Korea - running on empty?
fitter. But has anything of substance really changed?
A regional commentator has noted that Korean industry was good at making everything – except money. Fair comment? Well, one that deserves scrutiny certainly. The crisis was caused, primarily, by massive over-borrowing (or over-lending, depending upon your perspective). The loans were often in foreign currencies, especially US dollars, which made sense with the fixed exchange rates many regional economies set. Lending rates from the US were literally sometimes a fraction of those prevailing locally. It all stood up just so long as the local currencies remained stable. The trouble was they
did not. They collapsed: first in Thailand, on July 2, 1997, and from there the contagion spread like wildfire throughout Asia.
This reminder of events five years ago is timely because it serves to remind that one of the economies worst hit was that of Korea. It highlighted the fact that the mighty Korean manufacturing machine, based upon a handful of family-controlled conglomerates (chaebol), had been running on empty for some time, the consequence of ‘buying’ market share – the process whereby market share is gained regardless of cost, and invariably at a loss. The chaebol were exposed as financially bankrupt – though not always in a strictly legal sense. Whatever the terminology, these massive conglomerates had no money and little chance of repaying creditors. They did hold one trump card though: they owed the banks, both local and foreign, so much money that the lenders could not afford for them to go bust. Arguably, they owned the
banks.
The International Monetary Fund imposed harsh austerity measures on Korea in exchange for loans, a presidential election took place and a veteran opposition politician, Kim Dae-jong, became the new president, seemingly prepared to tackle the problems of the chaebol domination of the economy head
on. A raft of new measures were enacted designed to ensure the chaebol change the habit of a lifetime and consider making a profit as a possible objective. A bit of an over-simplification to be sure – but to the point. The chaebol were estimated, at the time, to account for about 85 percent of Korea’s
economy.
Although not so high-profile, many in the international leather industry had watched in amazement as Korea’s leather manufacturing industry continued to expand. Tanneries capable of producing one, two, three million square feet a year, continued to come on line long after the local shoe making industry
which spawned it had decamped to China. The mismatch is no surprise. Shoe manufacture requires a lot of cheap labour which, in modern Korea, is in very short supply. Leather manufacture, by contrast, requires lots of cheap capital and for that there was an abundance. Charges of ‘dumping’ filled the
air as overseas tanneries found their prices driven ever lower. Charges that, in retrospect, seem justified.
So what is different about today?
There have been real changes in Korea’s manufacturing sector. On taking office President Kim did tackle the chaebols. Initially, the government’s policy won out. Sadly, over time, and endless delaying tactics from the chaebol, government actions have become harder to enforce. Eventually they simply ran out of steam. It would not be fair to say the changes that have survived are purely cosmetic. Many, especially those initiated at the start of the new administration, are real enough. Against that one has to conclude that the chaebol grip on the national economy remains only slightly less than before.
But before drawing a sweeping conclusion from all the above consider another aspect. Not for the first time in these columns, the leather industry probably emerges with a little more credit than those in the limelight of ‘sunrise industries’, notwithstanding earlier comments about the over supply of leather in previous years. One thing that strikes a visitor to Korea is the abundance of small businesses. The chaebols might account for the vast bulk of the economy – but the remaining percentage (which today may be nearer 20 percent) is very active. Unlike the chaebol, these enterprises do not have unfettered access to unlimited credit.
Indeed, the way in which so much money goes to the chaebol distorts the lending market badly. Instead, small- and medium-sized enterprises (SMEs) have to - wait for it - make a profit.As usual the ‘little guy’ does not compete on the proverbial level playing field. Manufacturers of DRAM might have access to millions ($ that is) and be able to fix whatever price they like so long as it is (a) above the cost of production and (b) below the nearest competitor. The guy offering metal tannery drums from a back street factory...well, he cannot entirely ignore (b) but he certainly cannot ignore (a). Derided, despised even, and driven overseas by the cost of rules and regulations designed – with some justification – to make the world a better place, it is the SMEs that make this industry struggle on, be they Korean or
any other nationality.
