Moon gov't rapped for 'socialistic' profit sharing

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Moon gov't rapped for 'socialistic' profit sharing

Minister of SMEs and Startups Hong Jong-haak, left, and Democratic Party of Korea Chairman Lee Hae-chan. Korea Times file

By Park Jae-hyuk

The Moon Jae-in administration and the ruling Democratic Party of Korea (DPK) have come under mounting criticism from the business circle for their unprecedented attempt to force companies to share profits with subcontractors, according to industry officials, Thursday.

Many business leaders here brand the controversial policy move "socialistic."

Some of them even fear possible trade disputes with other countries, given that it may lead to discrimination against foreign subcontractors.

"It is an unconstitutional idea that threatens the base of capitalism," Federation of Korean Industries (FKI) Vice Chairman Kwon Tae-shin told reporters Wednesday. "If the government wants to force conglomerates to share profits with subcontractors, it should urge them to share losses as well. Also, foreign subcontractors may file complaints with the World Trade Organization, if they are excluded from profit sharing."

Korea Employers Federation Vice Chairman Kim Yong-geun also said profit sharing will harm the independence of corporate management.

"It may cause another dispute, because it is impossible to calculate each subcontractor's contribution," he told reporters the same day.

A possible violation of the Subcontracting Law is another problem.

"For conglomerates to evaluate each subcontractor's contributiveness, they will have no choice but to force subcontractors to share proprietary information, and this is a violation of the Subcontracting Law," said an executive at one of the country's top business groups, declining to be named.

Smaller firms also worry about the side effects of the policy.

They expect it will accelerate the exodus of Korean companies.

"More conglomerates will replace their Korean subcontractors with foreign partners," said an official at the Association of High Potential Enterprise of Korea, a business lobby for medium-sized firms. "Korean subcontractors will face a worsening business situation, if this happens."

The government and the ruling party claim the profit sharing is not a compulsory measure.

"The government will just give incentives to conglomerates, if they voluntarily share their profits with small- and medium-sized subcontractors," a Ministry of SMEs and Startups official said.

However, most observers expect the National Tax Service and the Fair Trade Commission will pressure businesses to comply with the measure, one of the 100 major policy tasks President Moon announced in July 2017.

"Firms that do not share their profits will face unfavorable public opinion," a researcher at the Korea Economic Research Institute said. "It will practically be a compulsory measure."

This is not the first time legislation for profit sharing has stirred controversy in Korea.

In 2011, then Korea Commission for Corporate Partnership Chairman Chung Un-chan tried to implement the system under the previous Lee Myung-bak administration.

However, he failed, after facing a strong backlash from business leaders.

Back then, Samsung Chairman Lee Kun-hee came under the spotlight for his sarcastic comments regarding Chung.

"I'm confused about whether it is a term used in socialist states or capitalist countries," he said at the time. "I grew up in an entrepreneur's family and have studied economics. However, I've never heard of the concept."


Minister of SMEs and Startups Hong Jong-haak, left, and Democratic Party of Korea Chairman Lee Hae-chan. Korea Times file

By Park Jae-hyuk

The Moon Jae-in administration and the ruling Democratic Party of Korea (DPK) have come under mounting criticism from the business circle for their unprecedented attempt to force companies to share profits with subcontractors, according to industry officials, Thursday.

Many business leaders here brand the controversial policy move "socialistic."

Some of them even fear possible trade disputes with other countries, given that it may lead to discrimination against foreign subcontractors.

"It is an unconstitutional idea that threatens the base of capitalism," Federation of Korean Industries (FKI) Vice Chairman Kwon Tae-shin told reporters Wednesday. "If the government wants to force conglomerates to share profits with subcontractors, it should urge them to share losses as well. Also, foreign subcontractors may file complaints with the World Trade Organization, if they are excluded from profit sharing."

Korea Employers Federation Vice Chairman Kim Yong-geun also said profit sharing will harm the independence of corporate management.

"It may cause another dispute, because it is impossible to calculate each subcontractor's contribution," he told reporters the same day.

A possible violation of the Subcontracting Law is another problem.

"For conglomerates to evaluate each subcontractor's contributiveness, they will have no choice but to force subcontractors to share proprietary information, and this is a violation of the Subcontracting Law," said an executive at one of the country's top business groups, declining to be named.

Smaller firms also worry about the side effects of the policy.

They expect it will accelerate the exodus of Korean companies.

"More conglomerates will replace their Korean subcontractors with foreign partners," said an official at the Association of High Potential Enterprise of Korea, a business lobby for medium-sized firms. "Korean subcontractors will face a worsening business situation, if this happens."

The government and the ruling party claim the profit sharing is not a compulsory measure.

"The government will just give incentives to conglomerates, if they voluntarily share their profits with small- and medium-sized subcontractors," a Ministry of SMEs and Startups official said.

However, most observers expect the National Tax Service and the Fair Trade Commission will pressure businesses to comply with the measure, one of the 100 major policy tasks President Moon announced in July 2017.

"Firms that do not share their profits will face unfavorable public opinion," a researcher at the Korea Economic Research Institute said. "It will practically be a compulsory measure."

This is not the first time legislation for profit sharing has stirred controversy in Korea.

In 2011, then Korea Commission for Corporate Partnership Chairman Chung Un-chan tried to implement the system under the previous Lee Myung-bak administration.

However, he failed, after facing a strong backlash from business leaders.

Back then, Samsung Chairman Lee Kun-hee came under the spotlight for his sarcastic comments regarding Chung.

"I'm confused about whether it is a term used in socialist states or capitalist countries," he said at the time. "I grew up in an entrepreneur's family and have studied economics. However, I've never heard of the concept."


Park Jae-hyuk jaehyuk@koreatimes.co.kr
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