San José State University
Department of Economics
& Tornado Alley
The chaebol are the large, conglomerate family-controlled firms of South Korea characterized by strong ties with government agencies. The name, which means business association, is properly pronounced jay BOL but the spelling pronunciation chay bol is considered acceptable by Korean speakers. There were family-owned enterprises in Korea in the period before 1961 but the particular state-corporate alliance came into being with the regime of Park Chung Hee (1961-1979). Park modeled this arrangement on the zaibatsu system which developed in Japan during the Meiji Era. There were significant differences between the zaibatsu and the chaebol, the most significant of which was the source of capital. The zaibatsu were organized around a bank for their source of capital. The chaebol in contrast were prohibited from owning a bank. The Park regime nationalized the banks of South Korea and could channel scarce capital to industries and firms it saw as necessary for achieving national objectives. The government-favored chaebol had special privileges and grew large. This gave the impression of economic success for the chaebol that was not always valid. In some cases chaebol grew not because they were profitable but merely because they could borrow vast funds. When the international economy took a downturn these debt-ridden businesses were in trouble. In 1999 one quarter of the manufacturers in South Korea did not earn enough to meet the payments required for their debt.
In recent years there has been the growth of mid-sized corporations which are outside of the chaebol arrangement. For example, Appeal Telecom was started by a former employee of Samsung, Lee Ga Hyoung. Appeal Telecom is manufacturing and marketing cell phones and has risen to the top in its field. In Germany the mid-sized corporation make a great contribution to the economy and there is no reason that such firms could not be an important element of the South Korean economy.
Given below are the histories of some of the major chaebol. The record of the membership in the top ten gives a snapshot of the business history of the South Korea chaebol.
|The Top Ten Chaebol Over the Years|
The special case of the Kukje chaebol.
Samsung was once the largest of the chaebol. It was created by Lee Byung Chull, the son of a wealthy landowner. He grew up in a Korea occupied by Japan. He had a classical Chinese education in his early years, but when he was ten he was sent by his family to a primary school in Seoul. His university education was at Waseda University in Tokyo. He dropped out before completing his degree and returned to Seoul and did nothing for a few years. At 26 he used inherited money to start a rice mill in his home town. The venture was not particularly successful and he moved to Taegu and started a trucking and real estate business which he named Samsung, which means "three stars." The business went bankrupt in a credit squeeze that resulted from the Japanese invasion of Manchuria. But Lee went back into business and by the end of the war in 1945 Samsung was flourishing. He added domestic and international trading to the trucking and real estate business that he had started in. Samsung Trading Company was one of the ten largest trading companies in Korea when the Korean War broke out. Lee escaped from Seoul after the North Korean invasion and set up operations in Pusan. The business grew by leaps and bounds due to the war. In 1953 Lee started the first sugar refining company in Korea, which he called Cheil ("first") Sugar. Cheil Sugar was highly profitable and in 1954 Lee setup Cheil Wool Textile Company.
Samsung's companies benefited from the import-substitution policy that the government pursued. Domestic producers were encouraged and imports were discouraged. By the end of the 1950's Lee had acquired control of several commercial banks and insurance companies.
In 1961 Park Chung Hee carried out a military coup d'etat and immediately staged an anticorruption campaign. Lee was in Japan at the time and initially refused to return to South Korea because he knew he, as the richest man in South Korea, would be a prime target of Park's campaign. Later Lee returned to Seoul and struck a deal with Park that became the model for South Korea's chaebol. Samsung would be allowed to remain in business but it would have to be the vehicle for carrying out the development projects that Park wanted. Park was somewhat of a puzzle when he siezed power. When American government officials found that Park in his younger days had not only joined a communist cell, but had been, in fact, the organizer of the cell, they thought that the Communists had taken control of South Korea. Park had a fondness for collectivist-type slogans such as "Enrich the Nation and Strengthen the Army!" and "Steel is National Power."
Lee offered to donate most of his wealth to the government and accept expropriation of his bank shares. Also he agreed to gain the cooperation of other businessmen in promoting Park's development projects.
The chaebol benefited greatly from this arrangement but the nature of the economic system of South Korea was closer to a centrally planned socialist state than the capitalism that it purported to be. The success of Samsung or any of the other chaebol in selling products cannot be taken to be proof of their success in profit making. It could just as well be a result of the South Korean government subsidizing in one way or another a money-losing venture.
