[Lee Jong-woo's Economic Insights] The Shift of Dominance to the Soft Industry

The Decade of Large Corporations' Heyday Since 2005
7 of Top 10 Market Cap Companies Are Large Corporation Affiliates
Naver, Kakao, Celltrion Rapid Growth
Expansion of Bio and Software Industry Shares
Large Corporations Respond to Industrial Changes Through Investment

From 1970 to the mid-1980s, the U.S. economy was, in a word, a mess. Automobiles were successively taken over by Japanese companies such as Toyota, Nissan, and Honda. Nissan dominated the U.S. small pickup truck market in the 1960s, and Honda led the small car market with the Civic. As a result, by 1980, Japan produced 11 million cars?twice as many as the U.S.?with a significant portion sold in America. Considering that Japan's automobile production was only 500,000 units in 1960, production increased twentyfold in just 20 years. From the perspective of the U.S., which controlled 80% of the global automobile market in 1950, this was astonishing. Steel declined as rapidly as automobiles. The market share of U.S. steel companies, which accounted for 60% of global steel production immediately after World War II, fell to the 20% range by the late 1970s.

While large corporations pressured the government to block Japanese entry, quiet changes were underway within the U.S. economy. Small and medium-sized enterprises (SMEs) were developing soft industries, avoiding the large-scale heavy industries dominated by big corporations.

The first effect of the SME revival was employment. SMEs created enough jobs to offset the decline in employment at large corporations. Over the decade following 1974, while employment at Fortune 500 companies decreased by 1.5 million, net employment in SMEs increased. Overall, 20 million new jobs were created in the U.S. economy, allowing three times as many people to find work compared to Japan. As a result, the share of manufacturing jobs in total employment rose to 48%. This contrasts with Europe, where manufacturing jobs decreased by 10% during the same period. In the 1980s, SME employment growth accelerated further, with 60% of new jobs in the U.S. attributed to independent SMEs. These growing SMEs became attractive acquisition targets for large corporations. In 1980, 95% of mergers exceeding $500,000 involved SMEs, and SMEs like Amazon and Microsoft, which emerged during this period, now drive the U.S. economy.

The heyday of South Korea's large conglomerates, represented by 'chaebols,' was the decade following 2005. There are reasons for this view. First, large corporations were highly profitable during this period. Thanks to the China boom, as China's economy grew rapidly, demand for capital goods surged, and Korean conglomerates benefited significantly. They held advantages not only in geographic location but also in cost-effectiveness, enabling them to earn substantial profits. Consequently, stock prices rose, with POSCO's stock reaching 760,000 won, and large-scale heavy industries like chemicals and shipbuilding also saw significant stock price increases after 2005.

Problems arose after the peak period. The slowdown has progressed faster than expected, and many large corporations now earn profits lower than those from ten years ago. Although the top 10 groups as a whole currently report much higher profits than a decade ago, this is mainly due to Samsung Electronics generating profits tens of times greater than the declines in other companies, so it is not a general trend.

As profits decline, the status of large corporations in the stock market has also diminished. Among large corporate affiliates, seven are in the top 10 by market capitalization. Samsung Biologics is a Samsung affiliate but differs from traditional heavy industries, so if classified separately, the number drops to six. The other three companies are Naver, Celltrion, and Kakao, which either did not exist or had minimal presence in the market ten years ago. Hyundai Motor ranks 11th, but its market cap is only 1.5 trillion won higher than game company NCSoft, so rankings could change anytime. Changes beyond the 10th place in the business world are even more severe. Kumho lost its status as a chaebol, Doosan is in poor condition to the extent that selling affiliates is inevitable, and Hanjin is struggling with the aviation industry's downturn due to COVID-19 and management disputes. This collective difficulty among chaebol companies is the first since the foreign exchange crisis.

The status of large corporations may decline further in the future. Above all, the current business environment is very different from when large corporations grew. Until now, Korean conglomerates have grown by producing goods through large-scale facilities and exporting them overseas. They still cannot break away from this framework, but the world's leadership has shifted to soft industries centered on creativity. The rise of FAANG (Facebook, Apple, Amazon, Netflix, Google) companies in the Nasdaq market and the fact that bio and software industries account for over 25% of the KOSPI market capitalization are all results of this change. Large corporations find it difficult to adapt to these changes. Companies find it hard to escape the environment in which they were born and grew. Not only the business foundation but also the mindset of the people inside is structured according to the environment in which they grew up.

What should Korean large corporations do going forward? Large corporations currently hold the most money in the Korean economy. Operating profits of listed companies, which were only 30 trillion won in 2001, reached 200 trillion won in 20 years, with a significant portion belonging to large corporations. Although profits are not increasing as rapidly as ten years ago, maintaining past profit levels is not a problem. It is worth considering creating Samsung Funds or SK Funds to invest in promising companies with this money. Many investment companies will disappear, but some may succeed like Naver. Then, large corporations can recover their invested money through successful companies, strengthen cooperative relationships to utilize them in business, or incorporate them as affiliates through capital acquisition to respond to industrial changes. SMEs can receive the most necessary funding to conduct their businesses, benefiting everyone. Until now, the government has played a part in this role, but it cannot keep up with companies in terms of industrial insight, investment fund management, and technology assessment. If large corporations move away from the mindset of 'I must do everything profitable myself,' they will have many more opportunities. Models pursued by GE Capital or SoftBank under Chairman Masayoshi Son are examples of connections between capital and SMEs.

This content was produced with the assistance of AI translation services.