Asia Pacific Business

Introduction

Roles of Chaebols

In the 20th century, business in South Korea and Japan was dominated by business groups or conglomerates. In South Korea, the business group was Chaebol, while in Japan the business group was Keiretsu. Keiretsu were formed on the ground of specialization and products produced. Chaebols, on the other hand, were formed on the ground of families. This method of conducting business proved to be better and more productive than capitalism at the time. This is because it was easy to raise capital under business groups, and business groups could come up with rich business ideas and solutions. This is why these business conglomerates performed much better than their Western counterparts did. Good performance of business groups in South Korea and Japan helped the countries to grow economically. Good performance enabled the countries to register economic growth at a time when economic growth was least expected. The purpose of this paper is to look into performance of these business conglomerates, as well as their effects on their countries’ economy. The paper will also focus on the effect of conglomerates’ performance on the international business between South Korea, Japan and the West.

Both Chaebols and Keiretsu have played significant parts in the economies of their respective countries. They have made considerable achievements in the businesses in their countries. They helped the countries recover after the wars (Guanxi, & Inhwa, 2006). Chaebols have enabled South Korea to experience a stable economy soon after the Korean War. Keiretsu, on the other hand, enabled Japan to recover from the World War Two economically. That is, these conglomerates enabled businesses to gain footing and peak in these countries after each country had gone through a period of war. To begin with, these groups form good percentage of their countries’ labor base. That is, each Keiretsu or Chaebol needed a labor force. This labor force or personnel come from the country it is operating in, thus benefiting the country through employment. It made sure that both Japan and South Korea did not suffer from unemployment greatly. Even if the countries were recovering from the periods of war, there was little unemployment. The fact that the countries experienced little unemployment enabled their economies to grow rapidly and flourish. There was a lot of internal trading between the Chaebols in South Korea and between the Keiretsu in Japan. Internal trading was important for the countries’ economic growth. This is because the countries did not depend on the external trade. Since these conglomerates operated in a wide range of businesses, they supplemented each other. That is, in South Korea, the Chaebols depended on each other for labor, raw materials and market for the products. In Japan, the Keiretsu depended on each other for market, personnel and raw materials. This interdependence was incredibly important to the countries’ economy (Tu, 2002). A country recovering from a period of war experiences a lot of mistrust and barriers from other countries. Since these countries depended more on the internal trade than external trade, at these critical times it helped them recover quickly (Sullivan, 2002).

Discuss what changes to (a) Chraebol's and (b) Keiretsu's have had to make since the Financial Crisis of 1997/1998.

Chaebols

Chaebols focused on downsizing the companying and maintaining stable cash flow through layoffs and freezing salaries. Under these efforts, Chaebols sold off business units that were less profitable. It was not hard to downsize companies under Chaebols since their structure allows it to be done simply. That is, Chaebols are based on the families and are not related in operation. One Chaebol can have several business units dealing in different products, which are not interrelated. It enabled them to remain with business units that were manageable in the financial crisis and were considerably profitable. In case a non-performing business unit has not been bought during the big deal, the Chaebols put the unit under workout. It evaluates the business and allows it to run for some time. After this time, the business unit could drift into another Chaebol or close down.

Keiretsu

Keiretsu could not easily get rid of the non-performing or non-profitable units because of the nature of their formation. Keiretsu is structured in a way that every Keiretsu deals in a certain line of products. It made it difficult to cut a unit from the Keiretsu. Each unit was related to the other, and it was not possible to operate the Keiretsu comfortably while one unit was cut off. In that case, the best way to deal with the financial crisis was through forming mergers and cartels (Tolfree, 2009). It involves the merging of similar businesses to enable them to cater for the financial needs of the business. It was not easily achieved since Keiretsu had a kind of leadership that calls for consultation. In some cases, the Keiretsu had to sell off some units or close them down. It would lead to many business adjustments, which can affect the business drastically. In addition, Keiretsu formed financial coalitions or controlled some financial institutions. It also helped them curb the financial crisis (Guanxi, & Inhwa, 2006).

