does cartelization deteriorate or enhance industrial ...

CARTELS ET RÉGULATION DES CRISES

DOES CARTELIZATION DETERIORATE OR ENHANCE INDUSTRIAL COMPETITIVENESS? A CASE STUDY OF KOREAN AUTOMOTIVE INDUSTRY

© Éditions ESKA, 2014

by Jimmyn PARC EU Center, Graduate School of International Studies (GSIS) Seoul National University and Ecole Doctorale 188, Centre Roland Mousnier-CNRS UMR 8596 Université de Paris-Sorbonne (Paris IV)

Les fonctions et les effets des cartels restent très controversés. Nous versons à ce dossier le cas de l’industrie automobile coréenne. Le gouvernement a encouragé la cartellisation afin de parvenir à un développement efficace de cette branche et de renforcer sa compétitivité internationale. En particulier, le gouvernement est activement intervenu dans l’industrie pendant les périodes de ralentissement économique. Mais à certains moments les industriels de l’automobile ont regimbé contre cette politique. En définitive, l’industrie automobile coréenne s’est stabilisée et a amélioré sa compétitivité pour devenir l’une des cinq premières mondiales aujourd’hui1.

1 This paper is based on a part of my doctoral dissertation: J. Parc, An Eclectic Approach to Enhancing the Competitive Advantage of Nations: Analyzing the Success Factors of East Asian Economies with a Focus on the Development of South Korea, PhD thesis in history, Seoul National University and Université Paris-Sorbonne (Paris IV), 2014.

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DOES CARTELIZATION DETERIORATE OR ENHANCE INDUSTRIAL COMPETITIVENESS? A CASE STUDY…

INTRODUCTION In South Korea (hereafter Korea), one of the recent hot issues is cartels, notably after 2013 when the largest trade partner, China, took a first enforcement action against the international price fixing cartel2. A number of Korean medias reported that the enforcement of the competition law and sanctions against cartels became very strict in the EU and the US as well3. Several Korean newspapers asserted that foreign governments discriminate Korean multinational companies (MNCs) by utilizing the competition law and the like in order to protect their domestic industries4.

According to the Korean Fair Trade Commission, the fines imposed on Korean MNCs reach around KRW 3,4 trillion (approximately USD 3,2 billion), which is the second largest amount after Japanese, followed by Taiwanese firms5. Assuming that Korean MNCs were victimized, these medias even argued that Korean MNCs should learn “strategic approaches” to leniency policy or plea agreement, as foreign MNCs take advantage of these measures. Meanwhile, as

others do, most Koreans usually consider that cartels, collusions, ententes, associations, and other similar agreements or associations hamper economic growth and free trade as they have learned in economics textbooks and seen from media.

Although cartels have been traditionally viewed negatively in the development of a national economy, many practical evidences have proved that cartels can also be beneficial, overcoming fixed-cost problems and increasing efficiency, particularly during an economic downturn6. This may be achieved by, for example, reducing overcapacity and/or agreeing on a “fair” price level to avoid bankruptcy and elimination7. While most people regard Korean MNCs as victims, few Koreans know the fact that the Korean government and companies have exploited cartelization to benefit from the aforementioned positive aspects, not only during the economic downturn, but also at the initial stage of several strategic industries, notably automotive and electronics industries.

Therefore, before determining whether cartels are beneficial or harmful to the economic development, it is necessary to trace

On January 4th, 2013, China’s National Development and Reform Commission (NDRC) imposed fines of RMB 353 million (approximately USD 56 million) on six international manufacturers of liquid crystal display (LCD) panels for price fixing in connection with the so-called LCD cartel. This is the first time that Chinese antitrust regulators have imposed a fine on participants in an international price-fixing cartel. Jones Day, January 6th, 2013, http://www.jonesday.com/antitrust-alert—china-takes-first-enforcement-action-against-international-price-fixingcartel-01-06-2013/ (accessed March 21st, 2014). 3 MK News, March 18th, 2014, http://m.mk.co.kr/news/politics/2014/424448; The Aju Business, February 11th, 2014, http://www.ajunews.com/view/20140211080944978; Munhwa Ilbo, November 19th, 2013, http://www.munhwa.com/news/view.html?no=2013111901070224306002; The Herald Business, November 19th, 2013, http://news.heraldcorp.com/view.php?ud=20131119000057&md=20131122004948_BC; New Daily, June 24th, 2013, http://www.newdaily.co.kr/news/article.html?no=159727; E-Journal, November 22nd, 2012, http://www.e-journal.co.kr/news/articleView.html?idxno=791; The Hankyoreh 21, April 23rd, 2010, http://h21.hani.co.kr/arti/special/special_general/27165.html (all accessed March 21st, 2014) (all in Korean). 4 E-Journal and MK News, supra note 3; The Aju Business, February 24th, 2014, http://www.ajunews.com/view/20140223154408347; (accessed March 21st, 2014) (in Korean). 5 Korean Fair Trade Commission, press release, November 18th, 2013. 6 D. Barjot (ed.), International Cartels Revisited-Vues nouvelles sur les cartels internationaux 1880-1980, Caen, Editions du Lys, 1994; J. Taylor, “The Output Effects of Government Sponsored Cartels during the New Deal”, The Journal of Industrial Economics 50, 1, 2002, p. 1-10; H. Schröter, “Cartels Revisited: An Overview on Fresh Questions, New Methods, and Surprising Results”, Revue Économique, 64, 6, November 2013, p. 989-1010. 7 Organization for Economic Co-operation and Development (OECD), Crisis Cartels (January 27th, 2011), available at http://ec.europa.eu/competition/international/multilateral/2011_feb_crisis_cartels.pdf (accessed March 27th, 2014). 2

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the causes and effects of cartelization in the history of the Korean automotive industry, particularly from the perspective of strategy. First, it is one of the major industries in Korea; second, it represents a dynamics of industry life cycle within a relatively short time — from a small government-controlled parochial industry to a significant global player; and lastly, the industry faced a great turmoil and even helped push Korea into the Asian financial crisis in 1997.

