Chaebol under fire amid South Korean scandals

July 16, 2013 6:28 am

Chaebol under fire amid South Korean scandals

By Song Jung-a in Seoul

The audio file is uncomfortable listening. Uploaded on YouTube, it captured a young salesman at Namyang Dairy Products, one of South Korea’s leading dairy companies, bullying a representative of one of the group’s distributors. At one stage he threatens to kill the distributor unless he buys more of the company’s products. The threat comes after a series of verbal insults are hurled at the buyer, who pleads that he does not have the space to store any more stock. The poisonous exchange, which has rocketed around South Korea’s vibrant social media forums since May, has become a lightning rod for mounting discontent over the dominance of the chaebol – the country’s big family-run conglomerates – which are accused of choking the development of small and medium-sized companies. The recording provided an extreme example of something many people believed had been happening up and down the country – lifting a veil on decades of abuse meted out by the chaebol.“In the past, such bullying tactics were not exposed to the public because consumers had only small channels of information,” says Chung Sun-sup, editor of a popular news website on Korean chaebol.

“But now [the] chaebol have come under greater public scrutiny as social media enables consumers to share all kinds of information and to take collective action against such corporate misbehaviour.”

Consumers reacted swiftly to the Namyang incident – which the company says happened three years ago – by boycotting its products. Namyang fired the salesman, publicly apologised and promised to reinforce its training to prevent future similar incidents.

Analysts say these tensions, buried during periods of rapid growth, are amplified as the slowing economy makes the relationship between big conglomerates and their smaller partners more strained.

The chaebol have led South Korea’s rapid economic development, but Koreans are increasingly uncomfortable about their perceived excessive power.

Criticism of their economic dominance and alleged choking of smaller businesses has intensified with Asia’s fourth-largest economy becoming increasingly divided between a handful of chaebol fuelling growth through exports while the SME sector, which provides 90 per cent of jobs, remains far weaker.

Analysts say the situation is worst in the retail business, which relies heavily on domestic consumption.

“Manufacturers can find their way out of the current economic slump through exports, but retail companies have no way to boost sales other than forcing them on to their vendors, given the limited domestic market size,” says Lee Dong-joo at Korea Small Business Institute, a research house studying SMEs. “But the vendors have also reached the limit because of the sluggish domestic consumption.”

The Namyang case provides a very tangible example of the excessive arrogance of the chaebol. But there are others.

In April, an executive from Posco Energy, a subsidiary of steelmaker Posco, verbally abused a flight attendant and slapped her face with a rolled-up magazine, complaining about Korean Air’s business-class service. The executive later resigned amid a public uproar.

Prosecutors are also investigating Baesangmyun Brewery, a leading liquor maker, after one of its vendors killed himself, blaming the company for forceful sales tactics similar to those used by Namyang.

The company says it has implemented measures to prevent the recurrence of such practices. It added that “such forceful sales tactics were used briefly in 2010, but we have corrected them and reached an agreement with our vendors for co-prosperity”.


Kim Sang-jo, economics professor at Hansung University, says the recent spate of incidents is a turning point for Korea Inc. “[They] have helped build up some momentum for chaebol reform. The public’s changed perception of their business culture and calls for changes seem irreversible.”

The public demand is for a more even playing field for the SMEs, and it is one that chimes with President Park Geun-hye, who during her election campaign promised to rein in the power of big business and provide more support for SMEs.

Legislation passed in June has toughened punishment for unfair intra-group deals, struck by chaebol, which are often seen to discriminate against smaller independent groups.

But companies complain that such social pressure has made the business environment tougher at a time when they are already grappling with the slowing global economy, sluggish exports and a weakening yen.

“Now, we have to pay more attention to our corporate image because of the ongoing controversy,” says Chung Jo-won, a spokesman for the Federation of Korean Industries, a chaebol lobby group. “Conglomerates need intra-group deals and business integration to some degree to protect corporate information.”

However, prodded by the growing social pressure, big conglomerates such asHyundai Motor and Samsung are now paying more attention to forming productive partnerships with suppliers and vendors.

Contracts previously reserved for subsidiaries are being opened up to public tendering while they are withdrawing from some peripheral areas such as the food retail business to offer more opportunities for small vendors. Small businesses remain sceptical about how far this moral pressure can go.

“The changes are welcome but it is too early to say that this signals the end of decades of abuse by big businesses,” says Yoon Hyo-sup, of the Korea Federation of Retailers Organisation. “These gestures could be just a show by companies to overcome the current trouble.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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