Fair Trade Commission Files Complaint Against Hanwha Solutions... "Unfair Support to Chairman's Sister's Family"

Hanwha Solutions fined 15.68 billion KRW, Han Express 7.28 billion KRW with corrective orders
KFTC: "Hanwha Solutions supported unfair internal transactions and toll fees for Han Express"
One month after sanctioning Nike OEM Changshin Group, regulation on 'unfair transactions among relatives'
Hanwha: "Unfair to evaluate internal transactions based on 'family ties' without reasonable grounds"

Kim Seung-yeon, Chairman of Hanwha Group. (Photo by Hanwha Group)

[Asia Economy Reporter Moon Chae-seok] The Fair Trade Commission (FTC) has filed charges against Hanwha Solutions (formerly Hanwha Chemical) with the prosecution. This follows the imposition of a fine exceeding 22.9 billion KRW for unfairly funneling work and supporting transit fees to Han Express, a company controlled by the family of Kim Seung-yeon, chairman of Hanwha Group, through his sister's family.

Hanwha has been sanctioned not only for 'work funneling' and 'transit fee support,' which the FTC strictly regulates, but also for support activities based on owner family ties. The FTC's sanction on 'unfair transactions among relatives' came just a month after imposing a fine exceeding 38.5 billion KRW on Changshin Group, an OEM company for Nike whose largest shareholder is the owner's child, on May 13.

Hanwha strongly denied the main issues sanctioned by the FTC, including preferential work allocation to relatives, transit fee collection, and unfair support to Han Express, stating, "This is not true," and "We will actively clarify that the transactions were lawful through future judicial procedures."

"Grew Kim Chairman's Sister's Controlling Company 'Unfairly' Due to Affiliate Relationship"…Hanwha's 'Defense'

Hanwha Group ownership stake. (Source: Korea Fair Trade Commission)

The FTC judged that Han Express was 'unfairly' grown from its inception as a 'cheat' by Hanwha. The grounds cited include ▲allocating all export container cargo worth 83 billion KRW over 11 years and paying high transportation fees (work funneling) ▲assigning tanker truck transportation worth 151.8 billion KRW and paying high transportation fees (work funneling) ▲cutting off transactions with existing transport companies and dealing exclusively with Han Express (forming a transit fee structure).

Both work funneling and transit fees are the most sensitive unfair trade practices for the FTC. The FTC imposed corrective orders (future conduct prohibition orders) and fines totaling 22.97 billion KRW on Hanwha Solutions and Han Express. Hanwha Solutions was fined 15.687 billion KRW, and Han Express 7.283 billion KRW respectively.

According to the FTC, until May 2009, Han Express was a disguised affiliate company owned under a pseudonym by Chairman Kim, the same person as Hanwha's ultimate owner, and managed by the Group's Management Planning Office. This pseudonymous company has been used as a major means for the family's wealth accumulation.

The FTC stated, "The Hanwha corporate group is structured with Chairman Kim at the top, and the Management Planning Office is an organization for Chairman Kim's wealth accumulation and efficient group control," adding, "Hanwha affiliates are highly likely to engage in transactions favorable to Chairman Kim's pseudonymous company, and under this background, the support activities occurred."

It further added, "Even after Han Express was sold to Kim Young-hye's family, Chairman Kim's sister, in May 2009, such support activities continued under the same background."

The FTC announced, "We will eradicate the management practice where companies belonging to large business groups unfairly support the extended family of the ultimate owner under the pretext of being 'affiliates,'" and said it plans to establish a policy for voluntary opening of logistics work by cargo owners affiliated with large logistics companies within this year.

The FTC said, "This action is significant in that it confirmed and strictly dealt with the act of unilaterally funneling logistics work to a controlling company of the sister's family, which can be considered part of the extended ultimate owner family, under the pretext of being an 'affiliate,' thereby damaging fair trade order, even though the company is not an affiliate of the relevant large business group."

Hanwha responded, "The FTC claims that the Management Planning Office led the support based on blood relations, but it is making such claims unilaterally without any evidence or data," adding, "Although the FTC conducted a review according to laws and separated the family relationship, it used the term 'extended ultimate owner family,' which is not a legal term, and mentioned the individual names of shareholders, evaluating it as if it was an act for the ultimate owner's private gain, which we consider inappropriate."

