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Antitrust rule is ineffective: FTC

Conglomerates are still awarding contracts to their own affiliates
June 26,2018
A study by Korea’s antitrust regulator on Monday found that regulations have not been effective in stopping conglomerates from unfairly awarding contracts and projects to their own affiliates.

When the regulation was first adopted, the number of affiliates that could not legally accept projects from their parent company went down from 15.7 percent of affiliates in 2013 to 11.4 percent in 2014. But last year, the number rebounded to 14.1 percent, indicating the policy is not working, the Fair Trade Commission said.

The revenue that these affiliates made from their parent companies also bounced back last year after a slight retreat. In 2013, the affiliates brought in an accumulated 12.4 trillion won ($11.1 billion). That fell by more than half to 7.9 trillion won the following year, but last year, it grew to 14 trillion won.

Under the current rule, conglomerates are not allowed to give contracts to their own affiliates when a member of the conglomerate’s owner family has more than 30 percent in an affiliate. For unlisted companies, the threshold is 20 percent.

Companies that violate the regulation face a penalty up to 5 percent of the unfairly gained revenue, a fine of up to 200 million won and maximum three years in prison. The goal is to prevent conglomerates from monopolizing projects and expand opportunities for smaller businesses.

However, some conglomerates have skirted the regulation by lowering their stakes in affiliates to just slightly below 30 percent. The Fair Trade Commission found that four listed companies continue to depend on contracts from their parent company, and they account for 21.5 percent of listed affiliates.

At eight companies - three of which are owned by Hyundai Motor Group - a member of the conglomerate’s owner family had a stake between 26 and 29 percent to avoid the regulation.

One such company is Innocean, an ad agency owned by Hyundai Motor Group. The ad agency was founded in 2005 with Hyundai Motor Group Chairman Chung Mong-koo and his family as the full owner.

However, Chairman Chung’s daughter, Chung Sung-yi, now owns 27.99 percent, while his son, Chung Eui-sun owns 2 percent. The family’s combined stake in the ad agency is 29.99 percent, just below the legal threshold.

Yet the company’s revenue from contracts with other Hyundai Motor Group affiliates surged 75 percent from 137.6 billion won in 2013 to 240.7 billion won in 2017. It now accounts for more than half of the ad agency’s total revenue.

“The regulation has not properly operated,” said Shin Bong-sam, head of the Fair Trade Commission’s business group bureau.

Since last year, the Fair Trade Commission has been working on tightening regulation to lower the stake ratio of listed companies to 20 percent.

Kim Sang-jo, chairman of the Fair Trade Commission, has vowed to end monopoly-like practices at conglomerates and said in a speech earlier this month that while the government can’t force conglomerates to sell off their stakes in “nonessential” affiliates, it can target them for investigation.


BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]