1. CARTELIZATION AS A MEASURE OF STRATEGY

For better or worse, cartels have shaped economic and business history since the late 19th century. As Harm Schöter has argued, the prevailing views on cartels are from the consumer’s interests, which concern mostly price. However, from the corporate view, cartelization can be considered as an entrepreneurial act, thus a strategy. This view concerns com-

petitiveness, rather than price. If this is ipso facto, cartelization is designed to enhance the competitiveness of a firm per se or it is part of a process toward a strategic alliance8.

A number of scholars have delineated how corporations employ cartelization strategically: providing market and ensuring market share9; sharing patents and knowhows10; and spillovers and innovation11, which are rather indirectly related to price. It is not just corporations that use cartelization as a means of strategy. Governments sometimes take on a considerable role for a fleet of domestic firms: protecting domestic infant industries12, raising national champions13, or even directly and indirectly intervening in major industries for the sake of growth14. Most of the aforementioned cases concern industrial competitiveness.

Although the orthodox view of cartels is that a collusive agreement benefits the firms involved at the expense of consumers15, there is a discrepancy between the definitions of cartels at different times16. Also,

C. Bronder and R. Pritzl, “Developing Strategic Alliances: Conceptual Framework for Successful Co-operation”, European Management Journal, 10, 4, 1992, p. 412-421; J. Fear, “Cartels and Competition: Neither Markets nor Hierarchies”, Working Paper Harvard Business School, 7, 11, 2006, p. 1-31. 9 N. Fligstein, The Transformation of Corporate Control, Cambridge, MA, Harvard University Press, 1990. 10 H. Schröter, “Risk and Control in Multinational Enterprise: German Businesses in Scandinavia, 1918-1939”, Business History Review, 62, 3, 1988, p. 420-443. 11 R. Petri, “Cartels and the Diffusion of Technologies: The Case of Hydrogenation and Catalytic Refining”, Revue Economique, 4, 6, November 2013, p. 287-300. 12 S. Hasegawa, “International Cartels and the Japanese Electrical Machinery Industry in the Interwar Period”, ibid., p. 243-251. 13 T. Yui and K. Nakagawa (eds.), Business History of Shipping: Strategy and Structure, Tokyo, University of Tokyo Press, 1985. 14 E. Hadley, Antitrust in Japan, Princeton, Princeton University Press, 1970; H. Iyori, A. Uesugi, and C. Heath, Das Japanische Kartellrecht, Cologne, Carl Heymanns Verlag, 1994. 15 J. Taylor, “The Output Effect”, art. cit. 16 According to John Connor, Robert Liefmann, one of the most cited authors, for example, defined cartels as “free [voluntary] associations of producers [linked by formal of informal contractual agreements] for the monopolistic control of the market” (R. Liefmann, Cartels, Concerns and Trusts, New York, Dutton, 1932 [1897]); here producers mean independent companies, thus if the associations are enforced by government decrees or parliamentary statutes, they are not true cartels. William Notz accepted Liefmann’s definition. However, in his definition, business organizations may be private corporations, state enterprises, or national cartels. Leading European cartel scholars such as Paul de Rousiers, Kurt Wiedenfeld and others dwelled on conceptual and organizational issues surrounding cartels. They contained little of interest on price or welfare impacts, providing a striking contrast with the industrial analyses emerging in the United States. J. Connor, “Price-fixing Overcharges: Legal and Economic Evidence”, Research in Law and Economics, 22, 2007, p. 59-153; R. Liefmann, Cartels, op. cit.; W. Notz, Representative International Cartels, Combines, and Trusts, Washington, DC, US Department of Commerce, 1929. 8

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quite a number of empirical cases are hardly explained by the orthodox view. This gap may be due to the “visible hand”, a strategic approach of professional managers based on dynamics of industrial capitalism as Alfred Chandler Jr. suggested17.

The business strategy professor at Harvard Business School Michael Porter18 approached this issue more systematically, looking at its overarching effect on national competitiveness. He was in line with the traditional views on cartelization, stating that “the presence of a cartel in an industry dampens rivalry and is associated with lower competitiveness” (p. XVII-XVIII); “the resulting mergers or informal agreements undermine the process of innovation in the industry” (p. 169); and “leniency toward cartels is also a trap” (p. 664). Furthermore, Porter argued that cartelization may maintain profits for a time, but usually it marks the beginning of the end of international success.

However, there are particular cases of cartels, mergers, alliances, and collusive behavior, which he encouraged because they do not hamper fair competition, and they eventually enhance competitiveness. For instance, competitiveness enhancement activities; acquisitions of smaller domestic rivals by a firm in a related industry seeking to transfer skills; restructuring of declining industries; protections on small retailers for more efficient chains; vertical collaboration between suppliers and buyers; vertical activities that do not unduly exclude other

competitors from access to customers, channels, or suppliers; and trade association activities connected with factor creation such as training infrastructure, and researches as long as they are not exclusionary, should be permissible (p. 664).

There are several important criteria for these activities to be considered: economic conditions (booming vs. declining), life cycle (growth/maturity stage vs. infant stage), firm size (large vs. small), industry structure (same vs. related), and activity type (horizontal vs. vertical). Cases of cartelization that cannot be well understood by the orthodox view — focusing on price — can be better explained in terms of a strategy aiming at enhancing competitiveness.

Small Finnish paper and pulp producers, for example, sized up and improved efficiency through vertical integration, mergers, and cartels in order to overcome government intervention and to compete with Western giants in the world market during the 1920s. They eliminated their rivals by focusing on the creation and construction of their sales and distribution channels in export cartels19. They enhanced their competitiveness and could expand their business abroad.

