Reckless chaebol
The past five years must have been good times for Korea’s chaebol groups. During this period, the nation’s 30 largest business groups saw their number of affiliates more than double. According to data compiled by the Financial Supervisory Service, the figure surged from 500 in January 2006 to 1,087 in April this year. This means the conglomerates added a new member to their fleet of subsidiaries every three days during that period.
These groups owe their rapid expansion partly to the deregulation drive of the Lee Myung-bak government. Lee eliminated or softened various regulations introduced to curb their excessive business diversification. For instance, he abolished the regulation restricting chaebol affiliates’ acquisition of equities in other companies. He also softened the rules on industrial corporations’ shareholdings in financial companies.
Lee took these steps to spur corporate investment in new growth sectors, such as renewable energy, biotechnology, health care, robotics and software. Without doubt these measures have boosted investment in these and other strategically important new technologies.
But an analysis of the 587 newly created affiliates suggests that the top business groups have been more engrossed in muscling into areas that are neither new growth sectors nor their present core business lines.
The tendency of chaebol groups to diversify into areas not related to their main business fields is nothing new. But their recent investment pattern appears excessive. This may be attributable partially to the ascendancy of third- and fourth-generation chaebol offspring to top posts. Many of the newly added subsidiaries were set up by these younger members of chaebol families.
Inexperienced chaebol siblings often start a company without doing their homework, captivated by the impulse to turn their hobbies or interests into a business. Companies established and run in this fashion cannot be expected to make money. Therefore it should not come as a surprise that about 45 percent of the newly established subsidiaries are in the red.
But these companies do not have to worry about their losses because they have sugar daddies ― parent companies that cover their losses. One problem with this practice is that it undermines the interests of the minority shareholders of the parent companies.
A more serious problem is that it distorts competition in the marketplace. Few small and medium-sized enterprises would be able to survive if their competitors are affiliates of big business groups that can rely on subsidization by their parent companies. In this regard it is a cause for concern that many of the newly created chaebol affiliates engage in business areas that have traditionally been the preserve of SMEs.
Another problem with companies run by chaebol offspring is that in many cases they are a channel through which chaebol families transfer their wealth and managerial control to their children without paying gift or inheritance taxes.
To give an example, many business groups have affiliates responsible for maintaining and repairing the computer systems of other subsidiaries. These firms can make money easily through intra-group deals. Since they are profitable, the chaebol children who operate them can make huge capital gains by making initial public offerings of their shares. They can use the proceeds from share offerings to boost their stakes in group holding companies, bolstering their managerial control.
The recent surge in the number of chaebol affiliates would have been seen in a positive light had they been the result of active investment in new technology fields that would power the nation’s economic growth for the next couple of decades. Unfortunately, this is not the case. If big business groups continue to focus on maximizing their private gains regardless of the negative consequences of their behavior, the government may have second thoughts about deregulation.
These groups owe their rapid expansion partly to the deregulation drive of the Lee Myung-bak government. Lee eliminated or softened various regulations introduced to curb their excessive business diversification. For instance, he abolished the regulation restricting chaebol affiliates’ acquisition of equities in other companies. He also softened the rules on industrial corporations’ shareholdings in financial companies.
Lee took these steps to spur corporate investment in new growth sectors, such as renewable energy, biotechnology, health care, robotics and software. Without doubt these measures have boosted investment in these and other strategically important new technologies.
But an analysis of the 587 newly created affiliates suggests that the top business groups have been more engrossed in muscling into areas that are neither new growth sectors nor their present core business lines.
The tendency of chaebol groups to diversify into areas not related to their main business fields is nothing new. But their recent investment pattern appears excessive. This may be attributable partially to the ascendancy of third- and fourth-generation chaebol offspring to top posts. Many of the newly added subsidiaries were set up by these younger members of chaebol families.
Inexperienced chaebol siblings often start a company without doing their homework, captivated by the impulse to turn their hobbies or interests into a business. Companies established and run in this fashion cannot be expected to make money. Therefore it should not come as a surprise that about 45 percent of the newly established subsidiaries are in the red.
But these companies do not have to worry about their losses because they have sugar daddies ― parent companies that cover their losses. One problem with this practice is that it undermines the interests of the minority shareholders of the parent companies.
A more serious problem is that it distorts competition in the marketplace. Few small and medium-sized enterprises would be able to survive if their competitors are affiliates of big business groups that can rely on subsidization by their parent companies. In this regard it is a cause for concern that many of the newly created chaebol affiliates engage in business areas that have traditionally been the preserve of SMEs.
Another problem with companies run by chaebol offspring is that in many cases they are a channel through which chaebol families transfer their wealth and managerial control to their children without paying gift or inheritance taxes.
To give an example, many business groups have affiliates responsible for maintaining and repairing the computer systems of other subsidiaries. These firms can make money easily through intra-group deals. Since they are profitable, the chaebol children who operate them can make huge capital gains by making initial public offerings of their shares. They can use the proceeds from share offerings to boost their stakes in group holding companies, bolstering their managerial control.