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Now look at the implications for western firms (a) wanting to do business in South Korea or Japan, and (b) at the 'receiving end' of these new focused Chaebols / Keiretsu.

It was hard for Western firms that wanted to do business either in South Korea or Japan. The conglomerates in these countries made it difficult for foreign investors to invest in the countries. This is because these conglomerates had the capital needed to invest in the big and most profitable ventures in their countries (Sullivan, 2002). In addition, they had a competitive advantage over foreign investors, being nationals of these countries. The competitive advantage came in terms of labor availability, as well as raw materials. It was also easier for conglomerates to adapt to the legal requirements of their countries, than it was for Western firms. As aforementioned, the conglomerates traded with each other, thus availing labor from the service firms, raw materials from the goods firms, thus they were a considerable market for each other. It would be very risky for a Western firm to come and invest in either South Korea or Japan. The firm would have trouble in getting labor force, as well as raw materials. In addition, these business conglomerates were doing better than their western counterparts. Therefore, it would not be a good idea for a Western firm to come and compete with these conglomerates in their countries.

The Western firms that were at the receiving end of new focused Keiretsu and Chaebols enjoyed numerous benefits. To begin with, since these conglomerates made their products at quite a low cost, it was convenient for western firms to buy from them. Although South Korea and Japan depended greatly on the internal trade between these conglomerates, there was some percentage of external trade. In South Korea, internal trade was up to 28 percent, while in Japan internal trade was up to 50 percent (Tu, 2002). The remaining percentage in each country depended on the external trade, which was mostly done with firms from the West. There was a lot of determination in the business groups in South Korea and Japan. This determination ensured business success. It means that Western firms that traded with these firms counted on the efficiency of these groups.

On the other hand, every business is ambitious and wants to do better than others, as well as better than it was doing previously (Sung-Hee, 2002). Western firms, being at the receiving end of the focused Keiretsu and Chaebols, were threatening them. That is, Western firms felt threatened by the ambition and valor of Keiretsu and Chaebols. Since these conglomerates from Japan and South Korea were doing better than Western firms, Western firms could not rest assured that these conglomerates would beat them in the regional or international market. There were a lot for western firms to learn from the South Korean and Japanese conglomerates. At the same time, there was a great fear of losing the market to these conglomerates (Shinhan, 2004). Western firms could imitate what the conglomerates were doing to be very successful in order to improve their businesses. It could serve to improve business in the West, as well as improve performance of personal western firms.

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It is clear that the efforts of business conglomerates made great contributions to their countries’ economies. It is difficult for a country to recover from a war and flourish economically within a short time. It makes efforts of the conglomerates inevitably noticeable. In 1997 and 1998, Asia was going through a period of financial crisis. In this case, conglomerates had to readjust their strategies to ensure that they survive the financial crisis. Readjustments were determined by the conglomerates’ structures as well as legal requirements of their countries (Dillerup, 2006). Regardless of the differences in the readjustments done, they were all aimed at reducing the conglomerates’ spending while remaining productive and competitive. It was the only way to survive the financial crisis and remain competitive and relevant in the market. The International Monetary Fund’s requirements were also a factor to consider in these readjustments. Performance of these conglomerates had considerable effect on the Western firms. These effects revealed in two ways. The first one was that the firms intended to trade in South Korea or Japan. Two, being at the receiving end of the conglomerates’ achievements, Western firms had different experiences.

Appendix

Conglomerates are business groups. The grouping can be based on different ideas.

Chaebols refer to the business groups that were in South Korea. The name is derived from two words, chae-, which means wealth, and bol, which means clan. Therefore, these were business groups based on the clans.

Keiretsu refer to a series of interlocking businesses. It is the name that was used for business groups in Japan in the 20th century.