Declining Dominance: Korea’s Chaebol are Losing Their Privileged Position

Lee Jae-yong was halfway through a five-year jail sentence for fraud, embezzlement and bribing Korea’s then-president when he was granted a special presidential pardon in August 2022. Lee, scion of the family that controls the multi-billion-dollar Samsung corporation and chief operating officer of Samsung Electronics, was jailed in 2018 for offences including embezzling company funds to buy a US$800,000 horse for the daughter of a friend of the then-president Park Geun-Hye. The government justified the decision by claiming that Korea's most significant company needed him back at the helm to boost Samsung's flagging performance. He was duly appointed Samsung executive chairman not long after his release from jail.

Known as the chaebol, Korea’s huge mostly family-owned conglomerates, which include Samsung, Hyundai and LG Group, powered the country’s surging economic growth between 1961 and 1997 and continue to dominate the domestic economy. Public sentiment toward the chaebol is mixed: While there is pride in their economic success, there is also widespread animosity toward them. While the middle classes seek to place their highly educated children in the chaebol, they view the companies as corrupt, thwarting social justice while many family owners behave as if they are above the law. 

Concentrated ownership of conglomerates creates tension in mid-sized industrial economies such as Korea. There are advantages to having powerful large-scale businesses that can compete successfully in international markets. Domestically, however, the dominance of the chaebol appear to have detrimental consequences. Korea has only one representative (Samsung Electronics) in the World Investment Report's Top 100 non-financial multinational enterprises (China has 10 and Japan nine). 

The government's simultaneous support and constraint of chaebol may be rightly balanced. For more than 30 years, Korea pursued a heavily subsidized export-oriented development strategy. The mid-1990s represented the high point of the chaebol's economic success. But the 1997 Asian financial crisis undermined the position of the most highly leveraged chaebol. Ten of the top 30 in 1997 were bankrupt and dissolved by 2003, including fourth-ranked Daewoo. Subsequently, Chinese competition in manufacturing industries has reined in the surviving chaebol. Many chaebol firms now face a precarious future.

In 2018, activist investor KCGI increased its holdings in KAL and engineered the Cho family leadership handover to a shareholder-appointed chief executive. In April 2019, KAL's chairman and chief executive Cho Yang-ho died suddenly at age 70, leaving his son Cho Won-tae with a ruinous estate tax estimated at US$149 million, shrinking the bereaved family's ownership stake in the group. Estate taxes and inheritance laws threaten the chaebol's dynastic intentions by limiting father-son succession.

Hanjin made risky investment bets with disastrous consequences. Hanjin Heavy Industries attempted to corner the booming market for giant container ships, building a US$2.3 billion facility at Subic Bay in the Philippines in 2006. In October 2018, Hanjin delivered the world's largest container ship, the Antoine de Saint-Exupéry, to French shipping company CMA-CGM. In January 2019, Hanjin Philippines abruptly declared bankruptcy and closed the Subic Bay facility, throwing 28,000 people out of work. Despite low wages in the Philippines, Hanjin could not stay competitive with lower-wage rivals from China.