If you ever watched a Korean drama in a contemporary setting, you most probably know what a chaebol is. Who wouldn’t remember the elitist rich family of Boys Over Flowers, for example, or the rude and yet adorable shopping mall owner in Secret Garden? Chaebols are an indispensable part of Korean society, the family owned businesses that made it big and helped Korea become what it is today in terms of economy. However, do we really know how and why chaebols became what they are now and why they are so significant for Korea’s economy?
An octopus in disguise
Chaebols are usually portrayed in movies and television series as rich families running a successful business, not caring about anyone or anything that has no contribution to their wealth. The filthy rich chaebol successors are often shown as rude, spoiled but having a good side buried deep down behind the facade of their ‘royalty’, brought to the surface by the love of a lower class woman/man. How these people behave in real life, I cannot tell you, but I can shed some light on where they come from!
Probably the most well known chaebols of Korea are Samsung, LG, Hyundai and Lotte and they are also the biggest. Samsung alone contributes to around 20% of the national GDP, this figure is a subtle hint at just how important these companies are for the Korean economy. A chaebol usually runs more than one companies in several business sectors, the California Management Review aptly compared them to an octopus having several arms. Did you know that the electronic giant Samsung has one of the most successful construction companies in the world, that built skyscrapers like the Burj Dubai, the Taipei 101 and the Malaysian Petronas Towers? Or that they once manufactured self-branded cars, now own a luxury hotel chain and a clothing brand, too?
A little bit of history
The story of chaebols begins right after the Korean War. The Japanese built several factories during the occupation period between 1910 and 1945, which were left to rot after the world war and the Korean war ended. The chaebols of today started out as small family businesses utilizing the infrastructure left by the Japanese. The growth of these small companies began when Park Chung-hee became president in 1961. Park paid more attention to economy than his predecessor and began dictating a strong vision on how companies should focus on growing the market. Chaebols started to be aided by government policies, tax exemptions and favourable loans to boost the export of the country. If a chaebol needed additional resources or supplies to manufacture certain products, instead of finding a supplier, they created the company to supply the needed parts. Thus the chaebols soon outgrew themselves and really became like an octopus reaching out to an unimaginable number of markets, often totally unrelated to their core businesses.
This constant growth was of course largely financed by bank loans. GDP grew almost by 10% every year and Korea became heavily dependent on export – and thus on chaebols. The rapid expansion of chaebols was also aided by external factors like the collapse of the Soviet Union and thus the opening of a new, unexplored market and the normalization of relations with Japan.
However, when you start to inflate a balloon, it will eventually burst. The crash kicked in in 1997 with the outbreak of the financial crisis throughout Asia. By 1996 76% of chaebol expansion was financed from loans. The companies were obliged to fulfill a certain export quota set by the government and they did not really care whether a certain product or business segment was profitable or not, the goal was to fill the quota. When the financial crisis hit, Korea’s export ratio suddenly started sinking down the drain. To top it all, Korea went down the road of becoming a real democracy just a few years before the crisis hit in, markets, including financial institutions, were liberalized. Chaebol attitude to business, however, remained unchanged. These factors all contributed to the major collapse of chaebol companies in the 1997 financial crisis. 11 of the 30 biggest chaebols went totally bankrupt. Behemoths like Daewoo and Hyundai had to be frittered to pieces due to the enormous weight of their debts. Democracy involved the rise of trade unions, civil rights movements and the political influence of foreign investors – all of them demanding the lessening of chaebol power.
Curbing the power of chaebols and their rise back to the top
To repair the damages, Korea had no other options but to apply to the IMF for an emergency package. Part of the deal was the complete restructuring of the corporate sector. Chaebols were encouraged to shed their octopus arms, or at least the ones providing no profit whatsoever. Unrelated businesses were picked up by other chaebols, to focus on core segments. Hyundai Electronics for example bought up LG Semiconductors and Hyundai Motors bought 51% of Kia. Most chaebols went from being conglomerates to holdings. The reforms demanded by the government called for larger transparency and greater accountability of management, greater protection of small shareholders. The debt-equity ratio of chaebols went down from 500% to 118% by 2005. Foreign investors were allowed to buy in chaebols. The liberal economic policy that followed the crisis significantly curbed the power of Korean conglomerates but people soon lost faith in the new direction as it deepened social differences. In 2008, chabeol-favouring government policies returned and at the same time these companies also started to rethink their path and began adapting to the new era of globalization.
While Europe and America was struggling in the new financial crisis, Korean chaebol market capitalization kept growing, reaching 577 billion dollars by 2012. While other companies had to close down parts of their production due to the crisis, Korean chaebols were able to grow their market penetration, to the disadvantage of American and Japanese firms. Samsung started climbing the stairs to become a market leading company in electronics, making the Fortune 500 list at 22nd place in 2011. While General Motors in the US practically went bankrupt in the financial crisis, Hyundai sales went up 11%.
In 2010, the 30 biggest chabeols contributed to 70% of the South Korean GDP, Samsung alone accounting for 20%.
Over the past half a century, chaebols became essential for the economy, and even the culture of Korea. They do, however, get a lot of criticism, with news emerging about corruption scandals, and economists commenting that the chaebol ruled economy is far from a liberal economy based on free competition, making it hard for small and mid-sized companies to survive.
Do you have favourite dramas with chaebol characters? Share in the comment section below!
Additional sources used:
The Origins and Development of Chaebol, Library of Congress, USA, 1990.
The Chaebols in South Korea: Spearheading Economic Growth. Thomas White International, Ltd., 2010.
Colpan, Asli M., Hikino, Takashi and Lincoln, James R.. 6.2.1, The Oxford Handbook of Business Groups. Oxford University Press (0191613983)
Kalinowski, Thomas (2009.). „The politics of market reforms: Korea’s path from Chaebol Republic to market democracy and back”. Contemporary Politics 15 (3), pp. 287–304. , Taylor & Francis. ISSN 1469-3631.
Powers, Charlotte Marguerite (2010.). „The Changing Role of Chaebol: Multi-Conglomerates in South Korea’s National Economy”. The Stanford Journal of East Asian Affairs, pp. 105-116.