The new President of South Korea, Moon Jae-in, is less than three months into his term. By most accounts Moon has taken a measured approach in the early days of his administration, but he should take careful note of the direction in which the South Korean economy is heading. He should be mindful of how economic instability can be used by both opponents and enemies alike.
The South Korean economy is overbalanced in favor of its huge family-owned conglomerates, known as chaebols. Like them or not, they are the backbone of the economy. In fact one chaebol, Samsung, accounts for more than 20 percent of the entire South Korean economy.
Imagine if one of the top Forbes Fortune 500 companies, Walmart, accounted for one-fifth of the U.S. economy. It would have to book sales of $3.7 trillion -- nearly 7 1/2 times more than their global revenue of nearly $500 billion a year -- to come anywhere near that level of influence and power. That number is astounding and it shows how vital is Samsung’s success to the larger Korean economy.
Samsung’s leader-in-waiting, Jay Y. Lee, was arrested in February and is still in jail awaiting trial. Lee was arrested in conjunction with the same set of events that led to the impeachment and jailing of former President Park Geun-hye, who also awaits her turn before the country’s judicial system. (Under South Korean law, those awaiting trial cannot be released, even on bail.)
The turmoil at the head of Korea’s largest economic driver has created real concern about what a weakened economy might mean for the country, and about how Samsung can continue to succeed absent strong leadership. Lack of leadership at any organization, let alone one whose success is woven hand-in-hand with the country’s, can enhance vulnerabilities and open the door for enterprising competitors and opponents.
A leadership vacuum at Samsung can only slow Korean innovation and reduce its hard-earned competitive edge over rivals such as Apple and a number of fast-growing Chinese companies. With Apple ready to roll out its next generation of iPhones and China’s strong growth in the smartphone market, even a short-term stumble can hit hard. The tech space moves fast, and winners and losers are determined within one or two product cycles. For an example, take Japan’s tech giants of the 1990s and 2000s. They failed to see the changes in the market and in consumer habits -- one or two cycles without success and now we relegate Sony Walkmans and Panasonic TVs to the tech graveyard in favor of iPhones and tablets that fit in the palm of our hand. Sony’s rapid decline stemmed from a leadership vacuum, and right now that should scare Samsung’s investors.
Because Samsung’s performance has such a tectonic effect on South Korea’s economy that even short-term stumbles due to lack of leadership in the C-suite could have effects on other powerhouse divisions in Samsung such as their DRAM chip operation. DRAM (Dynamic Random Access Memory) chips are used in virtually every electronic device on the planet. Samsung owns just short of 50 percent of that market. The goalposts for DRAM chips are speed and density, and any stumble in innovation can be devastating to the entire division.
It doesn’t take long for waves of change to usher in dramatic shifts in the global markets. And it takes even less time for geopolitical crises to happen. South Korea faces challenges both to its economy and its national security. President Moon can and should focus on ensuring stability and smart reforms while letting Korea’s economic drivers like Samsung focus on helping him keep the economy moving as it has for nearly two decades. The reality is that companies like Samsung are integral to Moon’s success. The symbiotic relationship between the chaebols and government in modern Korea is an outgrowth of policies and of Confucian culture. Moon cannot jettison a cultural dynamic that has existed for centuries without endangering the system that has helped Korea prosper over the last 50 years. Moon would be more prudent to persuade chaebol leaders to join him in reforms that will make not only these large companies more agile and innovative but smaller companies as well. Discrete reforms aimed at particular challenges offer a better course than upending the entire system.
Moon and officials in his administration certainly understand this. He has yet to lay out in detail what he proposes to do that will create private sector jobs while also curtailing the reach of the chaebols and clipping their ties to the government. Recommendations seen as too ambitious or aggressive would likely face stiff opposition from Korean lawmakers, many of them conservative proponents of the country’s unique system. Deliberate and thoughtful actions on tax policy and regulations, along with more transparency, would likely be better received by policymakers and corporate leaders alike. Moon has a chance to use the system to improve the system, and by thus doing to help all Korean citizens and business stakeholders.
