Chaebol and Hyundai

[novemberfog]

There is an interesting article in Business week about Chaebol. It was really interesting to see how the money was transferred to the families as well. The full artcile is below:

http://www.businessweek.com/globalbiz/content/may2006/gb20060503_118188.htm?link_position=link3&campaign_id=nws_asia_May8

In a report released on Apr. 6, shareholder activist group People's Solidarity for Participatory Democracy (PSPD) said a study of 250 companies belonging to the 38 largest family-run conglomerates showed a quarter of them had records of irregular deals aimed at enriching the family at the expense of public shareholders in the past 10 years. "The problem is widespread," says Kim Sang Jo, head of PSPD's Economic Reform Center.

Chaebol representatives counter the report doesn't fully take into account business reasons for the deals. Given the difficult business environment due to high oil prices and the rising Korean currency, PSPD is making irresponsible claims that could damage the credibility of Korean companies, says Yang Se Young, general manager at the Federation of Korean Industries, a chaebol lobby group.

No one would doubt that Korea's chaebol have come a long way in the past decade. In theory, at least, corporate governance has improved. Companies including Hyundai, Samsung, and LG are global brands that make top-quality products. The growth-at-all-cost mantra has weakened, and the priority is now on profits rather than market share.

I am not too knowledgeable about Korea, but I know that in Korea there is a very strong responsibility to one's family. Does there seem to be any indication that younger Korean business leaders want to turn away from Chaebol?

Also, does something similar to Chaebol exist in Chinese corporations?

[bhchao]

Does there seem to be any indication that younger Korean business leaders want to turn away from Chaebol?

I think it is an issue of reforming corporate governance within the chaebol, rather than turning away from the chaebol altogether. The norm of transferring power from CEO to the next leader follows a dynastic pattern, from father to son. This is outdated in today's corporate world. Passing the reins of power should be based on merit and competence, not on family ties.

Today there are a lot of connections between government and business in Korea. This creates an environment conducive to bribing politicians for favors in the business environment. This strong connection dates to the Park Chung Hee era where the government made sure that the chaebol did not collapse, since they were key in Korea's rapid industrialization. The government controlled all commercial banks, which helped prop up faltering chaebols with low interest-rate loans. Some banks today have bailed out failing chaebols by writing off loans using taxpayer money.

This created a "triple alliance" between government, banks, and the chaebol, helping to create an environment ripe for corruption.

There needs to be a greater independence between business and government in Korea, in the sense that politicians should get rid of individual vested interests in business that conflict with their government roles.

That does not mean government should stay out of the economy. Government activism can be good in encouraging investment in potential growth areas and technologies, like Kim Dae Jung's government and the Clinton/Gore administration during the dot.com boom.

I fully support the arrest of the Hyundai chairman, and hope that he serve jail time. That will send a message to other chaebols to reform their corporate governance. The politicians who accepted the slush funds should be prosecuted too. In Korea the person on the giving end is punished, while the person on the receiving end is usually not.

There is a stark contrast between Taiwan and South Korea. Both started off as authoritarian governments and experienced parallel economic development, but the degree of corruption resulting from government-business ties is much lower in Taiwan than in South Korea. This is because KMT distanced itself from large corporations, and followed a policy of business equity where SMEs generated most of the island's economic output. The KMT administration in Taiwan practiced monetary conservatism where credit lending policies offered by state-run banks to businesses were strict.

[bhchao]

Many businesses or companies in Taiwan today also have strong family connections within the entity. Evergreen Group and Formosa Plastics are two companies where leadership was passed from father to son, or is going to pass to a family member.

Leadership went from father to son at Evergreen. A while back there was a famous episode in Taiwan where the head of Formosa Plastics fired his son, the heir apparent, from the vice president position of a business unit. Apparently the son had an extramarital affair with a student while teaching at National Taiwan University.

Din Tai Fung is an example of a franchise where family reputation prompted the original owner's youngest son to open a store in the US after a failed competitior used DTF's name as its own, inadvertently causing some damage to the Yang family name.

[bhchao]

In the most recent JD Power survey released last week, Hyundai has skyrocketed to the top echelon of the list (#3) for initial quality.

http://www.msnbc.msn.com/id/13207035/

Most of the gains in quality over the years were achieved under the tutelage of the imprisoned Hyundai chairman. I wonder if quality can still be sustained despite his imprisonment.

Operational management in the chaebol has greatly improved, but business ethics (especially interactions with government) needs improvement.

It’s no secret that Japanese automakers are thrashing their U.S. rivals, producing award-winning vehicles and grabbing an ever bigger share of the North American auto market. But Japan’s venerable carmakers may soon be getting a taste of their own medicine.

South Korea’s No. 1 automaker, Hyundai Motor, scored a stunning victory with American consumers in the latest J.D. Power and Associates Initial Quality Study, released Wednesday, placing third overall behind Porsche and Toyota’s luxury Lexus brand. It was Hyundai's best showing ever in the influential quality study, which is based on responses by just over 63,000 new car buyers and lessees, measuring defects or design problems that occur in the first 90 days of ownership.

While Japan’s Toyota dominated the J.D. Power rankings, taking the top spot in 11 of 19 model categories, Hyundai’s recognition is significant because it means the South Korean automaker is a force to be reckoned in the North American and global automobile markets, said Jack Nerad, market analyst at Kelley Blue Book....

“The Japanese are really going to have to take the South Koreans seriously now,” Reale said. “Hyundai is really up there and it’s playing with the major competitors, but it’s not there by mistake — they have put a lot of effort and time into their ability to make good cars, and they have fixed their supply chain so they can quickly rectify quality issues.”