The concept of “crisis cartel”, i. e. the formation of a cartel among firms during severe sectoral, national, or global economic downturns, or when a national competition law allows for the creation of cartels

A. D. Chandler Jr., Scale and Scope: The Dynamics of Industrial Capitalism, Cambridge, MA, Belknap Press, 1990 argued that the visible hand implies decisions about current operations, employment, output, and the allocation of resources for future operations and higher long time growth rate made by professional managers, not owners of the enterprise. Also A. D. Chandler Jr., The Visible Hand: The Managerial Revolution in American Business, Cambridge, MA, Harvard University Press, 1977. 18 M. Porter, The Competitive Advantage of Nations, New York, NY, Free Press, 1990. 19 M. Kuisma, “Government Action, Cartels, and National Corporations-The Development Strategy of A Small Peripheral National during the Period of Crisis and Economic Disintegration in Europe (Finland 1918-1938)”, Scandinavian Economic History Review, 41, 3, 1993, p. 242-268. 17


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during such downturns20, can be also understood with Michael Porter’s strategic approach: stabilizing the current status and enhancing competitiveness in the end.

2. THE KOREAN AUTOMOTIVE INDUSTRY

The Korean automotive industry started with a car called Sibal, built on the basis of a Willys Jeep and other spare parts from US military in 1955. In 1962, the Park ChungHee government initiated the Automobile Industry Protection Law, which forbad foreign companies to sell cars in Korea unless they were cars imported as CKD21 and in partnership with a Korean company.

The first conveyor-belt assembly plant and the first modern manufacturing plant were built in 1973 and 1975 respectively. Hyundai Motors (hereafter Hyundai), currently Korea’s largest automaker, produced the first Korean-developed automobile, the Pony, in 1976 and made Korean history by exporting Pony to Ecuador in 1976. In 1986, Hyundai exported made-in-Korea

cars to the US for the first time in Korean automobile history.

Although the Korean automotive industry faced turmoil during the Asian financial crisis of 1997, Korean automobile companies recovered soon and increased their production thanks to exports. According to the International Organization of Motor Vehicle Manufacturers (Organisation Internationale des Constructeurs d’Automobiles, OICA), in 2013 Korea is the fifth largest automobile nation in the world as measured by automobile unit production22 and Hyundai is the world’s fifth biggest automaker by sales along with its affiliate Kia Motors (hereafter Kia)23.

When one deals with cartelization in the history of the Korean automotive industry, there are two critical points that should be taken into account. First, regarding the automotive industrial policy, there was a significant change in the government’s philosophy by January 1987 when the government cancelled the “Automobile Industry Rationalization Plan”24: it shifted from “support and protection” to “autonomy and competition”25. Second, government inter-

OECD, Directorate for Financial and Enterprise Affairs, Competition Committee, Global Forum on Competition, Crisis Cartels, Background Note, Session III, DAF/COMP/GF(2011)6, p. 6 et seq. available at http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DAF/COMP/GF(2011)6&docLanguage =En (accessed March 28th, 2014). 21 Completely knock-down (CKD) - completely disassembled cars are shipped and then assembled locally. 22 OICA, 2013 Production Statistics, http://www.oica.net/category/production-statistics/ (accessed March 22nd, 2014). 23 Reuters, April 2nd, 2014, http://www.reuters.com/article/2014/04/02/hyundai-car-idUSL4N0MT0JB20140402 (accessed April 2nd, 2014). 24 Due to the second oil shock and the slowdown in the world economy, the Korean economy faced a sudden crisis. To overcome it, in 1980 the government instructed all automotive companies to integrate with one another in order to reduce costs by achieving economies of scale and product specialization. Hyundai and Saehan were set to merge for passenger vehicles, retreating from the commercial vehicle sector, whereas Kia was enjoined to exit from the passenger vehicle sector with a guarantee of monopoly in the light commercial vehicle sector. However, the original plan of government did not work out. Thus, the government-led “rationalization” was introduced in 1981 and lasted until the beginning of 1987 with several modifications; as a result, Hyundai and Saehan were in severe competition for the passenger car market. 25 Korea Automobile Manufacturers Association and Korea Auto Industries Cooperative Association (KAMA and KAICA), 50 Years of Korea’s Automobile Industry, Seoul, KAMA, 2005, p. 603 (in Korean); regarding the history of Korea’s industrial policy, the World Bank divided into three terms: the take-off phase (1962-1973), the heavy and chemical industry (HCI) promotion phase (1973-1979), and the liberalization phase (since 1979). See World Bank, Korea: Managing the Industrial Transition, Washington, DC, World Bank, 1987. 20

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Rank Country

2013

2010

2000

1990

1980

1970

1960

1950

509,242

222,288

87,166

22,574

n/a

1

China

22,116,825 18,264,667 2,069,069

2

USA

11,045,902 7,761,443 12,799,857 9,782,997 8,009,841 8,283,949 7,905,119 8,005,859

3

Japan

9,630,070 9,625,940 10,140,796 13,486,796 11,042,884 5,289,157

4

481,551

Germany* 5,718,222 5,905,985 5,526,615 4,976,552 3,878,553 3,842,247 2,056,149

31,597 306,064

5

Korea

4,521,429 4,271,941 3,114,998 1,321,630

123,135

28,819

n/a

n/a

6

India

3,880,938 3,536,783

362,655

113,917

76,409

51,136

14,688

7

Brazil

3,740,418 3,648,358 1,681,517

914,466

1,165,174

416,089

133,041

n/a

8

Mexico

3,052,395 2,345,124 1,935,527

820,558

490,006

192,841

49,807

n/a

9

Thailand

2,532,577 1,644,513

304,843

73,347

22,055

n/a

n/a

10

Canada

2,379,806 2,071,026 2,961,636 1,947,106 1,369,607 1,159,504

397,739

387,726

801,360

325,888

Table 1. World motor vehicle production (by country) Note: *West Germany before 1990. Source: OICA, Production Statistics, http://www.oica.net/category/production-statistics/ (accessed March 22nd, 2014).

vention in Korea has always been intensive and extensive, although it was the “target” of the policies that differed strategically across the changing stages of economic development in Korea26. This view is in line with the works of many scholars, such as Alice Amsden, Leroy Jones and Il Sakong, Richard Leudde-Neurath, Michael Porter, and Robert Wade27.