Samsung however has been a well managed and economically successful business. By the late 1960's Lee chose electronics to be the focus of Samsung's manufacturing. In 1977 Samsung put Korean engineers to work dismantling color television sets from the United States, Europe and Japan to see how they could be copied. It took about three years for Samsung to to go into production of color television sets. In 1979 Samsung started making VCR's and in 1980 microwave ovens.
Hyundai is probably the largest chaebol. Hyundai was started by Chung Ju Yung who came to Seoul as a teenager in the 1930's. He worked on the docks and as an errand boy for a rice mill. By 1940 he was able to buy an auto repair shop. After WWII he developed business relations with the U.S. military and won construction contracts from them and the government of Syngman Rhee. In the 1960's Chung came to the attention of the ruler of South Korea, Park Chung Hee, when he bid one won to reconstruct a bridge over the Han River that runs through Seoul. Park was impressed with his patriotism and his ability to finish a job ahead of schedule. In the late 1960's Hyundai was given the contract to construct the 260 mile highway between the capital Seoul and the second largest city of South Korea, Pusan, on the southern coast of the Korean peninsula. Hyundai also was constructing highways in Thailand and dredging facilities for the U.S. military in Vietnam in the late 1960's.
Chung shared many of the values and goals of Park and they had a close personal relationship over the years. When Park decided that South Korea should build ships he chose Chung and Hyundai to create a ship-building company. Not only did Chung not have any experience in building ships, there was no one in South Korea that had built a ship larger than 10,000 tons and Chung was intending to build 260,000 ton oil tankers. Chung needed a loan of $60 million to build the ship yard. European bankers which Chung approached for this loan turned him down. Even the Korean Shipbuilding Association told prospective lenders that Chung's project was impossible. Nevertheless Chung eventually got the loan from British bankers and immediately got an order from a Greek shipper for two larger tankers.
Supposedly the key step in Chung getting the loan is that when the British bankers asked him if Korea had any experience in building steel ships he pulled out a South Korean banknote that showed a picture of the iron-clad turtle ship built centuries ago to combat the Chinese navy.
The tankers ordered by the Greek shipper were to be copies of ships that were being produced by a shipyard in Scotland. Chung bought the design and started construction of one of the ships as the shipyard was being constructed.
Hyundai completed the ships by 1973 but the OPEC oil price increase depressed the oil transport business and the Greek firm refused to take delivery. Other customers also refused delivery. Only through considerable effort on the part of Hyundai and the South Korean government were alternate buyers found for the ships.
Hyundai was also involved in overseas construction projects. Chung wanted to expand this construction work to the Middle East but his younger brother, Chung In Yung, disagreed after the company lost $50 million on a highway project in Indonesia. Chung forced this brother out of the company as a result of this disagreement. Hyundai won $1.4 billion of construction contracts in the Middle East.
Daewoo was founded by Kim Woo Choong, whose father had been the teacher of Park Chung Hee. Kim Woo Choong, who was born in 1936 in Taegu, is one of the youngest of the heads of the major chaebol. Kim started his company on what might be best described by the Yiddish word, chutzpah. Kim was a salesman for a trading company that imported yarn and fabric. On one trip to Singapore he picked up fabric samples in Hong Kong and Saigon which he told potential clients were the product of Korean manufacturing. He got $300,000 worth of orders and went back to South Korea and had the samples duplicated and the order filled. At age thirty Kim borrowed $5,000 and started his own trading company with an total investment of $18,000. He named his company Daewoo (great universe). In its first year, 1967, Daewoo exported $580,00 in textiles and in 1968 Daewoo opened its first textile factory, in the city of Pusan.
By 1970 Daewoo was exporting $8 million worth of fabrics. Kim perceived that the U.S. was likely to establish quotas on textile and clothing imports from South Korea. Kim increased Daewoo's sales to the U.S. as much as possible. When quotas were established in 1972 Daewoo received one third of the South Korean quota.
Daewoo began acquiring other companies and by 1975 it included 23 companies with 35,000 employees and had annual sales of $250 million.
Kim's agressive business success attracted the attention of Park Chung Hee and Park encouraged Daewoo's entry into heavy industry. Daewoo acquired Hankuk Machinery, a company originally setup by the Japanese to build submarines. Daewoo also revived a joint venture with GM for producing automobiles which had not been successful under another company Shinjin. President Park then order Kim to take over another failure, the Okpo shipyard project. The Okpo shipyard was a government sponsored project that couldn't be completed by the company that it was assigned to and was only one fourth completed and swamped with debt. As a result of Daewoo's takeover of these failed government projects Daewoo became a company of heavy industry rather than the light industrial company it started out as.
