Conglomerates Still Support Poorly Managed Subsidiaries

`The restructuring of the conglomerates centered on leading industries` which was agreed between the government and the conglomerates in the beginning of the present government, became ineffective because the conalomerates` financing support for their poorly managed subsidiaries have not changed in spite of the conglomerate reform. It was revealed in Korea Institute of Finance`s provisional report, `The Analysis on the Conglomerates` Contribution Style`. The result is directly contradict against the business groups` contention on `the relief of the restrictions over conglomerates`.

▼ The fleet-style management = The report, after examining the Korea Fair Trade Commision`s yearly report on `the internal contribution--receiving contribution situations of the conglomerates` said that, during the fiscal year of 1997-2000, 41.2 percent of the top 30 business group`s new contribution (13.45 trillion won), out of 32.6 billion won in total, was invested into poorly managed subsidiaries.

▼ Hyundai`s contribution is the most risky = Among the 4 conglomerates that carried out most of the contributions, Hyundai, which financed 48.4 percent of its contribution to the deficit subsidiaries, was the most risky investment. But SK group supported its subsidiaries based on their profitability. It invested 44.5 percent of the contribution to well-managed companies that the ratio of net income to sales is over 5 percent. LG and Samsung follow the next for high investment rate into profit-making companies.

▼ Refutation from the business circle = The business circle asked to consider the policy environments beyond the analysis of statistics. Lee Seung-Chul, an executive director of the Federation of Korean Industries, insisted that, ``The leading companies` contribution to deficit companies was inevitable in order to keep the government`s debt ratio guideline of 200 percent and support the subsidiaries` restructuring. The government should focus on the companies` change of the financial structure, before and after the contributions.`` Another related person of the business circle said, ``Liquidation of a company is not solely economic matter in Korea`s business climate.``

▼ Hot issue, the equity investment limit system = The equity investment limit system, which restricts the conglomerates` equity in subsidiaries over 25 percent of the group`s net asset, was abolished in 1998. But after President Kim`s statement of `5 + 3` principle that will cut off the succession of the conglomerates` wealth in 1999, the system was revived and the conglomerates should cut down the excess amount of contribution before the enforcement of the system in March 2002.

Since the necessity of the stimulation of economy has been raised, the reform position is criticized even from a section of the government, including the Ministry of Finance and Economy.

ecopark@donga.com