South Korean start-ups seek level playing field

SEOUL — In South Korea, the popular image of a start-up company is not a group of ambitious youngsters with laptops in a garage, but an aging man struggling to make a living from a restaurant set up with his redundancy package from the conglomerate where he spent his best years.

The country’s family-controlled conglomerates, known as chaebol, have been at the heart of its rapid industrial development over the past 50 years, and they tower over almost every area of business: from stockbroking to theme parks, from supermarkets to heavy weapons.

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Although the global success of chaebol such as Samsung and Hyundai has boosted South Korea’s standing abroad, at home their economic dominance has prompted concerns that they have developed a near-monopoly on the country’s most talented workers, while restricting the prospects of the small companies that supply and compete with them.

The need for a more dynamic small-business sector has become one of the dominant themes of the campaign ahead of December’s presidential election. Ahn Chul-soo, a self-made millionaire who founded Ahnlab, South Korea’s largest software company, has captured the imagination of frustrated voters by promising to pare back the dominance of the chaebol. The central bank has also responded to the calls for change: Last month, it increased to $1 billion the funding for a scheme that subsidizes bank loans to smaller companies.

Euh Yoon-dae, chief executive of KB Financial Group — owner of Kookmin Bank, the country’s largest lender — says banks are doing their bit to support small businesses. But he adds that South Korea’s continuing success relies on groups with a competitive edge against international rivals and that “smaller companies cannot have that kind of edge.”

Euh suggests Germany’s small and medium-size enterprises, or Mittelstand, as a model for South Korea’s smaller companies, emphasizing the importance of the “hidden champions” that provide parts and supplies to big corporations.

“Within one year, we will have created [supported] 500 hidden champions, by providing easy credit, a lower cost of capital, and providing other financial services to the companies,” he said.

Lee Seung-chul, vice president of the Federation of Korean Industries, a lobbying group for large companies, also stresses the positives for smaller companies that rely on a single chaebol for the majority of their revenue, noting that “partners” of the big conglomerates tend to be more profitable than other small companies.

But Kim Se-jong, a researcher at the Korea Small Business Institute, challenges that idea.

The small companies “get too lazy to develop their own brand or technology as they get used to contract manufacturing,” he said. “And the abuse of power by big businesses is really serious. They force their suppliers to cut prices when the business environment deteriorates, and they often steal technology and talent from smaller businesses.”

Others argue that the practices of Korean banks and corporations are making it harder for innovative small businesses to flourish. This year, Lee Han-joo and two fellow entrepreneurs set up Sparklabs, a Seoul-based “start-up incubator” that provides seed funding and mentoring to newly formed businesses. Lee, who co-founded the U.S.-based Web-hosting company Hostway, says a conservative banking culture makes obtaining financing in South Korea far more difficult.

“For start-ups, dealing with banks [is typically] not even a possibility,” he said. “Trying to line up financing for something that’s a little bit quirky and different — you can forget about that.”

Venture-capital investors are thin on the ground and put excessive pressure on entrepreneurs for quick returns, he added.

Politicians have suggested reforms including a crackdown on the complex cross-shareholdings between subsidiaries that give the chaebol’s founding families a level of control disproportionate to their relatively small equity holdings.

But Lee, of Sparklabs, argues that it is attitudes and practices, rather than the law, that need to change.

“One of the biggest criticisms of the chaebol is that the mother company will give [its subsidiaries] all these contracts,” he said. “If it’s up for bidding, that’s just for show. The rules are already there, you’re not supposed to do that. There’s a lot of hoopla in the media, saying that . . . we need new laws. No we don’t: Just enforce the ones that are already there.”

 
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