The presidential panel on shared growth between large and small businesses has taken another step toward developing and implementing a win-win model by hammering out an agreement on sharing profits between large companies and their small suppliers.
Under a deal reached on Thursday, large corporations agreed to undertake certain projects, such as R&D and overseas market development, jointly with their parts suppliers and share the profits thereof with them as per prearranged contracts.
This scheme is a compromise between a radical proposal put forward by Chung Un-chan, a former prime minister who now heads the Commission on Shared Growth for Large and Small Companies, and a more modest plan advocated by big businesses.
Since last February, Chung has persistently pressed large corporations to share their “excess profits” with the small firms in their supply chains. By excess profit, he meant the profit that a company earns beyond the profit target it has set at the beginning of the year.
Chung’s idea met tough resistance not only from large companies but even from government officials. To ease opposition, he came up with different versions of the proposal, but they were basically not much different from the original.
After all, Chung had to water down his proposal to end the year-long dispute. Big corporations, however, did not readily accept the compromise. In their view, this formula goes against the principles of capitalism and would likely put a drag on their operations.
They accepted it partly because its adoption is optional and also because anti-big business sentiment has been growing among the public and political circles.
Large companies prefer a benefit-sharing arrangement similar to the one practiced at POSCO. This scheme, however, is basically not about sharing the profits generated by large companies but about sharing the cost savings created by parts vendors through efficiency improvement.
Under this formula, if a parts vendor manages to lower the production cost of its product by, say, 20 percent, it would be allowed to lower the price of the item by, say, just 10 percent and boost its profits by keeping the remaining cost savings.
While this arrangement is beneficial to parts suppliers, the scope of benefit is limited compared with the scheme agreed on Thursday. If implemented as envisioned, the new scheme would enable a parts supplier to jointly develop a new technology with a large corporation or advance into a new overseas market with it and share the profits thus generated.
Yet the problem with this new arrangement is that it is not mandatory. The panel has no power to force private companies to adopt its proposals. All it can do is to apply pressure on them.
As a means of putting pressure on large companies, the panel has developed what is dubbed the “shared growth index.” The index is designed to measure and publicly announce how large businesses treat the small vendors in their supply chains.
The index consists of two components. One is the Fair Trade Commission’s annual assessment of how corporations follow its fair trade rules and provide support ― financial, R&D, production technology, managerial, etc. ― to their suppliers.
The other component, which is more important, is suppliers’ subjective assessment of their big customers in terms of commitment to fair trade and shared growth.
The panel is now ready to announce the shared growth indexes of the nation’s 56 largest corporations for the first time. If a company embraces the agreed-upon profit-sharing scheme, it would be given extra points in calculating the index.
The panel’s profit-sharing formula may not be the best solution that satisfies all parties involved. Yet it is an important step forward in building a framework for the shared growth of small and large businesses.
As such, large corporations need to view it in a more positive light and take the initiative in fleshing out the not-yet fully defined profit-sharing model. Doing so would ultimately benefit them as sustained growth is unthinkable without the backing of competitive parts suppliers.
The panel, for its part, needs to calculate the shared growth index in a transparent and trustworthy manner to ensure that it exerts influence on large companies. Otherwise, the time and effort it has spent on shared growth would go down the drain.
