, jobs at large conglomerates represented a dream destination — you made every effort to fit in, including accepting the drinking culture. Some job hunters still detail their drinking ability on their resumes.

But as conglomerates seek to increase employee loyalty in an increasingly mobile labor market, some are acknowledging that hoesik culture can be a turn off for some talented employees or potential new hires.

Mr. Cho left Samsung in 2011 to study for a Masters of Business Administration in New York, although he says the drinking culture wasn’t a factor in his decision.

Meanwhile, fresh recruits at Samsung said that they were surprised by the mild initiations and subsequent get-togethers this year.

“Maybe on one or two instances, we were asked to make a toast,” said a new hire who asked not to be named, “but that was it. No one was pressured to do anything.”

“The (company) policy is enforced so well that the general mood is it’s gone too far,” said a 20-something analyst who joined Samsung’s securities arm before this year’s campaign.

The trick for companies may be to find the sweet spot of team-building through social drinking, while avoiding the excesses that hoesik are sometimes known for. For society in general, the challenge remains much larger. ◦

Monday, October 15, 2012

Presidential politics in South Korea: Bashing the Chaebol

SINCE the days of Park Chung-hee’s often brutal dictatorship (he seized power in 1961 and was assassinated in 1979), South Korea has transformed itself as a democratic nation. Its politics, enlivened by occasional fisticuffs in the National Assembly, are among the most vibrant in Asia. The bid by the late strongman’s daughter, Park Geun-hye, to become the country’s first woman president is no throwback to the past. She faces two strong (male) challengers in the election on December 19th, including one, Moon Jae-in, whom her father’s regime imprisoned. The two men may eventually unite. But at this stage, the outcome is impossible to predict.

For all the candidates’ differences, a common theme has emerged in the campaign. All three have criticised what they see as the unfair nature of the South Korean economy. They focus on the family-controlled conglomerates, or chaebol, which rose to prominence under the state-led finance and cronyism of the Park Chung-hee era. Though greatly reformed since, the chaebol still dominate the economy.
Bashing the chaebol is not new in South Korea, but this time the mood appears to be hardening. Ordinary folk grumble at the scores of pardons issued to convicted chaebol executives under Lee Myung-bak, the outgoing president (himself a former executive in the Hyundai group of companies). Much as South Koreans are proud of having Samsung Electronics, part of the biggest chaebol, advertise on Manhattan’s Times Square and act as sponsors of Chelsea Football Club and the Olympics, they worry about the groups’ clout at home.

Recent data show chaebol engaged in more than two-thirds of 76 business categories in South Korea. New fields range from pizzas to handbags to furs. In the past decade the number of companies linked to the ten main chaebol has almost doubled, to nearly 600. Between January and June, the operating profits of the ten accounted for more than 70% of the profits of all the companies listed on the Korea Exchange. Exports lead the way, and this success has helped transform South Korea. Yet some also blame it for increasing inequality at a time when the population is ageing and economic momentum may be ebbing.

And so the presidential campaign is revolving around the term “economic democratisation”. It sounds woolly, but is used earnestly by all three candidates. The most surprising advocate is Ms Park. She has swung the ruling Saenuri Party away from the firmly pro-business Mr Lee. Members of her party have now drafted legislation that would stiffen sentences for convicted chaebol owners and their families, and restrict their business activities and investments. Other pro-chaebol diehards in her party continue to dismiss all this as empty populism.

Ms Park’s two opponents, Mr Moon of the Democratic United Party and Ahn Cheol-soo, a software entrepreneur and political independent, both claim to be out to protect small businesses from the chaebol. Mr Moon describes South Korea as a “jungle economy” in which the conglomerates enjoy “unfair privileges”. He does not intend to break them up, but wants to strengthen antitrust powers and to stop them from muscling into new territory where they jeopardise small businesses, such as bakeries.

Mr Ahn, who founded South Korea’s biggest antivirus software firm, accuses the chaebol of snaffling up innovative small businesses which then stagnate inside the conglomerates. His campaign was recently joined by Jang Ha-sung, dean of one of the country’s leading business schools. Mr Jang is a crusader for better corporate governance at the chaebol. Back in 2001 he helped win one of the first ever class-action lawsuits, against Samsung Electronics.

