CHEABOL

Cheabol is a Korean term for a conglomerate of many companies clustered

around one parent company. The companies usually hold shares in each
other and are often run by one family. Same is termed as ‘keiretsu’ in
Japanese.

In one line, Cheabol is a family-controlled industrial conglomerate in South

Korea.

Chaebol (alternatively known and called as Jaebol, Jaebeol); refers to a South

Korean form of business conglomerate. They are powerful global
multinationals owning numerous international enterprises. The Korean word
means “business family” or “monopoly” and is often used the way
“conglomerate” is used in English.

There are several dozen large Korean family-controlled corporate groups

which fall under this definition. Through aggressive governmental support
and finance, some have become well-known international brand names, such
as Samsung, Hyundai and LG.

The Chaebol has also played some significant role in South Korean politics. In
1988 a member of a chaebol family, Chung Mong-jun, president of Hyundai
Heavy Industries, successfully ran for the National Assembly. Other business
leaders also were chosen to be members of the National Assembly through
proportional representation. Since 2000, Hyundai has played a role in soften
of North Korean and South Korean relations.

History

South Korea's economy was small and predominantly agricultural well into
the mid-20th century. However, the policies of President, Park Chung Hee
spurred rapid industrialization by promoting large businesses, following his
seizing power in 1961. Government industrial policy set the direction of new
investment, and the chaebol were to be guaranteed loans from the banking
sector. In this way, the chaebol played a key role in developing new
industries, markets, and export production, helping place South Korea
as one of the East Asian Tigers.

Although South Korea's major industrial programs did not begin until the
early 1960s, the origins of the country's entrepreneurial elite were found in
the political economy of the 1950s. Very few Koreans had owned or managed
larger corporations during the Japanese colonial period. After the departure of
the Japanese in 1945, some Korean businessmen obtained the assets of some
of the Japanese firms, a number of which grew into the Chaebol of the 1990s.
It was alleged that many of these companies received special favors from the
government in return for kickbacks and other payments.

When the military took over the government in 1961, military leaders
announced that they would eradicate the corruption that had plagued the
Rhee administration and eliminate injustice from society.

Some leading industrialists were arrested and charged with corruption, but
the new Government realized that it would need the help of the
entrepreneurs if the Government’s ambitious plans to modernize the
economy were to be fulfilled. A compromise was reached, under which many
of the accused corporate leaders paid fines to the government. Subsequently,
there was increased cooperation between corporate and government leaders
in modernizing the economy.

Government Chaebol cooperation was essential to the subsequent economic

growth and astounding successes that began in the early 1960s. Driven by
the urgent need to turn the economy away from consumer goods and light
industries toward heavy, chemical, and import-substitution
industries, political leaders and Government planners relied on the ideas
and cooperation of the Chaebol leaders. The government provided the
blueprints for industrial expansion; the chaebol realized the plans. However,
the chaebol-led industrialization accelerated the monopolistic and
oligopolistic concentration of capital and economically profitable activities in
the hands of a limited number of conglomerates.

Factors behind the growth of Chaebol

The Chaebol were able to grow because of two factors—foreign loans and
special favors.

Access to foreign technology also was critical to the growth of the chaebol
through the 1980s.
• The Government selected companies to undertake projects and
channeled funds from foreign loans.
• The Government guaranteed repayment, a company is unable to repay
to its foreign creditors.
• Additional loans were made available from domestic banks.
In the late 1980s, the chaebol dominated the industrial sector and were
especially prevalent in manufacturing, trading, and heavy industries.

The tremendous growth that the chaebol experienced, beginning in the early
1960s, was closely tied to the expansion of South Korean exports.
• Growth resulted from the production of a diversity of goods rather than
just one or two products.
• Innovation and the willingness to develop new product lines were
critical.
In the 1950s and early 1960s, chaebol concentrated on wigs and textiles; by
the mid-1970s and 1980s, heavy, defense, and chemical industries had
become predominant. While these activities were important in the early
1990s, real growth was occurring in the electronics and high-technology
industries. The Chaebol also were responsible for turning the trade deficit in
1985 to a trade surplus in 1986. The current account balance, however, fell
from more than US$14 billion in 1988 to US$5 billion in 1989.

The chaebol continued their explosive growth in export markets in the 1980s.
By the late 1980s, the Chaebol had become financially independent and
secure—thereby eliminating the need for further Government-sponsored
credit and assistance.

Management structure

Some chaebol are one large corporation, while others have broken up into
loosely connected groups of separate companies sharing a common name.
Even in the latter case, each is almost always owned, controlled, and/or
managed by the same family group.

South Korea's chaebol are often compared with Japan's keiretsu business
groupings. Though there are major differences between ‘chaebol’ and
‘keiretsu’:
• Chaebol are still largely controlled by their founding families, while
keiretsu are controlled by groups of professional managers.
• Chaebol are centralized in ownership, while keiretsu are more
decentralized.
• Chaebol often formed subsidiaries to produce components for exports,
while large Japanese corporations often employed outside contractors.
• Chaebol are prohibited from owning private banks, partly in order to
increase the government's leverage over the banks in areas such as
credit allocation. In 1990, government regulations made it difficult for
a chaebol to develop an exclusive banking relationship. Keiretsu have
historically worked with an affiliated bank, giving the affiliated
companies almost unlimited access to credit, although this is no longer
a universal feature of keiretsu.

The model of chaebol rely a lot on a complex system of interlocking

ownership. The owner of the Chaebol, with the help of family members,
family-owned charity and senior managers from subsidiaries, only has to
control three of four public companies, who themselves control other
companies that control subsidiaries. The good example of this practice would
be the owner of Doosan, who controlled more than 20 subsidiaries with only a
minor participation in about 5 companies.
Laws regulating Chaebol

Laws passed to limit the expansion of chaebols include:

1. Law for separate finance from industry: Chaebols can't have banks
enacted in 1982.
2. Law for limit of investment: Law to limit a chaebol's growth by M & A
abrogated in 2009.
3. Law for limit of assurance: Law for defending the insolvency of a
chaebol's affiliates.