Kim Woo Choong became an icon, an ideal entrepreneur, a role model for Korea. He was reputed to work 100 hours per week, getting by on four hours sleep per night. He never took a vacation. The only time off he took was one morning for his daughter's wedding. His fatal flaw, however, is that he does not distinguish between expansion and profitability. He strove to expand his company into new industries and new markets, but often that expansion was not profitable. When his companies did not earn a profit he relied upon borrowed funds for expansion.
The concepts emphasized at Daewoo were creativity, challenge and sacrifice. Kim, rather than talking about profit, talked about a company creating coprosperity, which meant that the company should create benefits for its workforce, its suppliers, its customers and its government.
Kim emphasized that Daewoo was flexible and innovative, ready to adjust to changing circumstances. Although this might sound like a virtue, it is only a virtue is its innovations and adjustments are subject to constraint that they need to be profitable, at least in the long run.
When hard times came to Daewoo laying off workers was not an option Kim considered acceptable. The other side of coprosperity was that in times of trouble the community of interests would support each other and that included the notion of the government supporting the company.
The SSangyong chaebol had its origin in 1939 as a textile company founded by Kim Sung Kon. (The name means twin dragons; the initial S was doubled to correspond to the twinness of the name.) Later it went into cement production which became its core business. Cement was a strategic industry during South Korea period of rapid growth. But SSangyong, as is the case with all the chaebol, invested in many different industries. This expansion into other industries generally has not been motivated by a desire to diversify in order to spread risk. Instead it seems to be driven by the company leaders desire to parlay their success into new and more interesting industries. SSangyong, in addition to its stake in cement, is engaged in petroleum refining, trading, construction, financial services and unhappily vehicle production. SSangyong is about the sixth largest chaebol in South Korea.
In 1996 SSangyong had total sales of $25 billion but suffered a loss of $137 million. The losses of SSangyong Motor were $284 million. The other SSangyong businesses besides SSangyong Motor had a profit of $147 million.
SSangyong has tried to cut losses but South Korean laws make it difficult if not impossible to layoff workers. SSangyong tried in 1996 to sell SSangyong Motor to Samsung but Samsung decided to built its own automobile factories. There is generally an overcapacity of the world's automobile industry so it is not easy to find a buyer for SSangyong Motor. The German auto firm of Daimler invested in SSangyong Motor in 1991 but is not interested in buying the passenger car business.
The losses and increased borrowing have resulted in SSangyong having an extremely high leverage (debt/equity) ratio. When times are good a high leverage results in extraordinary rates of return on equity. But when times are only moderately bad such high leverage results in a catastrophically low (even negative) rate of return on equity.
The founder, Kim Sung Kon, died in 1975 and leadership of SSangyong fell to his 29-year-old son, Kim Suk Won. This was an extraordinarily young age for a business leader in Korea and most doubted he would be able to handle the responsibility. Kim Suk Won was educated in economics in New England at Brandeis University. When he returned to Korea he joined the Marines and later volunteered to serve in Viet Nam. After Viet Nam he served as an auditor in SSangyong but was ill at ease and left to pursue more exciting ventures. After his father's death he rose to the challenge of managing SSangyong. He expanded the company through vertical integration, entering the paper packaging, petroleum refining and the transportation industries, all field involved in the production and distribution of cement. He also made a personal investment in new ventures such as building a ski resort 130 miles east of Seoul called Yongpyeong (Dragon Valley). It was a world-class ski resort but its profitability was a different matter. SSangyong expanded into the leisure industry on the basis of the future market from South Korea's growing middle class.
Kim Suk Won also began to develop subsidiaries in the financial services industry. SSangyong Investment & Securities Co. earned a good profit in 1996 as the Korean public became more interested in stock investment.
Other chaebol are involved in construction, particularly in the Middle East. SSangyong also entered the construction field but concentrated on Southeast Asia. It was the general contractor for a $400 million complex in Singapore.
Kim Suk Won entered the automobile industry despite Government disapproval. The SSangyong vehicles were technically notable but profitability was a different matter from technical excellence. Its specialty vehicles such as a four-wheel drive station wagon were considered the most promising division of SSangyong Motor.
SSangyong has had notably better labor relations than the other chaebol. This is largely due to the personality of Kim Suk Won and his openness. He communicates very well and delegates authority to his chosen managers. He has administrative ability. There has been some sentiment for getting Kim Suk Won to enter politics. His father was a member of the national assembly and the leading fundraiser for the Democratic Republican Party during the Park Chung Hee era. Kim Suk Won was once considered for the mayorship of Taegu, the third largest city of South Korea.