The chaebol are keeping their heads down, hoping that the hubbub will die away. Their defenders note that however much people rail against the conglomerates, most want their children to work at one of them when they grow up. Defenders also say chaebol are so central to South Korea that to attack them would be to attack the country’s economy.

In fact, weaker chaebol could be just what the economy needs. According to the OECD, other sectors, such as services, are highly inefficient and starved of investment in research and development. That is because the country’s development strategy has focused on manufacturing, siphoning capital, talent and other resources from services.

There is a danger in complacency. The pampered life of a unionised “labour aristocracy” which works for the chaebol, compared with poor pay for those in the rest of the economy, feeds a sense of injustice. Incestuous business practices by the chaebol’s rich owners add to the concerns. This month, the Fair Trade Commission slapped a 4 billion won ($3.7m) fine on three companies tied to Shinsegae, a big retailer linked to the Lee clan of Samsung, for helping pizza and bakery businesses owned by the chairwoman’s daughter.

Perhaps the strongest indication that times may be changing involves Kim Seung-youn, chairman of the Hanwha group. He was once convicted for beating up bar workers with an iron rod, after they had been involved in a scuffle with his son. Mr Lee then promptly pardoned him. Convicted again this year, this time for embezzlement, Mr Kim was jailed in August. He is a rare example of a convicted chaebol chairman who spends time behind bars. Everyone is waiting to see whether Mr Lee pardons him before stepping down. ◦

Tuesday, September 18, 2012

Why are Asians, Especially South Korean Golfers Dominating The LPGA?

Posted by Contributor: Helyn Edwards |             

Jiya Shin, ranked No. 10 in the world, captured her second career major shooting 71 and 73 in a 36-hole final Sunday at the 2012 Women's British Open at the Royal Liverpool Golf Club with a record-breaking 9-shot victory. Shin's victory at the Open meant that for the first time in the Ladies Professional Golf Association's (LPGA) history, all four major titles in one season are held by Asian-born players, 3 by South Koreans.

Shin joined Sun Young Yoo who captured the Kraft Nabisco Championship, Na Yeon Choi who won the U.S. Women's Open, and Shanshan Feng from mainland China who won the LPGA Championship. The rest of the leaderboard included Inbee Park as the runner-up and American Paula Creamer at 3rd, joined by two other Americans in the top ten, Stacy Lewis and Katie Fucher. The weather as usual in British Opens was the major issue putting a dampener on the players, especially Karrie Webb, the 72-hole leader.

The sweep by Asian players of the majors this year comes 14 years after Se Ri Pak of South Korea became a national hero by capturing two straight LPGA majors: the U.S. Women's Open and the LPGA Championship in 1998. 12 of the players on the LPGA's top 20 money list are Asians, including #1 Park ($1,419,940) of S. Korea.

Surely the United States Golf Association (USGA) and other Federations are trying to discover and duplicate the South Korean Golf Assoc. Although making strides, none have had the same dominance, with only 4 Americans in the top money list. As good as reporting is on all levels, if there was one thing or something tangible it would have been cloned and there would be parity among the nations.

One intangible that is helping is the Asian culture. South Korean television signs on every morning with the national anthem, accompanied by images to instill national pride, like the military, Pak and other successful athletes. Also children are in school, then an after-school program in education or in a sports activity until it's time to go to bed everyday, unlike Western culture with its freer, more rounded emphasis. Most Asian children are expected to help their family and their country succeed, and golf is the new path to success even to the exclusion of education.

Besides more opportunity, another advantage is a more open sponsorship where even low ranked pros are assisted with their bills for travel and training in contrast to the USA. Ask American Meg Mallon winner of the 2004 US Open who had no sponsors. Won-Seok Choi, a manager for Hi-Mart, Korea's Best Buy, sponsors several players on the LPGA Tour and dozens more in Korea. "We like to support many Korean women golfers because they have a chance to become a big player, like Se Ri Pak...Asian people have very strong families, and support is the most important thing."

At the U.S. Women's Open this weekend, 5 Korean players were still on the putting green as darkness fell. Shin remarked that, "We work hard...I think so many Asia players are playing at the moment on the LPGA Tour, so it makes a lot of chance to win." In tennis, long-time coaches believe that the more numbers exposed to the sport early on, especially to those athletes who have a hunger for the sport and penchant for success, will lead to more great champions. Unless the USGA invests more in First Tee and the USTA in NJTL or similar grass roots programs and minor levels of play, particularly in the larger segment of the population, then the South Koreans and other Asians, who have done so already, will continue to excel.


