Korea’s large businesses have taken out more debt for financing to boost a number of new subsidiaries since the inauguration of the Lee Myung-bak administration in 2008. During the previous Roh Moo-hyun administration, conglomerates came under fire for amassing cash and refusing to invest to create jobs.
When they decided to invest, they took out loans, instead of tapping into their massive cash holdings, under the business-friendly policies of the Lee administration and ended up increasing their subsidiaries.
According to a data on cross-subsidiary investment in major conglomerates released recently by the Fair Trade Commission, Korea's top 10 business groups currently hold total debts of 618.4 trillion won, up from 423.3 trillion won or 48.4 percent at the beginning of the Lee administration in 2008.
Along with their debts, cash holdings also swelled. Their cash-related assets totaled 52.15 trillion won as of the end of 2009, an increase of 8.34 trillion won since 2008, which means their investments increased much more slowly than their debts.
The top-ranked Samsung Group saw its debt rise 33.6 percent from 172.6 trillion won in 2008 to 230.7 trillion won. Its cash holdings totaled 16.5 trillion won as of the end of 2009, up 39.4 percent from 11.8 trillion won in 2008.
Hyundai Motor’s debt rose 31.2 trillion won between 2008 and now, while its cash holdings rose 4.3 trillion won between 2008 and 2009.
Lotte Group, whose number of subsidiaries increased the most among the top 10 conglomerates, saw its debt load increase 90 percent or 7.4 trillion won from 2008 to 36.8 trillion won now. As of the end of 2009, Lotte held 2.4 trillion won in cash reserves, up 65.9 percent from 2008.
“As the size of conglomerates increased, they tended to boost the size of their cash holdings to make transactions more efficient,” an industry source said.
The total number of subsidiaries of the top 10 conglomerates increased 45.8 percent from 385 in 2008 to 562 now. Lotte boosted the number of subsidiaries by 32 from 46 to 78, followed by Hyundai Motor 28 from 36 to 64, LG 23 from 36 to 59, SK 20 from 64 to 84 and Samsung 19 from 59 to 78.
When extended to Korea’s top 20 business conglomerates, they have added 244 new affiliates over the last three years, a growth of 36 percent, while their assets have swollen 54.2 percent. The Fair Trade Commission said the total number of affiliates of Korea’s top 20 conglomerates rose to 922 this year from 678 in April 2008 when the Lee administration started. Their total assets swelled from 638.6 trillion won to 1,054.4 trillion won over the same period.
The number of affiliates of major conglomerates has mushroomed because curbs on cross-subsidiary shareholding were scrapped in 2009, lowering the barriers that the conglomerates face in establishing new units, said a business insider, adding, “Conglomerates also appear to be boosting their affiliates to profit by creating new business opportunities for their own units.”
Samsung group has increased the number of subsidiaries from 59 in 2008 to 78 this year, up 32.2 percent, while its assets burgeoned 59.9 percent from 86.5 trillion won to 230.9 trillion won. As a result, Samsung alone accounts for 21.9 percent of the total assets of the nation's top 20 conglomerates, up from 21.1 percent three years ago.
Hyundai Motor boosted the number of affiliates, thanks to the acquisition of Hyundai Engineering and Construction which had 21 subsidiaries, to 63 this year from 36 back in 2008, up 75 percent. Its total assets also rose 71.2 percent from 74 trillion won to 126.7 trillion won.
Meanwhile, the number of Korea's heavily indebted conglomerates declined in 2011 from a year earlier after some companies reduced their liabilities to banks, the Financial Supervisory Service (FSS) said recently.
The financial regulator designated 37 groups as heavily indebted for having unsecured debts to financial companies exceeding 1.4 trillion won (US$1.3 billion) as of the end of 2010. The number is 0.1 percent of the financial sectors’ total unsecured corporate lending of 1,396.2 trillion won posted at the end of 2009.
According to the FSS, the number of listed large companies has decreased by 41 from the previous year. The regulator said Hyundai Oilbank, Daewoo International Corp. and Hyundai Engineering & Construction were among those de-listed after merging with other business groups, while Hyundai Group and Aekyung Group were also excluded after reducing debt levels, the regulator said. Daewoo Engineering & Construction was added after being separated from Kumho-Asiana Group, the FSS noted.
The regulator annually releases the list of business groups with heavy debts to seven main local banks.
“The main lenders will examine the financial structure of their borrowers by the end of April and those who are found to have trouble in repaying debts will be required to sign an agreement with their lenders by the end of May on how to shore up their financial health,” the regulator said.
As of the end of 2010, a total of 238.7 trillion won of unsecured loans had been issued to the designated 37 conglomerates, which account for 16.3 percent of the financial sector’ss entire 1,462.2 trillion won credit lending to companies, according to the FSS.
This year, large businesses are expected to invest a record high amount. According to a report released recently by the Federation of Korean Industries, investment by the nation's top 600 firms will grow 9.7 percent from last year to a combined 114.65 trillion won.
Investment in facilities is forecast to rise 8.3 percent to 95.79 trillion won, and R&D 17.1 percent to 18.86 trillion won. Companies are apparently placing more focus on R&D to sharpen their competitiveness and secure new growth engines rather than expanding production facilities.
The manufacturing sector plans 71.47 trillion won worth of investment this year, up a mere 4.4 percent from last year, while the investment by the non-manufacturing sector is expected to grow 19.6 percent to 43.19 trillion won.
Early this year, Samsung Group announced it will invest a total of 43.1 trillion won, including 29.9 trillion won in facilities investments, 12.1 trillion in research and development, and 1.1 trillion won in capital investments to acquire other companies. The amount marks an 18 percent increase compared to last year and is the largest ever for the group. Samsung also plans to hire 25,000 new workers this year, which is another all-time high, up 11 percent from last year. LG Group also announced it will invest a record 21 trillion this year, including 16.3 trillion won in facilities and 4.7 trillion won in R&D.
Most other conglomerates are planning to boost investments this year as well. A survey on 1,200 businesses conducted last year by the Korea Chamber of Commerce and Industry showed a 6.1 percent increase in facility investment from last year.