Korea on path for ecosystemic development

Lee promotes ‘kinder capitalism’ that seeks shared growth between large and small companies


Large conglomerates such as Samsung, LG and Hyundai have been the key driving forces and big brothers of the Korean economy for decades, shepherding in thousands of smaller suppliers.

But with the conglomerates’ dominance having risen to an extent that many suppliers are bullied to cough up the lowest possible prices and put up with irregular trading practices, calls for greater social responsibility among business giants have mounted.

Conglomerates have been increasingly criticized for threatening small companies by encroaching upon their business areas such as restaurants, coffee shops and rice cake shops. Maintenance, repair and operation companies run by chaebol to procure materials and equipment are another example.

In light of the evident disparities, President Lee Myung-bak presented “ecosystemic development” as Korea’s new path for growth that creates jobs, reduces income gaps and preserves the environment.

“What is now being demanded is a new model of the market economy that evolves from greedy management to ethical management; from the freedom of capital to the responsibility of capital; and from the vicious circle of the rich getting richer and the poor getting poorer to mutual prosperity,” Lee said during his Liberation Day national address in August.

Noting that the U.S. financial crisis in 2008 and the ongoing fiscal crises clearly showed that neither a market economy based on extreme competition nor a welfare state model that runs on constant government spending were perfect, Lee emphasized the need for a kinder capitalism.

Two weeks after the speech, Lee brought together chaebol chiefs to drum up their support for his new socioeconomic vision and praised some for making large donations to charity.

Lee’s national address was followed up with announcements of government measures to expand employment of high school graduates, improve working conditions for irregular workers and reduce unfair trade practices in the retail industry.

The National Assembly last month passed a bill that bans large retail businesses such as department stores and major supermarket chains from coercing suppliers to cut prices, pay for sales promotion, buy gift certificates, or refusing or delaying receiving their products starting next year. Violators of the new law can face criminal punishment in addition to fines.

A nongovernmental panel for mutual growth chaired by an ex-prime minister has been announcing business areas that should be left for only small and medium-sized companies. It also grades large companies in terms of how much they support partner firms and announces the results so that they can be used as a major criterion for giving out government orders.

Several conglomerates are doing their part to step up efforts to seek shared growth with smaller companies.

SK Group recently announced that it will transform its MRO company into social enterprises which provide jobs and services for the underprivileged.

The Korea Federation of Banks said it will hire 2,700 high school graduates for the next three years.

The nation’s 30 largest conglomerates said they will increase the employment of high school graduates by 13 percent from last year to 35,000.

POSCO has been providing cash and incentives to partner companies that raise productivity under a “benefit sharing” program since 2004.

Listed as the world’s most admired among eight global steelmakers in an annual survey by the Fortune magazine, POSCO has offered 40.2 billion won in incentives to partner firms under the program as of last year.

The steelmaker expanded the benefit sharing program from first-tier suppliers to second, third and fourth-tier suppliers earlier this year, aiming to foster 30 high-tech partner firms with sales of over 100 billion won by 2020.

POSCO has also revised its terms and conditions so that suppliers can sign up for adjustment of costs when material prices rise by a certain degree, and make sure that the change can be applied to second through fourth-tier suppliers as well.

Samsung Electronics has made it easier for small companies with core technologies and ideas to become its suppliers by pushing for joint development projects with them to create new business opportunities.

The nation’s largest chipmaker runs a center under the direct control of its chief executive for mutual growth with suppliers and an executive advisory panel to spread its management knowhow to partner firms.

Major builders are also beefing up support for contractors as the construction sector suffers a prolonged property market slump.

Hyundai Engineering and Construction has been extending low-interest loans to partner companies from a 60-billion-won fund it created last year for mutual growth.

Samsung C&T Engineering and Construction developed a solar energy generation system for apartment complexes early this year through joint research and development with partner companies.

A committee for shared growth under GS Engineering and Construction is focusing on financial assistance for contractors out of 40 billion won fund it formed. GS was the first major builder to pay its contractors on a daily basis.

Daewoo Engineering and Construction has continued to establish a strong partnership with contractors in technological development, training and management consultation. Daewoo has been living up to an agreement it signed in 2009 for mutual growth and fair trade with subcontractors.

SH Corp., run by the Seoul City government, is expanding advance payments and cash payments for subcontractors as they often don’t get paid interest on delayed payments.

Most small and medium-sized companies often face liquidity problems as they have to wait for months to get paid after delivery of their products.

To pump up their liquidity, Hana Bank offers a “mutual growth” loan package to those who submit documents that prove their product delivery to large companies.

Suppliers have taken some 780 billion won from Hana using the loan package since it was introduced last October.

Korea Development Bank is speeding up steps to create funds with large businesses to provide low-interest loans to their suppliers. KDB has agreed to form mutual growth funds with Daewoo Shipbuilding and Marine Engineering, STX Offshore and Shipbuilding, Hanjin Heavy Industries and Construction as well as Doosan Heavy Industries and Construction.

Industrial Bank of Korea began selling a loan package for second-tier and third-tier suppliers out of a fund amassed with first-tier suppliers such as Seoul Semiconductor and Sejong Industrial.

By Kim So-hyun (sophie@heraldcorp.com)