Sunday, September 16, 2012



Friday, July 20, 2012

Between Giants: South Korea and the U.S.-China Rivalry

By Jennifer Lind

An American ally and a Chinese economic partner, South Korea is trying to hedge between two great powers as they compete for influence.

SK nationalists.jpg
South Korean conservatives protest the North Korean shelling of Yeonpyeong island in late 2010. (AP)

After a decade of preoccupation with the Middle East, the United States is turning its attention toward Asia. As Washington refocuses on managing a rising China, in part by strengthening its ties with a network of Asian countries, it's discovering that at least one of its principal allies in the region may not be as fully on board as hoped. While the United States was toppling dictators and chasing terrorists, its South Korean ally has grown accustomed to a powerful China, and appears ambivalent about its role in America's plans for Asia. That's not to say that South Korea is about to evict the tens of thousands of American troops who still help deter North Korean aggression. But nor is the country apparently eager to participate in what many South Koreans see as a U.S. effort to contain China, whose rise has so far benefited their country in many ways. South Korean views are after all shaped by history: not only by the Japanese occupation, World War Two, and Korean War, but by hundreds of years of living as a small country surrounded by giants.

Recent cooperation between Japan and South Korea, the United States' two key regional allies, suggested promise for a nascent coalition. In June, all three held joint military exercises and Seoul and Tokyo negotiated an accord to facilitate intelligence sharing on North Korea's nuclear and ballistic missile programs. This agreement, called the General Security of Military Information Agreement (GSOMIA), would enhance America's ability to work with its two allies and represented, as political scientist Jeffrey Hornung wrote in the Japan Times, a "practical, forward-looking effort to strengthen relations between two vibrant democracies facing shared security challenges." Or it would have, at least, if it had ever been signed.

When South Korean President Lee Myung-bak's government announced the accord with Japan, politicians and civic groups protested. The agreement had been negotiated too quickly and secretly, they decried, demanding that it come before the National Assembly. In the heat of South Korea's election-year politics, politicians railed against security cooperation with Japan and lambasted Lee's government for selling out their country to Tokyo." The idea of offering our military intelligence to the Japanese Self-Defense Forces is utterly unreasonable," declared Democratic United Party spokesperson Kim Hyun in a statement, demanding an apology from President Lee. Two members of Lee's administration resigned, and opposition politicians have submitted a no-confidence vote calling for the prime minister's resignation. Lee's government shelved the accord.

Commentators largely blame the fracas on the lingering Japanese-South Korean tensions over historical and territorial disputes. Many Koreans resent Japan for not clearly acknowledging the atrocities it committed during its occupation of the Korean peninsula in the first half of the 20th century. Japanese leaders have at times issued apologies, but politicians and intellectuals on Japan's right still routinely deny well-established historical facts about the country's past human rights violations And Japan and South Korea both claim the same string of tiny islands -- known as Tokdo to Koreans, Takeshima to Japanese, and trouble to everyone else -- which have become a nationalist minefield for the two countries to traverse.

Still, there's something more behind the unraveling of the GSOMIA accord -- South Korean ambivalence about the country's role in the unfolding U.S.-China drama. Several defense and foreign policy analysts in Seoul told me, when I visited recently, that many of their countrymen shied away from GSOMIA because they saw it as part of a U.S.-led security architecture positioned against China. They added that many South Koreans are dismayed that, as they perceive it, the U.S. increasingly sees China as a military threat. A professor at the Korea National Defense University named Lee Byeong-Gu told me, "In particular, signing the GSOMIA agreement is worrying to Koreans in light of the recent U.S. 'pivot' or 'rebalancing' toward Asia, which many people fear represents an increased containment effort toward China. Some South Koreans are calling for their government to sign an intelligence-sharing agreement with Beijing as well as with Tokyo. South Korean legislator Shim Yoon-joe commented that signing such a pact with both Japan and China is important in order "to wipe out the allegation that the Korea-Japan military pact is a stepping stone to trilateral cooperation to check China."

