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Electronics

Samsung Lee's death marks the end of an era in South Korea

Warm ties between government and business fueled growth, but no more

Lee Kun-hee, the deceased former chairman of Samsung Electronics, center, walks with his family members.

TOKYO -- The death on Sunday of Lee Kun-hee, the chairman of Samsung Electronics who led the South Korean company's push into global markets, symbolizes the end of an era when cozy ties between the Presidential Blue House and large conglomerates, or chaebol, propelled South Korea's rapid economic growth following the Korean War.

In December 2016, when I was on an assignment in Seoul, I witnessed a bizarre sight. The heads of South Korea's major corporate groups -- Samsung, Hyundai Motor, SK, LG, Lotte, Hanwha, Hanjin and CJ -- faced a harsh grilling in parliament by members of the country's political opposition.

Bribery allegations swirled over payments by 50 companies, including major conglomerates to two foundations controlled by a friend of then-President Park Geun-hye. Samsung Electronics Vice Chairman Lee Jae-yong, then the company's No. 3 executive, came under particularly close scrutiny.

Jae-yong's father, Kun-hee, had been bedridden for two years after suffering a heart attack. During the parliamentary questioning, Jae-yong flatly denied suggestions that he had sought a quid pro quo for donating to the group, saying it was purely for social causes. But prosecutors determined that Park and her friend colluded to receive bribes in return for offering support for the leadership handover from Kun-hee to Jae-yong. Park was subsequently arrested; the bribery charge against Jae-yong is still being weighed by the courts.

Samsung Electronics Vice Chairman Lee Jae-yong heads to court in Seoul in June. He faces charges of having paid bribes to South Korea's former President Park Geun-hye.   © Reuters

South Korea's rapid economic growth since the 1960s, called the "miracle on the Han River," was fueled by close collaboration between the military dictatorship that ruled the country at the time and the conglomerates.

After the ravages of the 1950-1953 Korean War, South Korea was Asia's poorest country, behind even its northern neighbor. The government funneled development assistance from the U.S. and Japan -- its one-time colonial ruler -- to the conglomerates. These nascent industrial powerhouses drove South Korea's export-led growth.

This strategy, led by Geun-hye's father, President Park Chung-hee, provided a big boost for Samsung founder Lee Byung-chull, helping him grow the company. Lee had founded the company's predecessor, Samsung Sanghoe, which began in 1938 as a food trader. He then established Samsung Electronics, the conglomerate's key unit, later expanding into heavy industry, life insurance, hotels and theme parks and a range of other industries.

South Korea's leading companies are renowned for their quick decision-making, management expertise and bold investments. Lee Kun-hee, who took the helm at Samsung from his father in 1987, was a master practitioner of South Korea's postwar business model, amassing huge profits for the conglomerate.

But Samsung and the other conglomerates were under the government's thumb. According to a former Samsung executive, companies faced harsh tax audits and difficulty winning approval for new projects if they defied government requests.

Conglomerates would grease the wheels with political contributions. By providing funds to governments under various pretexts, they were able to remain in leaders' good graces and pursue their ambitions for growth.

Lee Jae-yong, left, and former President Park Geun-hye in Gyeonggi Province, in May 2015.

But the conglomerates face a problem with leadership succession. Transferring authority from one generation to the next requires a vast amount of money. Conglomerates often split when new leaders are chosen because of battles within the founding family.

It is difficult to fully eliminate risk, even if every financial technique is used to diminish the burden of huge inheritance taxes.

In South Korea, where youth unemployment is high, Samsung is a desirable employer for graduates. At the same time, the company is also a hate object among youth, who see the conglomerate as the epitome of the establishment. The family-run giants were an attractive target when President Moon Jae-in's reformist government took power.

Moon, who heads the first such government in nine years, said as a candidate: "Samsung should reflect on the special treatment it has enjoyed, its violations of market principles and the collusive relations between the government and conglomerates. Then the group will grow stronger."

Lee Kun-hee died at a time when his son, among others, is on trial, accused of manipulating the stock prices of Samsung group companies to smooth his rise to the top. Lee Jae-yong has vowed that his own sons will not inherit the leadership of Samsung group. The era of hand-in-glove cooperation between the South Korean government and its corporate titans appears to be over.

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