Chaebol Expansion in Post-War Korea: Diversification Patterns of the Korean Conglomerates, 1962~1979 Kim, Y.

Presentation Outline Characteristics of the Chaebol Part 1 Factors in Early Chaebol Development Part 1 Part 2 The “Big Four” Chaebol Examined The Chaebol: Diversification Strategies The State’s Role

Characteristics of the Chaebol Company1 Company2 A Business Group Company4 Company3 “Family”

Characteristics of the Chaebol con’t The largest conglomerates: Hyundai, Daewoo, LG, Samsung → one-fifth of total manufacturing output → 8.1 % of Korea’s 1978 GDP Distinguished features Horizontal corporate expansion Close relationship with the state and financial intermediaries → expansion of the Korean large firms Acting as near-oligopolies Using corporate profits as a device for reinvestment and expansion

Factors in Early Chaebol Development: 1910-1962 Incorporated into the chaebol by an elite Korean bourgeoisie Korean banking institutions and managerial systems The zaibatsu corporate structure Japanese Control Demonstration effect Japanese Entrepreneurs

The “Big Four” Chaebol Examined LUCKY-GOLDSTAR (LG) GROUP 1931, Mr. Huh In-hwoi started as a dry good store → textiles, chemicals, electronics export agency was created (1953) → entered the international market entered the oil industry (1970s) Strategies: gradual diversification, making its own distribution networks The State, President Park’s order: “concentrate on textiles, chemicals, and electronics!” Maintained monopolies in 21 markets Sales in 1970: $ 164.5 million → Sales in 1979: $ 5.2 billion

The “Big Four” Chaebol Examined con’t 2) DAEWOO GROUP 1967, Mr. Kim Woo-Choong Started as a small textile exporter, with $6,700 start-up capital Expansion: textile → shipbuilding, construction, financial services, … Initial expansion: acquisition of troubled companies 1971, the first substantial growth: maximized the exports in 1970~1971 ← U.S. textile quota Relatively little family management control

The “Big Four” Chaebol Examined con’t 3) HYUNDAI CORPORATION 1977, Mr. Chung Ju-Yong “Hyundai Engineering and Construction Company” Korean government’s steady supply of dam, road, harbor construction 1960, diversify into related industries 1970, began to expand rapidly: automobile, shipbuilding → diversification and globalization Overseas construction contract: Southeast Asia, the Middle east Highway projects: Thailand, South Vietnam, Saudi Arabia

The “Big Four” Chaebol Examined con’t 4) SAMSUNG GROUP 1951, Mr. Lee Byung-Chull 1953, initial operations: sugar 1954, wool production: established key contacts in the U.S. armed forces → entered into American markets 1969, annual turn over: $ 100 million 1970s, expanded into electronics 1978, semi-conductor and telecommunications 1979, development of the world’s first 64K DRAM chip Korean government Mr. Lee → became a government industrial favorite → preferential financial treatment

The Chaebol: Diversification Strategies Hyundai Group Samsung Construction → cement manufacturing and shipbuilding Shipbuilding → shipping and metallurgy Diversified horizontally: electronics, computer peripheries, entertainment goods

The Chaebol: Diversification Strategies con’t Lucky-Goldstar Hyundai Group Cosmetic cream factory → plastics → manufacturing of chemicals, electrical and electronic products Acquisitions to grow due to its belated beginning

The Chaebol: Diversification Strategies con’t 1962~1979, the chaebol maintained impressive growth schedule Long-term growth strategy could be maintained ← relatively little pressure for dividend payments, stockholder demands, concern for short-run losses on long-term investments Less risk-averse expansion - subsidized loans - advantageous exchange and labor rates - overseas markets - entrepreneurial managers

The Chaebol: Diversification Strategies con’t Other factors that affected the diversification strategy 1) Industry-specific technical expertise from foreign firms ← joint ventures, reverse engineering efforts 2) External financing: governmental credit guarantees, low interest loans 3) Korean government’s intervention

The State’s Role Subsidized loans The most prominent ramification Large chaebol could operate with high debt-equity ratios National incentive schemes, laws, economic plans coordinated state + private sector funding + resource allocation Rapid diversification of the chaebol