South Korean analysts also emphasized to me that China is their country's top trading partner. As Aidan Foster-Carter put it, "South Korea can hardly afford to be seen as ganging up on the country whose growth largely drives its own." This year marks the tenth anniversary of the normalization of relations between South Korea and China. One researcher at a think tank in Seoul remarked to me that his institute has planned conferences and other events to commemorate the anniversary, and that South Korea's many other foreign policy institutes are all doing the same. At a time when the Americans appear to be orchestrating a coalition to balance against China, South Koreans are celebrating with it a milestone in productive and friendly relations.

Yet South Koreans are as wary of accommodating China as they are of containing it. Seoul resents Beijing's support for the North Korean regime. If North Koreans continue to kill South Koreans (as they did in 2010 in the attacks against the Cheonan frigate and Yongpyeong Island), Seoul may grow less tolerant of Beijing's sheltering of Pyongyang. Or increased Chinese belligerence in the South China Sea and East China Sea disputes may lead Seoul to decide that it needs allies to protect it from the behemoth in its backyard.

It's possible that Chinese policies could one day lead South Korea to edge closer to the U.S. and Japan, but that day has not yet come, and China may never even emerge as a security threat that requires the sort of balancing coalition that the U.S. seems to envision. As long as this ambiguity continues -- or as long as Washington tolerates its ally's coziness with Beijing -- South Korea's strategic position will likely push it strongly toward hedging. As such, Seoul will resist policies, like the agreement with Japan, that appear to situate it clearly on the side of one great power or another. ◦

Tuesday, July 10, 2012

Matthews Asia report: The Ascent of South Korea

"Korea has been one of the few nations to consistently increase R&D spending in recent years while many other countries have cut back."

The Ascent of South Korea

July 2012
One country in Asia that seems to attract less attention than it might deserve, considering its modern-day achievements, is South Korea.

While index provider MSCI this year (once again) left South Korea classified as an “emerging market,” both FTSE and Standard & Poor’s have placed Korea in the “developed market” camp for several years now. In June, South Korea became the seventh nation in the world to become a member of the so-called “20-50 club”—a moniker referring to countries each having a population size over 50 million and national incomes exceeding US$20,000. Other nations in the club are the U.S., Japan, France, Italy, Germany and the United Kingdom, with the U.K. having joined most recently in 1996. But what makes Korea even more impressive is just how far it has risen in a relatively short span of time. In 1960, the year following the end of the Korean War, the nation was among the poorest in the world, and its GDP per capita was comparable to some of the most impoverished areas of Africa. This economic progress has come in combination with Korea’s democratic trajectory. Now among Asia’s most democratic countries—on par with Japan—Korea’s political system includes leftists and progressives within a broad ideological spectrum. What has propelled Korea to this status? Let us examine the forces we believe to be shaping its future as well as the challenges that lie ahead.

 Emphasis on Education and R&D

Among Korea’s chief attributes is its strong emphasis on education. Korean parents are known for the importance they stress on education. In fact, Korea’s private sector spending on education is the highest among Organization for Economic Co-Operation and Development (OECD) member countries. Even today, small town communities hold celebrations for local students who are admitted into prestigious universities. The achievement is considered an honor for the entire town, and educational pedigree is generally considered a greater status symbol in Korea than monetary wealth. There are more than 75,000 foreign students from Korea currently studying in U.S. universities—a high ratio considering Korea’s university age population. Many of the students also tend to rejoin Korea’s workforce, benefiting Korea’s transformation from an industrial nation to a more research and development-focused economy.

In 2010, Korea showed the third-highest ratio of research and development (R&D) spending to GDP among OECD countries, and outpaced both the U.S. and Japan in this area. In fact, Korea has been one of the few nations to consistently increase R&D spending in recent years while many other countries have cut back. Even amid the recent global financial crisis, Korea increased its R&D spending. Accordingly, product quality among Korean auto and electronics makers has noticeably been on the rise.

Globally Competitive Companies

In many product categories—from semiconductors to shipbuilding—Korea now boasts a dominant market share. Its auto industry has also been making impressive and steady gains that have resulted not only from competitive pricing but also from improved brand image and product quality. This year, despite offering fewer incentives than the industry average in the U.S., Korean auto companies still continued to gain market share. One Korean automaker was also ranked highest among all automakers in the U.S., according to a recent consumer survey and has been honored with several automotive accolades in the past few years. Not bad for a company that didn’t start making its own branded cars until 1975—about seven decades after Ford introduced the Model-T and about 40 years after Toyota’s first car. Considering Korea’s recent free trade agreement with the U.S., Korean companies should be able to increasingly tap into the large U.S. consumer market.

