Merkel and Macron need a Korean lesson
South Korea shows that industrial champions are not the panacea that Paris and Berlin imagine.
Christian Oliver is a senior policy editor at POLITICO and was based in Korea from 2008 to 2012.
Imagine a European Samsung, or a European Hyundai.
Wouldn’t it be great if Europe could take on China by emulating the industrial mojo of the South Koreans? If we focused our energies on building Korean-style corporate champions, surely EU economies would be awash with highly paid jobs making cars and ships, and we’d be able to kiss goodbye populist movements like France’s Yellow Jackets?
German Chancellor Angela Merkel and French President Emmanuel Macron are certainly thinking this way. Last week, Macron ramped up the Franco-German push to steamroller antitrust orthodoxy in Brussels to allow the creation of industrial heavyweights. Merkel specifically mentioned South Korea (along with China, Japan and the U.S.) as a country with the right answer. “We must not be afraid to have global champions,” she insisted.
The irony here is that Merkel is looking to Korea just as Koreans are fighting to be more like Germany. The Koreans have had a bellyful of their too-mighty national champions, the legendary chaebol conglomerates that rebuilt the nation from the rubble of its fratricidal 1950-1953 war, and are now pushing for a rapid reorientation to more innovative startups. In fact, Koreans often cite the small and medium-sized enterprises (SMEs) of the German Mittelstand as a far more desirable model to gain an edge over China.
Europe cannot, of course, afford to be naïve about China’s rise.
Koreans have a neat expression for such a paradoxical situation: “Even a passing dog would laugh.”
Rather than being a paradigm for Macron and Merkel, South Korea should serve as a cautionary tale about the limits of champions once an economy reaches a moderately prosperous plateau of development. Its family-run chaebols now stifle innovation, fatally erode SMEs (helping depress wages where 90 percent of jobs are located) and have undermined rule of law in the country’s polarized democracy.
These days, South Korea’s battle with its chaebols and their toxic political influence resembles a far-fetched soap opera. Since 2017, Koreans have grabbed the popcorn for a gripping series of trials centered on the corrupt nexus of chaebols and political favor. Former Presidents Park Geun-hye and Lee Myung-bak received jail sentences, along with Samsung boss Jay Y. Lee. Plot highlights include bribes paid in million-dollar horses, and President Park being exposed as in thrall to a Rasputinesque adviser, who just happened to be the daughter of a notorious shaman.
Past their prime
Let’s give the chaebols their due. After the Korean War, the country was in ruins. The gross domestic product per capita was less than Ghana’s, and the top exports included scrap, wigs and dried fruit. It was chaebols like Samsung, Hyundai, Daewoo and LG that pulled off the “miracle on the River Han” and forged a leading world economy. Between 1972 and 1979, exports increased nine-fold and income more than five-fold.
It is an epic, bittersweet story. Many older Koreans will regale you with anecdotes about Hyundai’s laconic founder Chung Ju-yung, whose journey from peasant to tycoon (via a humble car repair shop, and without buying new shoes) mirrors the nation’s rebirth. On the darker side, no one doubts the tragic human cost of the chaebol revolution. One haunting image was described to me by a Korean journalist, who grew up in the port of Ulsan where Hyundai built the world’s biggest shipyard. He said the soundtrack of his childhood was the wail of ambulance sirens racing to the docks. Safety came second to the national mission.
So, yes, the chaebols rebuilt a country, but they can’t conjure up another miracle to take it to the next level in the showdown with China. Korea now realizes that it needs to change tack to unleash the country’s bottled-up talent and pump more oxygen into SMEs in areas like gaming, fashion, music, biotech and medical services. The current left-wing administration of President Moon Jae-in founded a ministry for SMEs in 2017 and is trying to roll out a raft of incentives to rebalance the economy more to the little guy.