The recent surge in the number of chaebol affiliates would have been seen in a positive light had they been the result of active investment in new technology fields that would power the nation’s economic growth for the next couple of decades. Unfortunately, this is not the case. If big business groups continue to focus on maximizing their private gains regardless of the negative consequences of their behavior, the government may have second thoughts about deregulation.
Household medicines
Controversy is raging over the government’s plan to make general household medicines available at supermarkets and convenience stores.
The Health and Welfare Ministry recently announced a list of 44 over-the-counter pharmaceutical products that would be sold at retail outlets starting August. If the plan goes as scheduled, it will be the first time in Korea that OTC products are sold at places other than licensed drug stores.
The list included 12 energy drinks, four ointments, 15 liquid indigestion drinks and 11 intestinal pills, but no cold medicines or fever reducers.
Health Minister Chin Soo-hee said cold medicines and fever reducers needed to be reclassified to become suitable for sales at non-pharmacy outlets. She said she would push for revision of the Pharmacist Act to include them in what would be termed “freely sellable OTC products.”
The ministry’s announcement came after President Lee Myung-bak scolded officials for failing to follow up on his instruction to address people’s long-standing complaints that they cannot purchase household medicines, including cold medicines and fever reducers, at night, on weekends or on holidays when their neighborhood drug stores are closed.
The ministry’s plan, however, was rejected by pharmacists, who claimed that the list included some items that could be dangerous when taken without the instructions of a pharmacist. The real reason for their objection, however, was that the anticipated sales of the OTC products at retail outlets would dent their incomes.
To offset the expected cut in pharmacists’ incomes, the Korea Pharmaceutical Association demanded that a total of 479 prescription drugs be reclassified as OTC medicines. The demand was put forward under the pretext that doing so would enhance consumer convenience.
Here pharmacists employ a dual standard ― they oppose non-pharmacy sales of OTC products for safety reasons, ignoring consumer convenience, but at the same time, they call for a reclassification of 479 prescription drugs as OTC medicines for convenience reasons, ignoring the health risks for consumers.
The KPA said more prescription drugs would be added to its list of reclassification candidates. It even said pharmacists would not accept the ministry’s liberalization plan unless their demand was met.
The proper term to describe pharmacists’ attitude is selfish. They deserve criticism for their crass disregard of consumer convenience and safety.
Chin assured that the ministry would be able to revise the Pharmacist Act despite pharmacists’ resistance. But this remains to be seen, given their powerful lobby and the presence of pharmacist-turned lawmakers on the National Assembly’s Health, Welfare and Family Affairs Committee.
What worries us is the possibility of the planned reclassification of drugs sparking a fresh conflict between pharmacists and doctors. Past experience tells us that when the two sides clash to defend their vested interests, it is really difficult to strike a compromise. The Health Ministry will have to tread carefully.
The Health and Welfare Ministry recently announced a list of 44 over-the-counter pharmaceutical products that would be sold at retail outlets starting August. If the plan goes as scheduled, it will be the first time in Korea that OTC products are sold at places other than licensed drug stores.
The list included 12 energy drinks, four ointments, 15 liquid indigestion drinks and 11 intestinal pills, but no cold medicines or fever reducers.
Health Minister Chin Soo-hee said cold medicines and fever reducers needed to be reclassified to become suitable for sales at non-pharmacy outlets. She said she would push for revision of the Pharmacist Act to include them in what would be termed “freely sellable OTC products.”
The ministry’s announcement came after President Lee Myung-bak scolded officials for failing to follow up on his instruction to address people’s long-standing complaints that they cannot purchase household medicines, including cold medicines and fever reducers, at night, on weekends or on holidays when their neighborhood drug stores are closed.
The ministry’s plan, however, was rejected by pharmacists, who claimed that the list included some items that could be dangerous when taken without the instructions of a pharmacist. The real reason for their objection, however, was that the anticipated sales of the OTC products at retail outlets would dent their incomes.
To offset the expected cut in pharmacists’ incomes, the Korea Pharmaceutical Association demanded that a total of 479 prescription drugs be reclassified as OTC medicines. The demand was put forward under the pretext that doing so would enhance consumer convenience.
Here pharmacists employ a dual standard ― they oppose non-pharmacy sales of OTC products for safety reasons, ignoring consumer convenience, but at the same time, they call for a reclassification of 479 prescription drugs as OTC medicines for convenience reasons, ignoring the health risks for consumers.
The KPA said more prescription drugs would be added to its list of reclassification candidates. It even said pharmacists would not accept the ministry’s liberalization plan unless their demand was met.
The proper term to describe pharmacists’ attitude is selfish. They deserve criticism for their crass disregard of consumer convenience and safety.
Chin assured that the ministry would be able to revise the Pharmacist Act despite pharmacists’ resistance. But this remains to be seen, given their powerful lobby and the presence of pharmacist-turned lawmakers on the National Assembly’s Health, Welfare and Family Affairs Committee.
What worries us is the possibility of the planned reclassification of drugs sparking a fresh conflict between pharmacists and doctors. Past experience tells us that when the two sides clash to defend their vested interests, it is really difficult to strike a compromise. The Health Ministry will have to tread carefully.
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