The Road Ahead

Korea’s strides in branding and R&D, coupled with a well-educated and Internet-savvy workforce (it now has one of the highest penetration rates of broadband and smartphone users), no doubt have helped to maintain its low unemployment rate, which was 3.2% in May. After Korea was hit, like many other countries, by the recent global financial crisis, it demonstrated notable resilience with its quick recovery.

Still, Korea’s growth is not without hurdles. Concerns include its quickly aging population and a birth rate that has been on the decline since the 1970s. Government officials have been trying to reverse this trend with measures to increase the participation of women in the workforce, create easier access to childcare, better work and social benefits and more affordable education. Another measure taken to address labor shortage issues was the reform of its foreign worker policy. The government introduced an Employment Permit System (EPS) in 2004 to manage foreign workers in a more systematic way while also improving the basic rights of foreign workers. Between 2006 and 2010, Korea had a net influx of 283,000 foreign workers. Fortunately, Korea’s growth in labor productivity has been one of the fastest among OECD members, allowing it to produce more goods and services with the same levels of labor.

It is difficult to explore Korea’s economic ascent without a discussion over its system of chaebols—large, often family-controlled conglomerates. Korean chaebol companies represent both the economy’s successes and challenges. On one hand, concentrating domestic economic power within a few chaebols has enabled Korea to compete internationally, driving growth as most chaebols have done exceptionally well in overseas markets. However, this concentration of power can also leave Korea vulnerable. The fall of one chaebol company could have significant and wide-reaching social, political and economic consequences. For example, the infamous collapse of one conglomerate in 1999, in the aftermath of the Asian Financial Crisis, forced a wave of closures and impacted jobs in several countries.

Many argue that Korea needs to cultivate a stronger small and medium-enterprise (SME) sector to better weather economic downturns. Fortunately, there are encouraging signs as we see an increasing number of smaller firms making inroads in areas such as consumer-related industries, particularly in China. In addition, Korea has seen its so-called “soft goods”—Internet services, pop music and television dramas—enjoy new popularity. These industries are primarily led by entrepreneurs, rather than chaebol-related firms.

Relationship with North Korea

Another long-term challenge continues to be South Korea’s relationship with its Stalinist neighbor to the North. Since the Korean War ended in an armistice in 1953, North Korea has continued to threaten South Korea with periodic military provocations that have included artillery fire attacks. Each incident has led to short-term market volatility and we expect this to continue to be the case for the foreseeable future. North Korea is still undergoing a leadership transition since long-time leader Kim Jong Il died in 2011. His son, Kim Jong Un, is expected to lead the country; for the time being, little is known about him and North Korea remains a closed economy.

Should North Korea change it stance, however, there are great potential benefits to the Korean peninsula. On a basic level, North Korea could become a good source of the labor and natural resources that South Korea lacks. In turn, South Korea—could provide the technology and capital to help North Korea develop.

More to Come

Korea tends to be viewed with the same lens that investors use to consider Asia’s two largest economies—China and India. But that may be the wrong comparison. China and India are still considered emerging countries while Korea has already gained developed country status. When compared to other developed nations, Korea’s growth profile stands out. Among developed nations, Korea had the third-highest GDP growth rate in 2011, trailing Israel and Sweden. In 2012, based on the OECD’s forecast, Korea is expected to be the fastest-growing developed country. Despite its growth over the past few decades, however, Korea’s GDP per capita is still just about half that of Japan, indicating room for further expansion.

Not only is Korea’s growth rate positive, it is also now more transparent. Last year, Korea became one of the first countries in the region to adopt International Financial Reporting Standards, which require companies with assets of more than 2 trillion won (US$1.7 billion) to make financial statements easier and more transparent for foreign investors to access. SMEs are expected to be required to adopt these standards by next year. Since the 1997-98 Asian Financial Crisis, Korea has also undergone significant corporate governance reforms. The introduction of outside directors is a major feature of the changes to board regulations, and enhances a board’s monitoring functions. Holding companies have simplified their shareholding structures and other measures have increased management accountability, protecting minority shareholder rights and information disclosure.

What I find most encouraging about Korea is its legacy of resiliency. If Korea can continue on a path of innovation and transparency, it should be able reach the next GDP milestone of US$30,000 GDP per capita. It took Japan five years to reach that target after joining the “20-50 club” and nine years for the U.S. Only time will tell when Korea will surpass such targets, and we will continue to keep a close watch.