In particular, the Korean government acted as the entrepreneur in the Schumpeterian sense28, which is more than just taking a considerable role for a fleet of domestic firms. Hence, the next two sections explain the cartelization process in the history of the Korean automotive industry by focusing on government and corporate dynamics.

26 Y. Heo, “Development Strategy in Korea Reexamined: An Interventionist Perspective”, The Social Science Journal, 38, 2, 2001, p. 217-231. 27 A. Amsden, Asia’s Next Giant: South Korea and Late Industrialization, New York, Oxford University Press, 1989; L. Jones and I. Sakong, Government, Business, and Entrepreneurship in Economic Development: The Korean Case, Cambridge, MA, Harvard University Press, 1980; R. Leudde-Neurath, Import Controls and Export-oriented Development: A Reassessment of the South Korean Case, Boulder, Westview Press, 1986; M. Porter, The Competitive Advantage, op. cit.; R. Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton, Princeton University Press, 1990. 28 A. Amsden, Asia’s Next Giant, op. cit.


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3. THE KOREAN AUTOMOTIVE INDUSTRY BEFORE 1987: SUPPORT AND PROTECTION

Before the Korean government liberalized competition in 1987 by cancelling the Automobile Industry Rationalization Plan, the infant industry argument has been cited as justification of government intervention29. The government, as the ultimate guarantor of property rights, had to plan development strategies, create “restraints of trade”, and provide rents to those in the automobile industry30. Under the powerful leadership of the government, a few corporate alliances, such as the Joseon Auto Industry Union (which became the Korea Auto Industry Union) and the Joseon Auto Parts Task Force, were formed to stabilize the procurement of spare parts for repairing cars and to support supplies for US and Korean militaries31.

3.1. The take-off (1945-1972)

In 1950, the Ministry of Commerce together with the Ministry of Transport and the Ministry of National Defense prohibited the importation of thirteen auto parts, which is the first industrial policy that the Korean government initiated. However, because of the Korean War, this plan was not well implemented. The sudden decrease of the market due to war and “imported” parts and components from overseas, notably by US military in Korea, hampered the development of the Korean automotive industry. The total number of cars in Korea was

16431 in 1949 and almost 75 % of them were destroyed by 195132. Disassembled US military vehicles — transferred to private ownership or abandoned — became a source of spare parts. The first Korean car was built in 1955 and in the same year Shinjin Motors and Ha Dong-Hwan Motors were established; the number of cars increased gradually. However, the situation was not favorable when the government announced the “5.8 line policy” on May 8th, 1957 to restrict the import of automobiles in Korea to save foreign currency. Oil was put on rations due to the lack of foreign currency to buy it. Immediately, only few foreign cars were imported.

Right after the coup d’État in 1961, the Park Chung-Hee administration set forth economic policies for the domestic automotive industry in 1962 with the Automotive Industry Protection Law, a part of the First Five Year Development Plan. The Ministry of Trade and Industry received the authority for the prohibition of imported cars (except CKD); it subsidized loans; it developed export subsidies and tax incentives; it instituted tariff exemptions for imported components which could not be produced in Korea33. Furthermore, the ministry determined the selection of participants in the industry.

The rationales of this law were to accumulate capital and earn foreign currency by the localization of auto parts production which would induce less imports and more exports. Despite all these efforts, this law was not effective. Eventually, the Park

Y. Heo, “Development Strategy”, art. cit. H.-J. Chang, “The Political Economy of Industrial Policy in Korea”, Cambridge Journal of Economics, 17, 1993, p. 131-157. 31 KAMA and KAICA, 50 Years, op. cit., p. 809-811. 32 Ibid., p. 111. 33 L. J. and D. B. Truett, “The South Korean Auto Industry: All Grown Up Now?”, The University of Texas at San Antonio, College of Business Working Paper Series, 2012. 29 30

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administration applied several different ways of management. By the end of 1963, all the automotive companies were merged to create a national champion. The unified firm was divided into a few assembly companies, integrated with other parts and components producers in August 1964.

However, the localization of auto parts production was not fruitful. So, in 1969, the government introduced the Automotive Industry Promotion Law34. To size up the economies of scale, a high volume with a few basic models was preferred to multikind and small-quantity products35 with a quota system. Also, instead of vertical integration between assembly companies and spare parts producers, horizontal integration was emphasized by the government. The establishment of an engine manufacturing plant was even planned in February 1970. During this period, parts producers gradually expanded their domestic market and gained technology thanks to the ban of importation listed parts and components36.

Assembly companies produced more cars than before and it seemed that they experienced excessive competition. As the demand for automobiles gradually increased, the amount of oil imports augmented as well. Thus, the government raised the commodity tax for automobiles to 30 %; the demand decreased immediately. Meanwhile, parts manufacturers expanded their market in Southeast Asia since the mid-1960s37.

It is noteworthy that although Korea protected the automotive industry by banning the import of several parts and components as well as of completed foreign cars38 and by pushing the localization of production, its intention was to nurture and upgrade rather than to protect and maintain the status quo of the industry. Furthermore, despite of weak competitiveness at the infant stage, the participants in the automotive industry — car assembly companies, auto parts producers, and government — were always looking forward to expand their markets by export.

3.2. The expansion (1973-1986)

On January 30, 1973, policies for developing heavy and chemical industry (HCI) sectors were announced. It marked a major turning point in the Korean economy. As a part of HCI sectors, the industrial policy for automobiles changed from the localization of auto parts to the development of a massproduction system, with substantial domestic contents39. The Korean government implemented this Long Term Automobile Industry Promotion Plan on January 16, 1974 and it raised the import tariff from 150% to 250 %, which was a sine qua non to make Korean-developed cars’ mass production possible, at least from the government’s viewpoint.

