Life in the Republic of Samsung

The oft-smiling Mr Lee Jae-yong is South Korea’s biggest hope and biggest problem.

The 46-year-old heir apparent to lead Samsung Electronics has been the object of media obsession since his 72-year-old father disappeared into a hospital. Mr Lee Kun-hee, Samsung’s chairman and South Korea’s richest man, had emergency surgery last month after suffering a heart attack. The nation is moving on to the younger Lee, with analysts and investors praying he will steer the business well.

SILENCE ON NEPOTISM IN THE CHAEBOLS

What is unfortunate is that the future of 50 million people hangs in the balance as this family drama plays out.

Of course, one company does not make an entire economy. But Samsung’s outsized role in South Korea makes the old axiom about General Motors, “As GM goes, so goes America”, seem quaint. Samsung remains the core of South Korea’s system of family-run conglomerates, or chaebols. The five biggest chaebols generate about two-thirds of gross domestic product, and none are more dominant than Samsung, which has more than 70 companies under its name. If the conglomerate closed shop tomorrow, the equivalent of 25 per cent of the country’s GDP would vanish. Is it any wonder South Koreans joke that they hail from the Republic of Samsung?

Handing off such an economically vital, publicly-traded company from father to son to grandson does not reflect well on South Korea’s global brand — a brand that Samsung’s flashy Galaxy phones and tablets have done much to create. Why do shareholders not speak out against the blatant nepotism exercised by most chaebols, not only Samsung? What about President Park Geun-hye, who rarely misses a chance to talk about the need for the country to evolve into a more creative economy?

The transition from Mr Lee Kun-hee to Mr Lee Jae-yong illustrates exactly why South Korea risks losing ground. The Organisation for Economic Co-operation and Development (OECD) last week issued a report on structural weaknesses that threaten to undermine the country’s effort to match Japan’s living standards. None looms larger than its domineering chaebol system.

GETTING TOUGH ON CONGLOMERATES

While making the rounds in South Korea last week, I heard over and over how small and medium enterprises are the heart of the economy. It is true that they account for about 87 per cent of employment. But their track record on productivity and innovation is appalling. Despite generous public support — with more than 1,300 government programmes, by the OECD’s count — they have failed to restructure, improve corporate governance or develop disruptive products. The country’s small companies tend to remain small, limiting wealth creation.

Ms Park has pledged support for start-ups, tax breaks for angel investors, loans for business incubators and limits on bureaucracy to spur sectors such as finance, education, healthcare and tourism. But I worry she is putting the cart before the proverbial horse. The real problem is the chaebol system. With tentacles deep into any industry that a young would-be innovator might want to crack, chaebol leaders can easily destroy any competitive threat.

The sheer scale of the chaebol system leaves virtually no room for a South Korean Google or Uber to disrupt the economy. Yet, so far, Ms Park seems reluctant to challenge the old guard. For one thing, she would be dismantling the economic model built by her father, dictator Park Chung-hee, and long championed by her party. She also knows that voters have a complicated love-hate relationship with corporate giants. They are proud of what Samsung and groups such as Daewoo, Hyundai and LG have achieved globally, but are increasingly aware of how the dominance of the chaebols holds the country back.

Ms Park’s policies are a bit schizophrenic. While she has clamped down on the cross-holding of shares and on deals where chaebols steer business to friends or relatives, she is relying on the big companies to boost economic growth. Last August, Ms Park even met Mr Lee Kun-hee and the heads of nine other chaebols to implore them to increase investment. The implicit quid pro quo: New regulations would not hurt their interests.

Chaebol bigwigs are not used to losing. In 2008, Mr Lee was convicted of evading taxes on about US$5 billion (S$6.25 billion), only to be pardoned one year later by Ms Park’s predecessor and fellow Saenuri Party member Lee Myung-bak, who is also a former chaebol executive. The pardon was emblematic of the cronyism and revolving-door dynamics that have been so heavily criticised during the country’s recent ferry crisis. The Sewol, which sank on April 16, killing more than 300 people, had been operated by Chonghaejin Marine, one of South Korea’s moderately-sized chaebols.

Who knows, Mr Lee Jae-yong might be an inspired leader, the vanguard of a younger breed of Western-educated executives. However, as she works to drive South Korea forward, Ms Park needs to get tougher with the sprawling conglomerates that are holding the economy back.

BLOOMBERG

ABOUT THE AUTHOR:

William Pesek is a Bloomberg View columnist based in Tokyo who writes on economics, markets and politics in the Asia-Pacific region.