Time to Take Down Korea's Stumbling Giants
If you think the folks at Samsung are having a rough week, just wait until Park Geun Hye gets to work on them.
Profits at Samsung Electronics Co. plunged almost 20 percent in the second-quarter, a deeply worrying sign of vulnerability for South 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 Inc.'s high-end iPhones, and from below by cheap upstarts like China's Xiaomi Corp. 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 schoolchildren -- sent Park's approval rating plunging to record lows and risked scuttling her entire economic-reform agenda.
Wednesday's special elections have 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 her 50 million people.
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 that rare twentysomething 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-shareholdings founding families use to control their sprawling conglomerates, and 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 more "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 services sector. Korea needs to shift growth engines away from exports in favor of knowledge-based industries that harness Koreans' proud status as the world's most wired citizenry, as well as their 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 told Bloomberg News. A month later, officials from the two countries held the first high-level talks since 2007. And in March, Jim O'Neill, the economist who coined the BRICs moniker and a Bloomberg View columnist, called unification "inevitable before this decade is over."
Whether that's too optimistic largely depends on Park's audacity. Her predecessor got nowhere talking tough to the late Kim Jong Il and his son Kim Jong Un. 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 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 dysfunctional family drama. She should seize this new mandate to do it.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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