Michael Oh, CFA
Portfolio Manager
Matthews International Capital Management, LLC ◦

Saturday, February 25, 2012

Corporate governance explains South Korea’s low stockmarket ratings

IT IS sometimes asserted that low South Korean equity valuations stem from the threat of instability in North Korea. That explanation looked a lot less convincing after the death of Kim Jong Il in December, when the KOSPI 200 index of leading shares and the won, the South Korean currency, both quickly shrugged off the news.

So what is the source of the “Korea discount”, which means that the KOSPI has a forward price-to-earnings ratio of under ten, below most other Asian stockmarkets (see chart)? There are a few possibilities. The national economic model is still built on exports, often in highly cyclical industries such as shipbuilding. The capital structure of South Korean firms has historically been debt-heavy.

But the prime cause of the discount is more likely to be poor corporate governance at the family-run chaebol conglomerates that dominate the economy. Nefarious schemes to pass on control to sons, avoid taxes and exploit company assets for the benefit of family members are widely discussed in private. They are also lambasted abroad: a 2010 survey by CLSA, a broker, placed the country third-from-bottom in Asia on governance, ahead of only Indonesia and the Philippines.

The issue is now also getting more of an airing at home. A recent report by Tongyang Securities, a broker, drew an explicit link between Korea’s low equity valuations and the practices of “tunnelling” and “propping”, which benefit insiders at the expense of smaller investors.

Tunnelling is the awarding of contracts to firms owned by family members. Chaebol heads typically own only a small portion of their firms, but are able to maintain control through complex cross-holdings; tunnelling offers a means of exploiting that control to get richer, quicker. In 2007, for instance, the Fair Trade Commission, an official watchdog, fined Hyundai Motor for, among other things, giving 1.3 trillion won ($1.4 billion) of business to Glovis, a firm owned by the son of Hyundai’s chairman—without any tendering.

Propping is similar to tunnelling, and means that unviable units get financial support from sister companies. But it is no less damaging to small investors. If company insiders are able to misuse shareholders’ funds at will, would-be investors will reduce their expectations of future cash flows and thus attach lower valuations to stocks.

Other allegations are even more serious. On February 3rd Hanwha Group announced in a regulatory filing that its chairman, Kim Seung-yeon, was among several officials being investigated for alleged embezzlement. Chey Tae-won, the chairman of SK Group, was indicted in January over the disappearance of 99 billion won from company coffers, as part of a scheme allegedly planned by his brother to cover futures-trading losses. Mr Chey denies the charges. The Federation of Korean Industries, a chaebol pressure group, has urged prosecutors to go easy on Mr Chey. They say that punishing him would harm “entrepreneurial spirit”.

Mr Chey has had previous scrapes, having been convicted of a billion-dollar accounting fraud in 2003. He eventually received a full pardon from the president and was also chosen to represent the nation during the 2010 G20 summit, leading a meeting of international chief executives. Lee Kun-hee, the chairman of Samsung, received a similar pardon in 2009, having been found guilty of tax evasion, and was picked to front South Korea’s bid for the 2018 Winter Olympics. Yujeon mujwai, mujeon yujwai—an old expression meaning “money = innocence, no money = guilt”—is enjoying a resurgence in popularity.

The irony is that the largest chaebol are models of efficient production and are enjoying a golden period. Their success, say proponents, vindicates the family-run approach to business. Their ownership structure means they have no need to appease short-termist investors or to meet quarterly earnings targets; instead, they can invest for the long run. Smaller shareholders have reason to feel less thrilled. ◦

Mobile phones in North Korea

Some North Koreans get better connected

A NORTH KOREAN professor apparently posted footage on YouTube last year boasting that his country was developing applications for the Android mobile-phone operating system. Ordinary North Koreans are more likely to be pining for a humble mobile phone of any sort, and now their chances of owning one are increasing. Smuggled mobiles have been used on Chinese networks near the border for years, but now business is booming for Koryolink, the North’s only official cellular network, based in the capital, Pyongyang.

The service—75%-owned by Orascom, an Egyptian firm, and 25%-owned by the North Korean state—has gone from 300,000 to 1m subscribers in 18 months. For a hermit kingdom whose rulers resent their subjects keeping closely in touch with each other, this is a remarkable development.

