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OM in the News: Understanding South Korea’s Chaebol System

February 20, 2017
The heads of South Korea’s most powerful chaebol companies at a recent parliamentary hearing in Seoul as part of a corruption inquiry.

The heads of South Korea’s most powerful chaebol companies at a recent parliamentary hearing in Seoul as part of a corruption inquiry.

I was just chatting with my coauthors, Jay and Chuck, about our coverage of keiretsu networks in Chapter 11, Supply Chain Management. We don’t mention the somewhat similar system of interconnected companies in S. Korea in that chapter, but the New York Times (Feb. 18, 2017) just published an article called “Inside the Chaebol of S. Korea” that is worth sharing. Chaebols, a handful of family-controlled companies dominate economic life in South Korea. Some, like Hyundai, LG and Samsung, are well-known outside their home country. But domestically, they all wield immense power — and are coming under increasing scrutiny. The word comes from the combination of the characters for “rich” and “clan.”

Chaebol are generally conglomerates of affiliated companies. LG, for example, makes smartphones, televisions, electronic components, chemicals and fertilizer. It also owns Korean baseball and basketball teams. Hyundai, which makes the Hyundai and Kia cars, also makes elevators, provides logistics services, and runs hotels and department stores.

Chaebol rose from the ashes of the Korean War. After the conflict ended, officials steered relief funds and cheap loans to businessmen who promised to rebuild the country. The government also protected homegrown industries from foreign competition to help them develop. The recipe proved to be potent: Chaebol played a major role in South Korea’s rise as an industrial giant in the following decades.

But the recipe also created imbalances. Money meant for the common people often ended up in the hands of the wealthy families, creating resentment that lingers to this day. Chaebol became sprawling businesses that held a nearly 2/3 market share in S. Korean manufacturing by the end of the 1990s. The Asian financial crisis at that time stirred worries that the cozy relationship between chaebol member companies could lead to severe damage across multiple businesses and supply chains if one failed.

Classroom discussion questions:

  1. What is the difference between Japan’s keiretsu networks and S. Korea’s chaebol?
  2. Why is chaebol a potential supply chain issue?
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