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By Charles S. Lee in Seoul
Far East Economic Review
March 4, 1999
Funded by South Korea's second-largest business group, the Samsung Economic Research Institute is an unlikely source of tutelage on what big business can learn from its long-suffering smaller brethren. But in early February, the institute published a 20-page report arguing that the key to corporate survival lies in maximizing productivity, quality and specialization--hallmarks not of the country's industrial giants, it noted, but of its most successful small firms. Among examples, it cited Jinwoong, a tent maker which controls 35% of the global market, and Hongjin Crown, a maker of motorcycle helmets with a 40% share of the U.S. market.
Coming from Samsung's think-tank, the report is an astonishing self-criticism following decades of self-aggrandizement by family-owned business groups, known as chaebols. Thanks to government policy to create corporate champions, big chaebols like Samsung, Hyundai and Daewoo had always bested the little guys in the race for scarce funds and market dominance. But Samsung's frank assessment reflects a major shift in South Korea's corporate landscape: Big no longer looks so beautiful.
In fact, big has looked downright ugly--gross mismanagement at the chaebols is blamed for helping to precipitate the country's economic crisis. President Kim Dae Jung is now leading the charge to overhaul them. But that's only half the story: More than ever, the government and public opinion favour the nurturing of smaller, more focused companies to generate jobs and enhance economic flexibility. President Kim wants to level the field for big and small players once and for all--a goal his predecessors pursued only in fits and starts. Although it's still early days, many are optimistic his initiatives will bear fruit. "The role of small and medium-sized companies will only get bigger in the future," says Han Ki Yoon, director of research at the Korea Federation of Small Business. "If not, economic restructuring will have failed."
That's not to say it is going to be easy. Last year, the financial crisis wiped out a record 22,828 small and medium-sized firms--defined as those with fewer than 300 employees and less than 80 billion won ($66 million) in assets--a 33% jump from the previous year, according to the KFSB. Those that survived had to deal with plummeting sales, higher interest rates, difficult debt roll-overs and elusive trade financing. (Big companies, of course, experienced similar difficulties but at a lower intensity.) Moreover, the failure or merger of chaebol subsidiaries such as Samsung Motors and Daewoo Electronics affected thousands of their subcontractors and suppliers.
The worst seems to be over now, however, with signs that business confidence is on the rebound. The central bank's monthly figure for newly incorporated firms hit a four-year high of 2,093 in December. And a survey done in January by the government's Small & Medium Industry Promotion Corp. found that more than half of the 400 respondents expected sales and exports to increase this year.
Various government measures should soon boost confidence even more. President Kim has made the promotion of small and medium-sized enterprises--in particular, hi-tech start-ups--a top economic priority. Rank-and-file government officials also seem committed to doing so, say many small-business owners. Of course, this may just be smart politics: South Korea's 2.6 million small and medium-sized enterprises employ 9.1 million people or 78.5% of the workforce.
The government has allocated about 4 trillion won a year to help such businesses, up more than 1 trillion won from 1997, with the bulk coming from the Asian Development Bank and the World Bank. The money is primarily used to cover export and credit guarantees for small and medium-sized enterprises and to jump-start new firms. In addition, the central bank is extending cheap credits to commercial banks for lending to smaller businesses. The government is also doing away with pages of restrictive regulations--for example, a rule that university researchers cannot set up their own companies while remaining on the faculty.
In time, these measures should significantly improve the lot of small-business owners, many of them say. "We feel positive about President Kim's economic restructuring," says Han of the Korea Federation of Small Business. "In particular, if the chaebols reduce overinvestment, it means markets for us will grow."
Entrepreneur-friendly initiatives are coming from the private sector, too. Among the most promising are the so-called "angel clubs." The "angels" are wealthy individuals who pool their money to invest in a start-up in its earliest infancy, when even venture capitalists might shun the risk. The idea is to help the young company stand financially and to offer informal management guidance. Angels are typically retired or seasoned business executives with a wide network of contacts.
An angel blessed GeneChem Inc. with a modest 25 million won in October 1997. Woo Jin Suk, 37, had founded the biotech firm in January 1997 to develop genetically engineered anti-tumour drugs. He had spent more than a decade in the U.S. earning a PhD, then working at a Seattle pharmaceutical company, before deciding to come home "to do what I wanted to do for myself." With no selling points other than his vision and scientific skills, he raised 200 million won in seed money from South Korea's nascent venture-capital market.
He was then introduced to his angel by Choi Jae Won of TeraSource Venture Capital Co. Choi says the investor belongs to the country's first angel club, formed in May 1997, whose 35 members have channelled a total of 750 million won to five fledgling companies. There are now half a dozen angel clubs in Korea, according to local press reports.
Despite such encouragement, running small and medium-sized businesses in South Korea is still a hard slog. The toughest problem is raising capital. And restructuring in the financial industry is actually aggravating the capital shortage, says the World Bank. A study it published in December concluded that the pressure to raise the capital-adequacy ratios of Korean banks has made them even more risk-averse than usual. What's more, many banks still hold their credit officers responsible for small-loan defaults. Since most Korean bankers don't have the credit-analysis skills to properly evaluate risk (having long made loans based on personal relationships or political considerations), they often don't recommend loans to small and medium-sized businesses without hefty collateral.
The situation is similar with government-assistance programmes. Official funds remain the country's largest pool of venture capital, according to TeraSource's Choi. But bureaucrats prefer to allocate funds through commercial banks in order to avoid personal responsibility for any losses, he says, and "that just perpetuates the same old habits" like demanding substantial collateral for loans.
But old lending practices may change slowly for the better after HSBC's purchase of a controlling stake in Seoul Bank, which is expected to be finalized in May. Under foreign management, Seoul Bank could lead the way to better credit analysis and risk assessment in the banking industry. This will help to level the field, making loans more accessible to smaller firms.
True, many small and medium-sized businesses are clamouring for assistance regardless of their own managerial and technological competence. They should help their own cause by seriously restructuring, going beyond the usual wage cuts and lay-offs. A few are now doing that, forging ahead with automation, computerization and developing new technology. Some banks are taking notice.
"Of course, we will support good firms," says D.I. Moon, head of the team at KorAm Bank in charge of lending to small and medium-sized companies. In fact, his bank is targeting such companies and redoubling efforts to attract quality borrowers. "As more big companies shift their focus toward direct capital markets, banks will have to switch loans to smaller firms, which will also guarantee higher returns for us," Moon says.
Indeed, some of the best performing companies in South Korea last year were small and medium-sized ones. For instance, Kedcom, a maker of satellite transmitters and office equipment with a staff of 600, has had a banner year: Its exports hit $100 million and net profit jumped 20% from 1997, thanks mostly to the weaker local currency. But it was also Kedcom's laser-like focus on research and development that enabled it to take advantage of a favourable shift in market conditions, says Chairman and Chief Executive Kim Young Soo.
GeneChem's Woo isn't yet in that league, but he has the right attitude. "You can't deliberately force people to invest in risky new firms," he says. "We also have to leave a lot of successful cases as precedents." With South Korea finally making life easier for small-business owners like him, his company has a better chance of doing just that.
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