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Secrets of Success
Korea's Unstoppable Conglomerates

The global market share of South Korea's biggest companies is on the rise. How have these chaebols managed to stay both big and flexible, and why are they so competitive?

Photos: cw

South Korea attained a major milestone recently when it finished ahead of archrival Japan for the first time ever in the annual competitiveness rankings of the Lausanne-based International Institute for Management Development (IMD).

Though the result may have come as a surprise to some, the Japanese had already noticed the ascendance of its East Asian neighbor. The weekly magazine Nikkei Business ran a cover story early this year called, "Secrets behind the Rise of Korea's Big Four," revealing how Japanese companies are stooping to learn from South Korea's Samsung Electronics, LG Electronics, Hyundai Motor Company and steel giant Posco (Pohang Iron & Steel Co.).

Engulfing the Globe

At a time when mobile phone giants Nokia, Motorola, and Sony-Ericsson were seeing their market share slide, Samsung and LG bucked the trend. Over the past three years, the global market share of Korean handsets has jumped to 30 percent from 25 percent.

In the global LCD TV market of nearly 150 million sets, Samsung and LG have assumed dominance over perennial leaders Sony, Panasonic and Sharp. Last summer, Sony's average LCD TV price fell below Samsung's for the first time ever. Soon after, LG's market share surpassed venerable Sony's, giving it the second highest global share in the industry. In merely three years, the global market share of Korean LCD TVs has risen from 27 percent to 37 percent.

Korean companies, which had already swept through the global TFT-LCD and DRAM sectors, took advantage of the economic meltdown to widen their lead. Samsung's capital expenditure is an unprecedented US$16 billion this year, more than Intel, IBM, and Sony combined. Of that, Samsung's investment in memory chips is more than four times the combined investment of Taiwanese DRAM makers Inotera Memories, Nanya Technology Corp., Powerchip Semiconductor Corp., and ProMOS Technologies.

These outstanding results beg a few simple questions: When American and European firms were wallowing in losses, how were Korean companies able to remain both big and flexible? And what special skills do Korean CEOs possess that have enabled them to steadily steer their giant battleships?

The answer can be found in the huge conglomerates that Koreans cannot figure out whether to love or hate – the chaebols.

Chaebols as Instruments of Government Policy?

The revenues of Korea's 30 biggest conglomerates account for 70 percent of the country's GDP. Kim Sang-Jo, an economics professor at Hansung University, says that based on public information filed with South Korea's stock exchange, the assets of the top four conglomerates (Samsung, Hyundai, LG and SK Telecom) amount to 50 percent of the country's GDP, and their capital expenditure represents 35 percent of the country's total investment.

"Chaebols are the Janus face of the Korean economy," says Kim, who as executive director of nonprofit group Solidarity for Economic Reform has sued Samsung and Hyundai on behalf of small shareholders. Seated in his simply appointed office, pensively lighting a cigarette, Kim muses on South Koreans' conflicted feelings toward their country's corporate giants – they are proud that the chaebols have become global leaders, but also disgusted at their corrupt practices, tax evasion, breach of faith, and illegal transfer of company assets.

To this day, these tenacious, stubborn giants remain the key levers used by South Korea's government to prop up the economy, as has been evident in its exchange rate policy. In just six months in 2009, the Korean won depreciated by 60 percent against the U.S. dollar, and the central bank's benchmark interest rate fell to 2 percent from 5.25 percent. The big Korean conglomerates saw their exports surge, and their cost of capital was cut in half.

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