ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintTitle ChevronIcon Twitter
Economy

Paint peeling off South Korea's economic miracle

The Cho family owns the conglomerate Hanjin group, which also owns Korean Air. The family came under intense criticism over one member's outrageous behavior.

TOKYO -- South Korea has significantly prospered in the past decade or so, but a series of incidents in recent months suggest problems are brewing below the surface. 

     Signs of trouble can be seen in the sharp decline in earnings at Samsung Electronics and scandals involving families who own various conglomerates. The Sewol ferry sinking that claimed 295 lives, mostly high-school students, and revelations that a navy rescue boat was inappropriately equipped have exposed South Korea's lack of focus on safety. A widening income gap is also fueling fears the country is stagnating. There is even doubt among the public that South Korea may not be fit to host the 2018 Winter Olympics. 

Negative effects

South Korea shone brightly after the Asian currency crisis in the late 1990s. The country had to get help from the International Monetary Fund to get through the crisis, but it woke people and industries up from a slumber.

South Korea is due to host the 2018 Winter Olympics in Pyeongchang.

     The Northeast Asian country has since achieved significant economic growth and produced major global businesses, but the success has bred complacency and cracks have started appearing.

     One major problem facing the nation is the growing number of oligopolies. Heeding the IMF's warning, Seoul began working toward dismantling and reorganizing its ranks of conglomerates, but efforts were abandoned halfway. This ended up worsening the country's problem of oligopolies and produced more adverse effects for the economy.

     Well-capitalized conglomerates have expanded into a wide range of business fields, making it difficult for small and midsize companies to succeed. This is the main reason why few small South Korean companies thrive in the global market with niche technologies and products -- a sharp contrast to the situation in Japan. Since small businesses create nearly 90% of jobs, their stagnation means fewer jobs, resulting in weaker consumer spending.

     The growing influence of conglomerates also means their success and failure have a bigger impact on the country overall. Autocratic management could improve chances of success, as it allows speedier and bolder decision-making, but it also increases the risk of failure by making businesses more vulnerable to ill-conceived ideas and reckless bets.

     The problem with South Korean conglomerates is that their leaders are often selected through hereditary succession. The negative effects of this have manifested themselves as poor corporate governance and deterioration in the quality of leadership.

     In the ''nut rage'' incident, a daughter of the Korean Air chairman, who herself served as the company's vice president at the time, threw a tantrum over the way a flight attendant served nuts and forced the plane to return to the terminal from the runway. A feudal mentality among conglomerate owner families is also apparent in scandals about inheritance among the Samsung group's owner family.

New vision needed

Even the big success that Korean businesses enjoyed after the economic crisis may be slipping away.

     Samsung Electronics, which beat many Japanese electronic makers and looked invincible not so long ago, may not have as strong a brand after all. The company has been rapidly losing its share of the smartphone market to Chinese makers, such as Huawei Technologies, Xiaomi and Lenovo Group.

     Cracks are also starting to appear at Hyundai Motor, Posco and LG Electronics, as well as a wide range of other South Korean businesses in shipbuilding and plant engineering. It shows the country's economy and businesses have hit a wall.

     It is a sign that South Korea's growth model of focusing on overtaking Japanese businesses by boosting scale is no longer working. It is perhaps time for the country to shift its focus to quality rather than quantity.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends October 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to Nikkei Asia has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more