Signs of Work Funneling…Hanwha: "Management Planning Office Led, FTC's Unilateral Claim"

The Fair Trade Commission judged that Hanwha Solutions changed the transportation transaction structure from 'loading point conversion,' which favored dealerships, to 'arrival point conversion,' enabling Han Express to operate advantageously. The photo explains the process through which the 'pass-through tax' structure was formed via 'arrival point conversion.' (Source: Fair Trade Commission)

The support activities by Hanwha Solutions that the FTC took issue with are mainly divided into ▲container transportation transactions and ▲tanker truck transportation support activities. In particular, the FTC judged that Hanwha Solutions provided 'transit fee support' under favorable conditions to Han Express in tanker truck transactions.

First, the FTC explained that Hanwha Solutions entrusted all inland transportation of export containers worth 83 billion KRW to Han Express through private contracts from June 2008 to March 2019. It provided a significantly high transportation fee, supporting a total of 8.7 billion KRW.

Hanwha Solutions centralized container transportation to Han Express in February 1999 by terminating transactions with other transport companies to funnel work to Han Express. This behavior continued even after Han Express was sold to Chairman Kim's sister's family.

The FTC judged, "Hanwha Solutions claimed cost reduction as the ultimate goal of the centralization measure, but the actual behavior was contrary to cost reduction or efficiency improvement," adding, "It showed irrational behavior that can only be explained by logistics work funneling."

It further added, "Cargo owners prefer multiple transactions to induce competition and reduce transportation costs, but this transaction was against such practices," and "Evidence such as selecting Han Express as a carrier simply because it is an affiliate of Hanwha Solutions reveals the intention of support in this case."

Hanwha explained, "Centralizing container inland transportation to Han Express was necessary for cost reduction in logistics unit price, scaling up, and specialization to improve service," adding, "In the same industry, it is common practice for major companies to have a specific main carrier for logistics transactions."

'Transit Fee Support' in Tanker Truck Transportation…Hanwha: "For Cost Reduction and Efficiency Improvement"

Case of exclusive carrier unit price reduction after 'arrival conversion'. (Data=Fair Trade Commission)

The FTC also found unreasonable unfair support in Hanwha Solutions' tanker truck transportation transactions. According to the FTC, from January 2010 to September 2018, Hanwha Solutions sold hydrochloric acid and caustic soda directly or through agents to customers. During this process, it exclusively entrusted tanker truck transportation worth 151.8 billion KRW (8.4% of the domestic hazardous chemical transport market) to Han Express, providing a significantly high transportation fee and supporting a total of 9.1 billion KRW.

More seriously, the FTC judged that there was evidence that Hanwha Solutions helped Han Express collect transit fees. The FTC explained, "When Hanwha Solutions traded with customers through agents, it added Han Express, which did not play a substantial role in the transportation process, to the transaction stage to enable it to collect transit fees."

According to the FTC, about 70% of Hanwha Solutions' hydrochloric acid sales volume through agents was transported under 'loading point condition,' where agents use exclusive carriers to deliver to each customer. This means the purchasing agent transported from Hanwha Solutions' factory, the seller. However, from January 2010, Hanwha Solutions uniformly pushed to change the transportation condition to 'delivery point condition' for all agents. This means the seller, Hanwha Solutions, arbitrarily changed the transaction condition to transport to the customer.

Buyers usually prefer the 'loading point condition' for profit reasons. The FTC judged that Hanwha Solutions ignored this background and added Han Express as an 'integrated carrier' above the existing exclusive carriers, changing the transaction condition to 'delivery point condition.' The volume was integrated and concentrated 100% to Han Express. Even after the transportation condition changed, all volume was funneled to Han Express.

The FTC stated, "Although Han Express was added as an integrated carrier in the transaction stage, it did not perform substantial roles such as dispatch or safety management," adding, "Actual transportation work was done between agents and exclusive carriers, but Han Express took over 20% margin in the middle, collecting huge transit fees."

The FTC judged that because of this, exclusive carriers were reduced to subcontractors of Han Express and experienced price reductions during transactions. Conversely, Han Express took the middle margin.

Hanwha countered that ▲considering all conditions, the amount supported was 1.23 billion KRW (88% less than the FTC's estimated normal price of 10.5 billion KRW), ▲even after switching to delivery point condition, actual transportation costs were reduced by 3% through integrated transportation management and curbing inflated agent transportation fees, and ▲the impact on container inland transportation after the transaction was only 0.26% of the market, and hydrochloric acid and caustic soda transportation accounted for only 2.5~2.6% of domestic transportation volume.

Hanwha explained, "Hanwha Solutions centralized container transportation to Han Express and selected Han Express as the integrated carrier for tanker trucks to reduce costs through logistics efficiency and improve management efficiency," adding, "Hanwha Solutions traded with Han Express, which meets standards in terms of transportation scale and facilities, because of the high risk of major accidents due to the large amount of highly toxic substances such as hydrochloric acid."

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