New rules push chaebol to begin open bid process

Korea’s family-owned conglomerates, better known as chaebol, are pledging to deal more openly with small and medium enterprises (SMEs) as lawmakers prepare to revise the Fair Trade Act.

Under proposed changes to the law, owners of chaebol and their families with stakes larger than 30 percent in affiliate companies could face jail time if they unfairly favor affiliates in business transactions.

The revision could impact 112 companies under 22 conglomerates, according to local research firm CEO Score. Chief among them are Hyundai Motor Group and GS Group.

Hyundai Motor Group Chairman Chung Mong-koo and his family own more than 30 percent of eight affiliates, including Hyundai Glovis and Hyundai Amco.

The eight companies earned 6.28 trillion won ($5.62 billion) in 2011 through business with other affiliates, and those transactions made up more than 50 percent in terms of sales.

In anticipation of the new regulations, Hyundai said yesterday that it will reduce inter-affiliate business in advertising and distribution by introducing a competitive bidding system open to SMEs.

In the advertisement area, the group said it will open 120 billion won worth of orders to the process, or about 65 percent of its total budget in that sector. Advertising was previously dominated by Innocean, which is entirely owned by Chung and his family members.

For distribution, Hyundai said that 480 billion won worth of orders, or 45 percent of the group’s annual total, will be given to outside companies through the bidding process. Hyundai Glovis, the distribution arm of the automotive group, will support SMEs with the projects.

“We will adopt a competitive bidding system and open doors in advertisement and distribution as well as other areas such as construction and systems integration,” Hyundai said in a release. “We will establish a committee to oversee competitive bidding in our projects, which will include independent experts.”

There were some exceptions to the proposal, though, including projects that require a global network or large investments from the group.

GS Group, controlled by Chairman Huh Chang-soo, also pledged to open projects to outside companies in light of the proposed revisions. GS is the nation’s eighth-largest conglomerate with more than 70 affiliates.

It is expected to feel pressure should the new rules be approved since Chairman Huh and his family members own more than 30 percent of 20 group affiliates, according to CEO Score.

“The company should respect law and order and conduct transparent management while working with others through fair competition and cooperation,” Huh said at an executive meeting yesterday. “GS needs to create quality jobs with sustainable growth and become a company that can give hope to society.”

Industry observers said that Huh’s comments should not be limited to GS Group as he is also the chairman of the Federation of Korean Industries, a business lobbying group that represents leading conglomerates.

Among the top 30 conglomerates, Hyosung and Booyong are also thought to be in dangerous positions. Eleven subsidiaries of Hyosung and 10 affiliates of Booyoung would be subject to the new rules.

But for Samsung, the nation’s largest conglomerate with more than 70 affiliates, only three subsidiaries would fall under the 30 percent rule.

In addition to conglomerates, civic groups have also made their voices heard on the issue.

Citizens United for Better Society released a statement on Tuesday saying that the revised law would violate constitutional freedoms.

The Center for Free Enterprise also criticized the move.

“Trade with affiliates is a normal business activity that leads to efficiency, stable supply and security,” it said in a release. “The revision is a change for the worse that is driven by populism.”

By Joo Kyung-don [kjoo@joongang.co.kr]