34 Government regulations aimed to stimulate the products of passenger vehicles, with 100 % Korean-produced content by 1972; KAMA and KAICA, 50 Years, op. cit., p. 151. 35 Because many different models in small quantity were imported as CKD and importers kept bringing new models, auto parts companies had to produce various parts and components without economies of scale. Ibid., p. 164. 36 L. S. Kim, Imitation to Innovation: The Dynamics of Korea’s Technological Learning, Cambridge, MA, Harvard Business School Press, 1998. 37 KAMA and KAICA, 50 Years, op. cit., p. 164. 38 According to KAMA and KAICA (2005), while having car manufacturers upgrading assembly skills by importing CKD kits, the government strongly promoted the localization of parts and components. To nurture the parts and components sector, the government and corporate alliances, for example, kept renewing the list of banned auto parts of which the localization was completed (p. 593). 39 Ibid., p. 196; L. J. and D. B. Truett, “The South Korean Auto Industry”, op. cit.


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The Park administration set firms a goal to produce half million vehicles annually by 1981 and was intimately involved with the process to produce Korean-developed cars. The new rules included exclusion of new entrants to the domestic market, tax reductions and concessions, promotion of vertical integration, preferential financing, and a decree that guaranteed a large market share for domestically-produced cars40. In addition, auto parts producers cooperated to establish affiliated research centers within relevant sectors which were intended to reduce overlapping investment and to advance technology with the help of government investment.

As the domestic market expanded from the mid-1970s onward, assembly companies and auto parts producers developed tight relationships for efficient procurements. In other words, vertical systematization was targeted41, which looked like a win-win partnership based on long-term contracts. However, the government preferred horizontal systematization. Meanwhile, Korean assembly companies experienced difficulties to cooperate with foreign MNCs which preferred to have Korean companies as original equipment manufacturers (OEM) without transferring advanced technologies. In this context, Korean automobile assembly companies

wanted to develop standard model automobiles and to expand their market overseas42. Hyundai achieved this long awaited desire with Pony in 1974.

From the end of 1979 to 1981, the automobile industry faced a sudden crisis caused by domestic insecurity after the assassination of President Park Chung-Hee and the second oil shock. The domestic automobile demand decreased and the new government under President Chun DooHwan considered that the HCIs were overinvested. This propelled the integration of the automobile industry since August 20, 1980. Companies could not resist because the automotive industry did not have any autonomous organization nor cartel for their interest43. Companies were easily enforced to abandon their business and to become integrated with others. For example, Hyundai and Saehan were planned to be integrated into a single company for producing passenger vehicles, Kia only for light commercial vehicles (e.g., 1-5 ton trucks). However, the attempt to integrate Hyundai and Saehan was not successful in the end44.

The Korea Automobile Manufacturers Association (KAMA) and the Korea Auto Industries Cooperative Association (KAICA) argued that this policy put off the

40 L. Kim, “Crisis Construction and Organizational Learning: Capability Building in Catching-up at Hyundai Motor”, Organization Science, 9, 4, 1998, p. 506-521. To reach the goal, government intervened deeply in planning details, such as localization ratio, price, numbers of products and models, engine capacity, etc. See KAMA, Korean Automotive Industry 1999, Seoul, KAMA, 1999 and S.-Y. Kim and J.-Y. Kim, “The Economic Crisis and Government-Business Relations in Korea: A Comparison of the Automobile Industry and the Electronics Industry”, Korean Political Science Review, 36, 2, 2002, p. 133-152 (in Korean). 41 KAMA and KAICA, 50 Years, op. cit., p. 597, 602; C. Lee, “The Rise of Korean Automobile Industry: Analysis and Suggestions”, International Journal of Multidisciplinary Research, 1, 6, 2011, p. 428-439. Korean automobile companies could organize to reduce the total time needed from scratch to market for a new car to about three years, which was very impressive compared to other competitors. In reality, they would save several millions of dollars and reduce risk significantly in the process (p. 430). 42 Ibid., p. 209. 43 S.-Y. Kim and J.-Y. Kim, “The Economic Crisis”, art. cit. 44 GM owned 50 % of Saehan and was still in charge of the management. GM was not interested in the equal partnership that the government and Hyundai proposed. R. Steers, Made in Korea: Chung Ju-yung and the Rise of Hyundai, New York-London, Routledge, 1999, p. 119.

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automotive industry’s growth for several years and that it negatively affected the industry. The integration policy was shortsighted — merely to normalize the industry without any long-term plan; the idle and other uncountable assets of each company were huge for two years45. The Chun administration acknowledged the drawbacks of the integration policy and later introduced the Automobile Industry Rationalization Plan on February 28th, 1981. A modification followed on July 26th, 1982.

As the market situation improved, Hyundai was able to mass produce passenger cars and export them to Canada in 1983 and finally to the US, the largest car market, in 1986. At this point in time, carmakers started to invest in R&D in earnest to enhance the competitiveness of their models against foreign carmakers abroad46. Jordi Catalan, Andrew Green, and Gordon Waitt have shown that Korean automobile companies’ production cost reduction and entry into the North American market were outcomes of the rationalization47, due to a “relatively” fair domestic competition.

To sum up, regarding the automotive industry as a strategic industry for national development, the government became involved in the industry through a variety of policies, including export promotion and acquisition of technology. Moreover, the government intervened in this industry with policies designed to enhance competitive-

ness by achieving lower costs and to facilitate growth by establishing mass production. Although the Park and Chun administrations intervened aggressively in the industry, their policies differed. The Park administration had a long-term plan, including localization of parts48 and Koreandeveloped cars, whereas the Chun administration aimed to stabilize the industry and focused on overcoming the recent crisis.