It’s going to be a long haul, though. Korean SMEs have a miserable time as the little fish, and their struggle to survive in the chaebols’ pond should show Merkel and Macron why tough competition policy on champions is so important. The conglomerates have such prodigious market clout in Korea that they can suffocate suppliers with bullying contracts and derisory payments. If you have a great idea or invention, the chaebol will buy you out, if only to kill you off as a rival. This is a very different situation from Japan, and Korean entrepreneurs look with envy to the city of Osaka, which prides itself on its SME culture.
Fears about Korea’s ability to innovate also loom large in Seoul’s attempts to steer away from chaebols. At heart, chaebols are fast-followers (or copycats, if you are less generous) with militaristically brilliant manufacturing. Apple invents the iPhone? No problem, Samsung can rustle up a Galaxy smartphone. But China can also play the fast-follower game. The sort of commercial DNA where Korea really does have a quirky, free-thinking edge over China is not really monetizable in old-school chaebols.
While Moon wants his agile front line against China to be composed of top-flight SMEs, that’s just not what Korea Inc. looks like. At least, not yet. The chaebols account for only 10 percent of jobs, but 80 percent of market capitalization and two-thirds of exports. Most crucially, wages in SMEs are 60 percent the level of those in the chaebols that squeeze them.
Political pressure cooker
Politically, this chaebol-SME divergence has fuelled a profound left-right schism. For such a sophisticated and well-educated society, the politics is bloody-mindedly binary. In short, there’s a belief that chaebol tycoons have been above the law and that is a red rag to the left.
In truth, chaebol untouchability was indeed shameless over the years before Moon. The chairmen of Samsung and SK (a telecommunications and energy conglomerate) received pardons for serious financial crimes from the two (now jailed) previous conservative presidents. Incredibly, the boss of the Hanwha explosives’ chaebol, involved in beating up some young barmen with a steel pipe, also received a presidential pardon.
This means many Koreans are angry over one rule for the chaebol royalty and another for everyone else. This is the gulf between haves and basement-dwelling have-nots that film fans will have seen in Bong Joon-ho’s Oscar-winning “Parasite.”
Koreans have a word — gapjil — that expresses the abusive power the haves exert over the have-nots. The word entered common currency after a dramatic air rage incident in New York in 2014, in which a Korean Air heiress exploded at cabin crew who did not serve her macadamia nuts in the way she wanted, and forced the plane to taxi back to the gate.
To Koreans, the case epitomized how chaebol types behave with lesser mortals. This intimidatory gapjil lies at the very heart of the conglomerate culture — say, in relations with contractors — and is now, literally, on page one of the latest Korean antitrust mission statement.
If Macron and Merkel want to snuff out malcontents like the Yellow Jackets by relaxing competition rules for champions, all in the hope of creating good jobs in Europe, they could be in for a rude awakening. The lessons from Korea show that chaebols widened social divisions by sapping the potential for a successful SME sector. What’s more, chaebols increasingly create employment outside Korea. Korean car giants, for example, happily produce in the southern U.S. where they don’t have to deal with fiery Korean unions.
Moon’s government is zeroing in on competition law and fair contracts with suppliers as one of the ways to retilt the economy. Antitrust enforcement in Korea stumbled into a depressingly typical scandal in 2018 when it emerged there were (surprise, surprise) revolving doors with the authority and the chaebols. Moon is seeking to rebuild credibility by appointing antitrust chiefs like Kim Sang-jo, dubbed the sniper,” and his successor, Joh Sung-wook, who is also seen as tough on conglomerates.
Europe cannot, of course, afford to be naïve about China’s rise, but the EU can use an arsenal of trade defense measures to deal with Beijing: investment screening, anti-subsidy instruments and reciprocity in public procurement.
The new Franco-German recipe of loosening competition rules to allow for more corporate titans clearly demands closer examination when Korea, a hardened competitor with China, wants to reduce reliance on champions and to toughen antitrust controls on them to give space to SMEs.
Merkel last week called the drive toward champions a “necessary response.” There’s a new generation of Koreans who are trying to speed off in the opposite direction.
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