For Choi Hae-pyung, head of an electronics parts maker, running his business over the last year has been like steering a boat through a double storm: competition from China and the rising value of the Korean currency have squeezed his already thin profit.
But those challenges were anticipated. What Mr. Choi did not foresee was a scandal.
For weeks, the manufacturing giant Samsung, which relies on thousands of parts suppliers, like Mr. Choi’s Green C& C Tech here, has been battered by accusations of corruption. Executives were banned from leaving the country. Prosecutors raided Samsung’s offices in search of traces of a suspected slush fund that was said to exceed $217 million.
“Everyone is watching what’s going to happen to Samsung,” Mr. Choi said. “If Samsung takes a punch, we feel the shock, too. If Samsung shrinks because of the investigation and cuts its investment, smaller companies like us will shut down in droves.”
Mr. Choi’s jitters help to explain why virtually no one in this country maintains that despite the enormity of its recurring scandals, Samsung should go the way of Enron.
South Koreans have grown tired of the corrupt ways of their big businesses. But because the economy is so heavily dependent on a handful of conglomerates, and their influence so pervasive in people’s daily lives, Koreans fear that striking these behemoths too harshly may hurt their own economic well-being.
Thus it has become a pattern: a scandal rocks one of these conglomerates, known as chaebol, roughly once a year. But by the time the scandal has run its course, executives accused of bribery walk away with light punishment, usually a suspended prison term accompanied by an admonition from the judge that they would have been punished more sternly were it not for their “contribution to the economy.”
So they all go back — supposedly in remorse, sometimes after making huge donations to charities — and continue to run their companies until the next scandal.
Many in South Korea saw no compelling reason to think it would be any different this time.
“There is a lot of slapping on the wrist and embarrassing exposure, but not full prosecution,” said Tom Coyner, president of Soft Landing Korea, a management consultant. “The scary thing about this is that people generally recognize Samsung is one of the best-managed corporations in South Korea. So if that’s the case with Samsung, it makes one wonder what degree of corruption we might find elsewhere.”
In a speech to Samsung workers on Monday, Yun Jong-yong, vice chairman of Samsung Electronics, the group’s flagship company, lamented the “confusion” created by the scandal and said “there was fear among shareholders and investors that it may disrupt our management.”
This scandal is unlike any Samsung has faced because it involves a whistle-blower, a rare species in South Korea.
Over the last month, Kim Yong-chul, Samsung’s former chief in-house lawyer and a prosecutor before that, has contended that Samsung stashed away a gigantic slush fund. He said it was created with company money, hidden in dummy stock and bank accounts in the names of executives, including his own, and used to bribe politicians, prosecutors and journalists, and even to finance an art collection for the chairman’s family.
Samsung denies any wrongdoing. But for many, fear deepened that the company they have taken great pride in, an epitome of Korean export prowess, along with the embrace of global standards of corporate responsibility, is still hostage to what critics call a “culture of corruption.”
Twenty years ago, the chairman, Lee Kun-hee, 65, took over Samsung from his father, the founder, Lee Byung-chull. A recluse with a premature stoop but a visionary among chief executives, he has transformed Samsung from a cheap imitator of Japanese electronics into an empire that gives Sony, Nokia and Philips a good run for their money, marketing cellphones, computers and television sets.
Samsung held no celebration for the anniversary. In addition to the bribery scandal, there was another cloud: Mr. Lee’s ambitious plans to pass the torch to his son and heir, Jae Yong, now under the scrutiny of prosecutors and the public.
“Samsung is the spine of the economy,” said Na Seong-lin, an economist at Hanyang University in Seoul. “If it shakes, the economy shakes. If Samsung does something, it becomes the standard. But it never cast off the old vices of chaebol. It’s not free from corruption.”
Samsung is the largest of the chaebol, family-controlled conglomerates that were created during the country’s military rule as engines of its growth. They still dominate the economy here, listed in 2006 as the 13th largest in the world by the World Bank.
With 59 affiliates and 250,000 employees globally, Samsung generated sales of $160 billion in 2006, more than a fifth of the gross domestic product. Millions more, like Mr. Choi, depend on Samsung for their livelihood.
Mr. Choi’s Green C& C Tech factory is nestled on a small roadside hill in Hwasung, south of Seoul. Around it, a new bedroom community is going up, many of its apartment complexes emblazoned with a coveted brand name among home buyers: Samsung.
Inside the two-story factory, 100 workers use machines built by Samsung Techwin, another subsidiary, to make components that light up lamps behind flat-panel screens.
About 70 percent of Green C& C Tech’s 12 billion won, or $13 million, in sales last year came from parts shipped to Samsung.
Lee Ji-soon, an economist at Seoul National University, noted an overall trend toward reform of the conglomerates, but foresaw “scandals waiting to happen” as long as “companies find it hard to do business without currying favors with those with power.”
Heavy-handed bureaucrats, inconsistent prosecution, regulations based less on reality and more on momentary political considerations and a lack of legal lobbying — all this leads business executives to resort to bribery as protection, Mr. Lee and Mr. Coy ner of Soft Landing Korea said.
“No matter what problems it might have, Samsung is still the cleanest and most competitive company we can depend on in this time of economic uncertainty,” Mr. Choi said. “If we hurt Samsung too much, we will make the mistake of burning down our house to kill bedbugs.”
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