4. THE KOREAN AUTOMOTIVE INDUSTRY AFTER 1987: AUTONOMY AND COMPETITION

During the 1980s, Korean automotive companies became competitive and selfsupporting. The liberalization, after the cancellation of the Automobile Industry Rationalization Plan in 1987, put companies in free competition. As Korean automobiles manufacturers expanded their domestic and foreign markets, the Korean automotive industry faced pressure to open its domestic market. In this context, Korean companies felt the need to organize a strong alliance for their common interests and they established the Korea Automobile Manufacturers Association (KAMA). This organization raised its voice and engaged actively in business, although it became weaker during the Asian crisis49.

KAMA and KAICA, 50 Years, op. cit., p. 220. KAMA and KAICA, 50 Years, op. cit. 47 J. Catalan, “Strategic Policy Revisited: The Origins of Mass Production in the Motor Industry of Argentina, Korea, and Spain, 1945-87”, Business History, 52, 2, 2010, p. 207-230; A. Green, “South Korea’s Automobile Industry”, Asian Survey, 32, 5, 1992, p. 411-428; G. Waitt, “Say Bye to Hyundai and Hi to Korean Autoparts? Restructuring the Korean Automobile Industry in the 1990s”, Tijdschrift voor Economische en Sociale Geografie (Journal of Economic and Social Geography), 84, 3, 1993, p. 198-206. 48 C. K. Kim and C. H. Lee, “Ancillary firm development in the Korean automotive industry”, KIEI Working Paper, 1980. 49 S.-Y. Kim and J.-Y. Kim, “Economic Crisis”, art. cit. 45 46


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4.1. The stabilization (1987-1997)

When the Automobile Industry Rationalization Plan was cancelled, Hyundai and Daewoo (Saehan changed its name to Daewoo Motors) participated in producing commercial vehicles, and Kia followed in passenger vehicle production. These manufacturers competed in domestic and US markets. Also, by July 1, 1989 new entrants were permitted: Halla Group, Daewoo Shipbuilding, and Samsung Heavy Industries (SHI) eventually entered the large commercial vehicle sector.

When Samsung Group (hereafter Samsung), one of the chaebols (large Korean conglomerates), declared its participation in passenger vehicle manufacturing in the middle of 1993, a cartel of carmakers was formed against it50. The cartel members argued that Samsung’s participation51 would cause an excessive competition over marketing and sales, rather than technology and competitiveness. They also argued that there were already enough competitors in the small domestic market and that Samsung would induce problems such as transfer of technicians, researchers, parts suppliers, and others, taking them away

from existing manufacturers52. Nevertheless, Samsung successfully entered the passenger vehicle sector and built a manufacturing plant in Busan, the second largest city in Korea, with aggressive lobbying and backing of Busan people53.

Meanwhile, the exports to the US decreased significantly from the late 1988 onward due to quality problems. As a solution, Korean automakers diversified their export portfolio and tried to enhance quality. The exports bounded back in 1991 and overpassed the record of the peak year, 1988. From 1986 to 1988, the annual export growth rate reached 67 %54. Hyundai, Daewoo, and Kia even competed abroad. On the other hand, the domestic market increased considerably from 1987 onward, which offset the decrease of exports to the US. From 1987 to 1993, the growth rate of the domestic market was 21 %55. Since 1993, domestic automobile manufacturers started to compete over sales and marketing as they worried about the entry of Samsung in the industry.

The industry began to face a series of difficult issues: air pollution in 1987, marketopening pressure in 1993, stagnant domestic market growth but increased customer

Officially, most of the participants in the industry and KAMA were opposed to the entry of Samsung. However, their cartelization and its solidarity were very weak. The biggest manufacturer in the market, Hyundai, accepted the idea of fair competition, while Daewoo focused on ending the relationship with GM and was looking for a technical cooperation with Ssangyong. Kia was the only one that expressed dissenting opinions. See Sang-soo Heo, Samsoungkwa Jadongcha Sanoeop: Samsoungui Seungyongcha Saeop Chamyoo Nonjaeng, Seoul, Saenal , 1994 (in Korean). 51 According to KAMA and KAICA (2005), when one of Samsung’s affiliates, SHI, tried to enter the commercial vehicle industry, all the auto manufacturers bitterly opposed SHI’s participation. They argued that Samsung’s ultimate intention was to enter the passenger vehicle market. These auto manufacturers considered that Samsung would bring foreign CKD and technology, which were superior to Korean. Hence, Samsung would harm the whole Korean automobile industry. To settle down this argument, Samsung confirmed that it would not enter the passenger vehicle market. However, Samsung Motors, for passenger vehicles, was founded in 1994 and it produced its first products in April 1998 (p. 315-328). 52 KAMA and KAICA, 50 Years, op. cit., p. 318-319. 53 Ibid., p. 318-328; S.-Y. Kim and J.-Y. Kim, “Economic Crisis”, art. cit.; The Hankyoreh 21, n° 38, December 15th, 1994 (in Korean). Si-yoon Kim and Jung-yul Kim have written that after the entry of Samsung into the automotive industry, no more substantive government industrial policy was effectuated. 54 KAMA and KAICA, 50 Years, op. cit., p. 329, 332. 55 Ibid., p. 349. 50

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sophistication in 1994. By setting higher targets to increase exports and to resolve the air pollution issue, Korea adopted emission control laws which were as demanding as that of America56, and it made it easier for Korean carmakers to export to the markets of developed countries.

Despite the stagnation in the domestic car market57, sales of foreign cars increased dramatically from 1994 onward; however, it was not significant vis-à-vis the number of exported Korean cars. Therefore, since October 1993, the US and the EU started to press the Korean government to open the domestic car market in order to handle the adverse balance of automobile trade. The government gradually lowered the imposed tax and tariff on imported cars and opened up the market. The opening was promoted after the Asian financial crisis58. Although Korean companies enjoyed relative stabilization, they were not satisfied with the level of success at that time. In October 1992, Korean automobile manufacturers asked government to help launch strategic planning, which was later called “Project X-5”. It planned the three main Korean car manufacturers to be listed in the top 10 by 200059. With a tremendous joint endeavor of both private and public sectors, Korea became the world’s fifth biggest automobile producing country, overtaking Canada in 1995.

