Red tape causes ‘reverse discrimination’ on firms

Last November, SK Group sold off SK Encar, Korea’s No. 1 used-car business. Launched by the conglomerate in 1999, it had an impressive 818.9 billion won ($723 million) in revenues in 2016. “Though the company wasn’t doing bad business,” said a SK spokesman, “we were unable to grow while being told by the government that we were infringing on the territory of SMEs.”

In 2013, the government designated the selling of used cars as a business most suitable for small and medium-sized enterprises (SMEs), and it actively discouraged conglomerates like SK from getting involved.

So it got out.

The vacuum left by SK was quickly filled by overseas carmakers, which do not face the same restrictions. In 2017, BMW, Audi, Jaguar, Mercedes-Benz, Land Rover and Lexus sold 23,168 used cars in Korea, 72.9 percent on-year growth over 2016.

In fact, SK sold SK Encar’s online secondhand car business to an Australian company.

Rules meant to prevent Korean conglomerates from monopolizing certain industries are proving to be big opportunities for foreign companies, which is being called reverse discrimination against the chaebol.

The policies being promoted by President Moon Jae-in’s administration threaten to give foreign competitors an even bigger edge over domestic companies.

Beyond simply discouraging conglomerates from entering certain industries considered suitable for SMEs, the current administration introduced a new law that goes into effect from December that will legally prevent conglomerates from competing with small businesses in certain sectors. Small businesses will be able to ask the Ministry of SMEs and Startups to designate certain sectors as no-go areas for bigger companies.

Experts fear that whole sectors will be taken over by foreign companies, as is threatening to happen with the used car business and bakeries, which have also been earmarked for SMEs.

“Not only are there many regulations in Korea, but many of them don’t apply to foreign companies,” said Shin Min-soo, professor of business administration at Hanyang University. “This often leads to a problem of reverse discrimination.”

A foreign takeover of the domestic LED (light-emitting diode) industry a few years ago serves as a warning.

In 2011, when the government designated the LED industry as suitable for SMEs, Samsung and LG Electronics began scaling down their production. But before domestic SMEs could fill in the gaps, much of the market was taken by Philips from Germany, Osram from the Netherlands as well as Chinese companies selling cheap alternatives.

“Not only does designating some businesses as being suitable for SMEs lead to reverse discrimination,” said Ha Sang-do, professor of food science and technology at Chung-Ang University, “it leads to more losses than gains. The designations did not come after thorough profit-loss calculations for the economy, industry and society, but solely out of populist concerns. They should be revoked.”

“The government needs to provide a way for [domestic] businesses to grow together instead of making them fight over who gets a larger market share,” said Ha Sung-yong, professor of automotive engineering at Shinhan University.

Under the Moon administration, the Ministry of SMEs and Startups has been pushing for the legalization of profit-sharing between conglomerates and their smaller partners. By making conglomerates share profits with suppliers and contractors, the government hopes smaller firms will grow more competitive, which could ultimately lead to higher profits for conglomerates in the long run.

Experts are concerned that this policy also holds potential for reverse discrimination against domestic companies, however, as conglomerates will be forced to set profit goals and share them with the government and their partners - possibly leading to important business strategies being leaked to competitors.

“Because large domestic companies like Samsung Electronics and Hyundai Motor will have to reveal key management goals and strategies [in accordance with the policy],” said Lee Sang-ho, head of Korea Economic Research Institute’s Industrial Innovative team, “the same rules not applying to foreign companies like Apple and Toyota could lead to serious reverse discrimination.”

Experts advise that instead of focusing on restricting conglomerates’ business activities, the government should create policies to nurture creativity in businesses.

Strict regulations on the IT industry should be relieved for Korean companies to reach their full potential and prevent foreign domination, experts warn.

The history of YouTube and Facebook’s near monopolization of the domestic video market can also be traced back to regulations that hobbled Korean firms.

Only 10 years ago, domestic companies like AfreecaTV, Pandora TV and Mgoon were leading in the domestic video market.

From 2009, regulations required people to use their real names on domestic video platforms. Many people migrated to YouTube, where they could upload anonymously.

Though the requirement to use real names on domestic video platforms was repealed in 2012, it was too late to win back users.

According to MezzoMedia, a digital marketing firm, YouTube claimed 40.7 percent of the Korean video advertising market in the first half of this year, with the country’s top two web portals Naver and Daum trailing far behind at 8.7 percent and 5.7 percent.

“In the video content market, the platform that has the most content accumulated from the past has a competitive advantage,” said Kwak Dae-hyun, a director at Naver. “It’s difficult to win consumers back.”

“Korean companies face strict regulations that aren’t found anywhere else in the world,” said one senior manager of an IT firm. “For example, games that are approved for users of all ages are categorized as rated R in Korea because of the presence, say, of a slot machine.”

BY KIM DO-NYUN, YOON JUNG-MIN [kim.eunjin1@joongang.co.kr]