Work Funneling Regulation
There have been continuous side effects of foreign-affiliated companies taking reflected profits from regulations related to large enterprises, such as the designation of suitable business areas for small and midsized enterprises (SMEs) and work funneling.
While regulations for protecting domestic SMEs are busy suppressing large enterprises, foreign-affiliated companies have formed a blind spot from which they poach opportunities from domestic MSEs and expand in Korea.
According to Bloomberg on July 22, DENSO Corporation, a member of the Toyota Group of Japan, has decided to expand its manufacturing factory in Korea. Analysis said, “The government’s plutocracy regulations have opened new business horizons for the Japanese company.” It seems that foreign-affiliated companies have found a loophole and are enforcing strategies for Korean market invasion after witnessing a rift in the vertical integration system due to the government and its economic democratization movements, such as regulating how large enterprises funnel business and support sister companies.
In fact, DENSO Corporation, ranked the second largest automobile parts manufacturer in the world, held a ground breaking ceremony on July 1 to begin a large-scale expansion of its factory in Changwon City, South Gyeongsang Province. The construction received a total of seven billion yen in investment to largely expand the existing Changwon City factory, and is expected to be in operation by June next year.
Furthermore, DENSO Corporation plans on building an automobile parts research center in Changwon City and will continue to extend its automobile parts supply business for Korean complete vehicle industries by investing an additional 400 billion won by 2020. This will allow DENSO to not only compete directly with domestic manufacturing enterprises such as Hyundai Motor Group affiliate Hyundai Mobis and sister company Mando, but also seek out more business opportunities depending on the future progress of economic democratization.
Businesses expect that such movements from DENSO Corporation will trigger similar action from other foreign companies. A senior business official, “Some foreignaffiliated companies in parts and materials business had already been planning to enter the Korean market by the time the government began discussing economic democratization,” adding, “This may create a negative impact on Korea’s industrial ecosystem as the nation lacks competition in the areas of parts and materials.”
It has been claimed that even if foreignaffiliated companies do not aggressively enter the niche market, domestic companies may end up looking for them first to handle work.
Bae Sang-geun, chief of the economic affairs division at the Federation of the Korean Industries (FKI), explained, “Domestic enterprises in System Integration (SI) and advertisement industries, which are subject to funneling regulations, are likely to give work to foreign companies since these foreign affiliates have better security and proven competitiveness, while domestic companies risk internal data and information disclosure.” In addition, foreign-affiliated companies are accelerating their Korean market advance, while large domestic enterprises remain banned from expanding under the regulation regarding designating SME suitable business areas. For example, in the Light Emitting Diode (LED) industry, designated to SMEs, China’s top LED company Kingsun moved in to intensify its operations in Korea.
Japanese food service enterprises, such as sushi, lunch boxes, fast food, and bars, are also increasing their number of franchises in Korea, while large domestic enterprises face bans on the launch of additional food services. As for the maintenance, repair, and operations (MRO) businesses, foreign companies such as Office Depot have replaced large domestic enterprises, putting the original intent of reviving domestic SMEs to shame.
“Movements like the work funneling regulation and designation of SME suitable business areas are meant to relieve the concentration of economic power from large enterprises and revive SMEs,” said an industry official, adding, “Unfortunately, there is no way to stop some of the world’s top foreign-affiliated companies from taking over the workload.”