During this period, the Korean automotive industry reached a growth path and gained competitiveness. With expanded domestic and international markets60, Korean auto manufacturers enjoyed an unprecedented autonomy ever since the beginning of the automotive industry, even with relatively lowered government intervention. They formed cartels to block Samsung’s entry into the industry as mentioned above.

4.2. The revitalization (1998-2004)

Since 1987, Korean automobile giants had accumulated a tremendous amount of debt in their race to expand. On July 15, 1997, Kia was effectively placed under bankruptcy protection. Initially, the Korean government did not intervene seriously in this problem61, letting creditors negotiate about Kia. The negotiation was at a snail’s pace and the government worried that it would affect and weaken Korea’s financial system. In October 1997, the Korean government finally decided to intervene and settled down the Kia crisis.

At the beginning, the government decided to run Kia as a state-owned corporation and to sell it later when Kia’s financial situation would improve. However, the workers’ union and the management of Kia62, as

Ibid., p. 432. When Korea was growing at a slower pace in the 1990s, the slow growth forced most Korean automobile companies to diversify their international export portfolio, besides the US market, and they started expanding their business globally. C. Lee, “The Rise”, art. cit. 58 According to Robert Ebert and Mariel Montoney, the domestic market in South Korea was protected until the late 1990s due to the government’s nationalist and protectionist policies. Therefore, Korean automobile firms dominated their domestic market with little foreign competition until 1999. R. Ebert and M. Montoney, “Performance of the South Korean Automobile Industry in the Domestic and United States Markets”, The Baldwin-Wallace College Journal of Research and Creative Studies, 1, 1, 2007, p. 12-24. 59 KAMA and KAICA, 50 Years, op. cit., p. 388. 60 M. Lautier, “The international development of the Korean automobile industry”, in F. Sachwald (ed.), Going Multinational: The Korean Experience of Direct Investment, London, Routledge, 2001. 61 Ibid., p. 475. 62 The workers’ union was against the government’s lay-off plan and the management of Kia did not want to give up their ownership. 56 57


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well as the International Monetary Fund (IMF), which engaged in the financial crisis on December 3rd, 1997, refused this deal. The newly elected President, Kim Dae-jung (1998-2003), argued that the way out of the crisis was to reform the government-bankbusiness nexus, to induce foreign investment, and then to increase exports63. Therefore, Hyundai, Samsung, Daewoo, along with Ford, bade for Kia, and Hyundai acquired Kia, outbidding Ford. Kia’s net profit reached KRW 180 billion (approximately USD 157 million)64 in the end of 1999 and Kia was discharged of bankruptcy in February 2000. When the IMF bailed out Korea during the crisis, a “big deal”, in which the chaebols would swap subsidiaries for specialization, was imagined to restructure the whole Korean industry. In January 1998, Daewoo examined the possibility of a big deal with Samsung over electronics and automobiles65 and in late November suggested to map out a specific plan with Samsung. In December, the government introduced a “Workout Program” which contained the big deal between Samsung and Daewoo66.

Instead of striking a big deal with Daewoo, in July 1999 Samsung decided to file for court receivership. Meanwhile, Samsung was looking for a foreign counterpart which could take over Samsung Motors, its automobile division. Exclusive talks between Samsung, Renault, a French automaker, and creditors began in January 2000. Renault agreed to buy 70,1 % of Samsung Motors’ capital. The French automaker became the first foreign carmaker to break into the Korean market. After the

acquisition in April 2000, Renault renamed Samsung Motors as Renault Samsung Motors67.

Because Samsung was under court receivership in 1999, Daewoo was left alone and the whole Daewoo Group, the third largest chaebol at that time, ran into deep financial trouble. Since no Korean company nor the government were able to take over Daewoo, the Korean government decided to sell it to a foreign firm. Finally, GM acquired Daewoo in 2002. Although Ssangyong, an SUV (Sport utility vehicle) maker, had been acquired by Daewoo in January 1998, because of Daewoo’s bankruptcy Ssangyong took self-rescue measures but it was sold to Shanghai Automotive Industries Co. in 2005 after experiencing management and financial problems.

During the crisis, the auto parts sector was also in turmoil. It received a lot of foreign investment directly and through M&As. The Korean automotive industry became naturally globalized, both in the automobile manufacture and auto parts sectors. By 2014, four foreign MNCs, GM, Mahindra, Renault, and Tata, are present in Korea. After the Asian financial crisis, thanks to the low value of the Korean won Korean automobiles obtained price competitiveness, and quality competitiveness was also gained through heavy investment in R&D. Exports to the US increased from 2000 onward and in 2004 Korea exported more than 2 million cars for the first time. In 2008, Hyundai entered the European dominated luxury arena by introducing a full-size luxury sedan, Genesis.

63 B. Cummings, “The Asian Crisis, Democracy, and the End of “Late” Development”, in T. J. Pempel (ed.), The Politics of the Asian Economic Crisis, Ithaca, NY, Cornell University Press, 1999, p. 17–44. 64 USD1 = KRW1145,4 in 1999. See ETAXKOREA, http://www.etaxkorea.net (accessed April 10th, 2014). 65 Hanguk Kyeongje Sinmunsa (The Korea Economic Daily), Kim Woo-jung Bisa: Daewoo Group Jaasalinga Tasalinga, Seoul, The Korea Economic Daily, 2005 (in Korean). 66 KAMA and KAICA, 50 Years, op. cit., p. 475. 67 L. Schweitzer, Mes années Renault, Paris, Gallimard, 2007.

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Ha-Joon Chang and Jang-Sup Shin have asserted that the measures enacted to settle down the financial crisis should be interpreted as government leading M&As or restructuring68. However, as mentioned above, at least for the Korean automotive industry, the Korean government first took a wait-and-see attitude. Only when there was an urgency did the government intervene actively to solve the problem at hand, contrary to the past.

