Take down the stumbling giants
Profits at Samsung Electronics plunged almost 20 percent in the second quarter, a deeply worrying sign of vulnerability for Korea’s most dominant company. As recently as a year ago, the talk was of Samsung, Apple killer. Now, the company is being squeezed from above by Apple’s high-end iPhones, and from below by cheap upstarts like China’s Xiaomi. Worse, there’s a dearth of sensational new products in the pipeline.
Samsung’s travails may have only just begun, now that a politically reinvigorated President Park has been given fresh momentum to rein in Korea’s family-run titans, or chaebol. Her plans to reduce their role in Asia’s No. 4 economy were temporarily sidetracked by the April sinking of the Sewol ferry. Anger over Seoul’s unsteady initial response to the tragedy - which killed more than 300 people, most of them high school students - sent Park’s approval rating plunging to record lows and risked scuttling her entire economic-reform agenda.
Wednesday’s by-elections reset the narrative. Park’s ruling party extended its parliamentary majority, offering her a second chance to increase Korea’s competitiveness and living standards. Here are three ways Park can use her new mandate for the betterment of the Korean population.
Chaebol reform: Any serious plan must involve tearing down the oligarchic web of companies that stifle the kind of ground-up revolution Korea Inc. desperately needs. These behemoths played a pivotal role in Korea’s postwar industrialization back in the days of Park’s father, Park Chung Hee. After seizing power in 1961, he championed a handful of companies to drive growth, generate millions of jobs and create the Korean brand. But the chaebol long ago outlived their usefulness. Their stranglehold on resources, talent, market share and political influence holds Korea back.
Too many Goliaths leave little space for would-be Davids that could launch the next game-changing company. Even if a 20-something Korean strikes out on his or her own, Daewoo, Hyundai, LG, Lotte and, of course, Samsung can easily buy or squash any nascent competitors.
Park should take aim at monopolistic business practices. She should put an immediate end to the cross-shareholding structure that founding families use to control their sprawling conglomerates, and that friendly affiliates employ to support each other. Such practices make it easy to finance expansion without revealing where the funding comes from. All this is critical to Park’s efforts to support start-ups. The president wants a “creative economy.” First, she needs to clear the way for one.
Accelerate the “474” plan: If you want to bring giggles to an audience in Seoul, mention Park’s pledge of 4 percent growth, a labor participation rate of 70 percent and per capita income of $40,000. One problem is that her predecessor, Lee Myung-bak, tried and failed with a “747” scheme seeking a fanciful 7 percent growth rate, $40,000 of income and making Korea a Group of Seven economy. Park should use her second wind to deregulate sectors like education, finance, health, technology and tourism; to curtail state-owned enterprises; to create publicly funded venture capital pools; and to offer greater incentives for companies to hire women.
These steps would help build a thriving service sector. Korea needs to shift growth engines away from exports in favor of knowledge-based industries that harness Koreans’ status as having the world’s most wired citizens, as well as its globally-revered entertainment industry.
Get on with reunification: Nothing would enshrine Park’s presidency into history books everywhere faster than peace on the Korean Peninsula. In January, she said combining the South’s high-tech economy and the North’s natural resources would create a “bonanza” for the Asia region.
“Unification will allow the Korean economy to take a fresh leap forward and inject great vitality and energy,” Park said.
Whether that’s too optimistic largely depends on Park’s audacity. A more flexible and creative approach toward Pyongyang could reap dividends for many decades to come.
As Samsung licks its wounds, it’s important to recognize that its woes are really a microcosm of what ails Korea. At the moment, the company is consumed with the fate of its hospitalized leader, 72-year-old Lee Kun-hee, and worries about whether his untested, 46-year-old son has the vision to replace him. Just as publicly traded Samsung is far too dependent on a singular leader, Korean growth is much too concentrated in a handful of leviathans that serve their families - not the nation.
Park has promised to end Korea’s family drama. She should seize this new mandate to do it.
BY William Pesek, Bloomberg View columnist based in Tokyo