Koryolink earns a gross margin of 80%, making North Korea by far the most profitable market in which Orascom operates. The company has worked hard to court the regime, its chairman travelling to Pyongyang last year to meet the late supreme leader, Kim Jong Il.

North Korean mobile-phone users spend an average of $13.90 a month on calls and text messages, and they tend to pay in hard currency. According to a foreign diplomat, many customers turn up at Koryolink shops with bundles of euro notes. There are even incentives for paying in euros, such as free off-peak calls. This provides foreign currency for a government that craves it.

Mobile-phone customers obtain the hard currency from the informal private trading on which many North Koreans depend. Such business is forbidden, but the government has failed to feed its people, forcing it to turn a blind eye to some capitalist practices. Many insiders benefit: Pyongyang’s “golden couples” consist of a government-official husband and an entrepreneur wife.

Mobile usage now appears to be spreading beyond Pyongyang. The gadgets are a common sight in other cities such as Nampo, not far from the capital, and increasingly are owned by non-officials. As yet, though, only a sixth of the country has a mobile signal.

The authorities are not naive. Some outside observers believe that North Korea’s first experiment with mobile telephony came to a sudden end in 2004 because a mobile phone was used to detonate a huge bomb at a train station that nearly killed Kim Jong Il.

Koryolink is a walled garden: users are not able to make or receive international calls, and there is no internet access. It would be hard to imagine that calls and text messages are not monitored. As in China, the network is even becoming a means by which the state disseminates propaganda. Rodong Shinmun, the government mouthpiece, sends out text messages that relay the latest news to phone subscribers.

Orascom’s slogan is “Giving the world a voice”. For Koryolink’s users, that may literally be true, as North Korean mobile-phone users enjoy some of the benefits of modernity that other countries take for granted. Their phones are not yet the tools of revolution, but mark an amazing change for all that. ◦

Let them eat cake: A half-baked effort to curb the conglomerates

SOME parents give their children cakes. A few give them cake shops. The hot topic in South Korea is the trend for daughters and grand-daughters of chaebol families to open bakeries and other small food outlets. The chaebol are the conglomerates that dominate the Korean economy, so these plutocratic pâtissières have deeper pockets than any of the little bakers they compete against.

Their baking has provoked outrage. Lee Myung-bak, South Korea’s president, calls it a “hobby” business for rich girls that threatens the livelihood of poor shopkeepers. Lee Ju-young, a member of the national assembly, likens it to Park Ji-sung (Manchester United’s Korean midfielder) lording it over amateurs in a backstreet game of football. A restaurateur in Seoul puts it more plaintively: “These families already control everything else in Korea. Why can’t they leave something for the rest of us?”

The chaebol families have decided that this is not a battle worth picking. Scions of the Samsung, LG and Hyundai dynasties are all hanging up their aprons. Artisée, a chain of swanky pastry shops run by Lee Boo-jin, whose dad is the chairman of Samsung, is to close. So is the Hyundai-affiliated Ozen.

Whether this will help small bakers much is open to question. Artisée has only 27 shops; Ozen a mere two. Both are cupcakes in comparison to SPC Group, which operates more than 3,000 Paris Baguette shops in Korea. Buns have always been SPC’s bread and butter—and its boss is not an heiress.

Some say all this pie-throwing distracts attention from the real problems that overmighty chaebol cause. Entrepreneurs complain that if they have a good idea, the chaebol show up with their chequebooks and poach their staff. Small firms that supply chaebol complain that they are ruthlessly squeezed, though few dare say so publicly.

Consumers also suffer. Korea’s Fair Trade Commission (FTC) detected over 3,500 cases of price-fixing in 2010, but only 66 led to fines. The average penalty amounted to just 2.3% of unfairly earned revenue. Samsung and LG were fined in January for fixing the prices of notebook PCs and flat-screen televisions between June 2008 and September 2009. Samsung was ordered to pay a fine of 25.8 billion won ($23m); LG, 18.8 billion won. LG’s fine is to be waived, in return for co-operation with the FTC. This is the third time the two firms have been caught price-fixing in the past two years.

Politicians follow the same old recipes when dealing with the chaebol. They lean on banks to lend cash to small firms. And they lean on the chaebol to stay out of a few minor businesses, such as baking or tofu-making. However you sugarcoat it, this is not serious reform. ◦