5. DISCUSSION

In the history of the Korean automotive industry, the Korean government actively employed various cartel-like measures to develop, normalize, and revitalize the industry. Thus, they all converged on enhancing competitiveness. The policies differed strategically across the changing development stages of the industrial and international business environment; this “policy inconsistency” was also due to the inexperience of government in the early years69.

From a strategic point of view, the Korean government actively protected firms and intervened both when the industry was in the infant stage of development (i.e. during the 1960s-1970s) and during economic downturns (i.e. in the late 1970s-early 1980s and during the Asian financial crisis of 1997)70. In addition, Korean auto manufacturers systematized vertical activities with parts suppliers to enhance efficiency for mass production. When the industry was in its growth stage,

not only auto manufacturers, but also parts providers organized joint associations or R&D centers to maximize creation.

Automobile cartelization, to stabilize the market or to protect their own benefits, did not appear soon in the history of Korean automotive industry. A relatively strong corporate cartel appeared in the mid-1990s, when the industry was on an narrow growth path, to oppose the entry of Samsung in the automotive industry. It was more than a pro forma opposition: each player’s position was different from one another. So, it was not strong enough to obstruct the new entrant.

A noteworthy feature in the Korean automotive history is that government-led cartelization aimed at overcoming internal (i.e. underdeveloped technology and market) and external (i.e. lack of foreign exchange and shortage of energy) disadvantages with corporations’ active participation, which was meant to enhance competitiveness. Furthermore, although government and corporations effectuated cartelization measures, their intentions were not to keep the current industrial status quo, but they were forward-looking for further development: for instance, localization of auto parts, Korean-developed cars, and exports orientation. In addition, the Korean government and corporations utilized internationalization as a tool to achieve better competitiveness and further development, from joint venture production to foreign direct investment, although the means differed strategically across the time71.

68 Ha-Joon Chang and Jang-Sup Shin, “Critical Assessment of Post-crisis Corporate Restructuring in Korea”, Journal of Korean Economic Analysis, 9, 3, 2003, p. 255-291 (in Korean). 69 See also M. Lautier, “ ‘Avoiding the Neighbours’: The National/Global Development Strategy of the Korean Automobile Industry”, in J. Carrillo, Y. Lung and R. van Tulder (eds.), Cars, Carriers of Regionalism?, Basingstoke, Palgrave Macmillan 2004, p. 218-232 and 266-267. 70 Among the three cartelization-like government interventions, only the integration policy of 1980 was severely opposed by participants, notably by GM. Also, Korean companies were already too large to be controlled by the government. For the Korean government, the American MNC GM was too complicated to deal with. Also, although the economy was unfavorable in the early 1980, market forces worked relatively well in a free market economy. 71 M.-K. Chung, “The chance of a peripheral market player: the internationalization strategies of the Korean automobile industry”, in M. Freyssenet, K. Shimizu and G. Volpato (eds.), Globalization or Regionalization of the American and Asian Car Industry?, Basingstoke, Palgrave Macmillan, 2003.


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The Korean government’s cartelization policy was strikingly similar to the Japanese experience72. From the 1940s to the 1950s, Japanese automotive companies were allowed to produce only a limited number of vehicles. This policy delayed the development of Japanese automotive industry. In order to overcome this tardiness, the Japanese government banned the import of foreign cars and promoted Japanese companies to engage in partnership with foreign companies. The government also fostered spare part producers and intervened to induce monopolistic and oligopolistic structures to enhance efficiency for mass production. However, Hongbong Choi73 argues that companies’ opposition to government policy kept the industry with severe rivalry which have made the auto industry more competitive in Japan, while the Korean automotive industry is more oligopolistic.

CONCLUSION

Although the traditional view has highlighted the negative aspect of cartels, many scholars have argued with empirical tests and cases that cartelization also has positive aspect. In this manner, the spread of cartels is one of the most controversial issues regarding economic growth. Through the history of the Korean automotive industry, the positive aspects of cartelization, which are mostly related to enhancing competitiveness, have been observed. However, cartelization was mostly done by government during the infant stage of the industry or during economic turmoil.

Government used corporate alliance as a tool of communication, though it was mostly unilateral. Since they worked together to achieve a common object ―industrial and economic developments―, the goal lubricated the relationships between government and corporations. Furthermore, various measures of cartelization were strategically utilized for further development, rather than for keeping the status quo.

Through three times of government’s major cartelization and interventions — although the case of the Korean automotive industry is not a typical orthodox form of cartel, the Korean government acted as an entrepreneur in the Schumpeterian sense — , one important implication can be drawn. The policy in the early 1980s implied that cartelization formed by the government to “violate” the market force, although the market was functioning well, would face unexpected hindrances and side-effects for industrial development and growth. Thus, cartelization should be carefully considered for economic growth whether it is in an economic upturn or in a downturn.

In Korea, besides the automotive industry, another major industry is electronics. Compared with the automobile industry, in electronics cartels and corporate alliances appeared earlier; the electronics cartelization was more active and tightened than that of automotive industry, which further prevented government intervention. Comparative studies and analyses on different causes and effects of cartelization between these two Korean industries would yield interesting policy implications for industrial and economic development.

72 According to Won-chul Oh, who took the lead in the HCI policy as a senior presidential secretary for economic affairs from 1971 to 1979, he submitted a report on the Japanese HCI policy to President Park and the Korean HCI policy was based on this report. Won-chul Oh, Park Chung-heeneun Eotteotge Gyeongjegangguk Mandeuleossna: Bulgului Dojeon Hangangui Gijeok, Seoul, Dongseomunhwasa, 2006, p. 155-189 (in Korean). 73 Choi, Hongbong, “A Comparative Study on the Automotive Industrial Policy of Korea and Japan”, Journal of Regional and social Studies, 21, 2, 2013, p. 73-90 (in Korean).

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