When the 1997 Asian financial crisis hit SSangyong sold off some of its subsidiaries such as its paper, petroleum refining and securities business. It also sold half of its ski resort and half of SSangyong Cement.
Despite the past successes and seeming strengths of SSangyong Business Week in January of 2001 labeled SSangyong Cement Industrial as a money losing dinosaur not worth saving and SSangyong as one of South Korea's worst managed chaebol. SSangyong has had to rely upon Government aid to stave off collapse and Kim Suk Won has resigned as head of the chaebol.
Lucky Goldstar (LG) was founded in 1947 by Koo In Hwoi. Its first products were toothpaste, face cream and soap. For a while in the 1970's LG was the top chaebol in terms of sales volume when it began producing consumer electronic devices but now is number three, behind topranked Hyundai and second ranked Samsung. But being number three still involved enormous sales revenue, above $60 billion per year.
The founder Koo In Hwoi turned management of the conglomerate over to his son, Koo Cha Kyung, and in 1995 the son of Koo Cha Kyung, Koo Bon Moo, took over the management of LG. Also in 1995 LG purchased controlling interest in Zenith, the last of the U.S. television manufacturers. The company decided in about 1995 to abandon the Lucky Goldstar name which it feared was too much identified with cheapness and Korea and adopted LG which was felt to be less identifiable as Korean. The change in identification was thought to assist the company in entering the higher scale market.
SK was founded in 1962 as Sunkyong. It was initially a refiner of petroleum products and continues to be the largest oil refiner in Korea. Later it went into the telecommunications business.
HYUNDAI: The Hyundai was divided among the sons of the founder. The experiences of the different components varied. The family experienced a tragedy with the suicide of the sixth son for his part in paying $500 million to North Korea to get negotiations between South Korea and North Korea started.
(To be continued.)
DAEWOO: Daewoo suffered the ultimate failure of an enterprise. It went bankrupt. The trouble for Daewoo was there all along. There was too little concern for profitability and too much concern with expansion. If a company has a profitable business it generally deserves expansion. If the company's businesses are unprofitable there is little likelihood that expansion will solve its profit problem. Yet that is the strategy that Kim pursued for Daewoo.
Daewoo expanded from textiles into a number of different industries:
These separate companies were overseen by the Daewoo Corporation. Altogether the Daewoo companies had 320 thousand employees in 110 different countries.
Up until 1999 Kim was able to keep Daewoo afloat and expanding through loans. Kim had Daewoo acquire ailing companies such as Ssongyoung Motors with its $2 billion in debt even when Daewon was failing itself. In 1999 it was no longer possible for Kim to keep Daewoo afloat. Kim was charged with using accounting fraud to reduce Daewoo's reported debts and assets. He was said to have reduced Daewoo's actual debt of $80 billion by accounting ploys to $40 billion and bogusly raised its assets by $40 billion. When the government filed charges in 1999 Kim fled the country.
After the South Korean government declared Daewoo bankrupt in 1999 it attempted to save some of the subsidiary companies. For example, Daewoo Electronics had $2.8 billion more in liabilities than in assets. The forty major creditors agreed to cut the interest rate on $2.5 billion in debt to 1 percent. Furthermore the creditors agreed to trade $1.3 billion in Daewoo for stock and convertible bonds.
SSANGYONG: (twin dragons) Ssangyong got into financial difficulty as a result of attempting to compete in the very difficult international market for luxury automobiles.
(To be continued.)
In 2000 the Financial Supervisory Commission of South Korea reported that LG had an indebitedness to the sum of $39 billion, a substantially greater figure than what had previously been publically acknowledged. Despite this negative publicity LG decided to invest $5.4 billion in the telecommunications industry. This is an attempt to enter a market in which there are large, entrenched leaders.
SK (Under construction)
|The 45 Top Chaebol
of South Korea, 1997
|18||Dong Kuk Steel|
|The 45 Top Chaebol
of South Korea, 1997
|28||Kang Won Ind.|
|33||Oriental Chemical Ind.|
|38||Taihan Electric Wire|
|43||Hankook Tire Mfg.|
|45||Tae Kwang Industries|
Source: Sung-Hee Jwa, The Evolution of Large Corporations in Korea, Edgar Elgar, Cheltenham, UK, 2002.
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