The recent trade dispute between South Korea and Japan has made the Korean economy more unstable. In response, Park Young-sun, Minister of Small and Medium Enterprises (SMEs) and Startups, discussed ways to create an ecosystem of divisional cooperation between large and small businesses for localization of materials, components and equipment.
Minister Park said, “The latest case of export regulations by Japan shows how easily a global value chain could collapse if certain countries play greedy, and we will strive for cooperation between small and large companies to localize parts and materials in the future.” Minister Park’s interview brought the spotlight back on SMEs, which were suffering from their darkest hours after their prime in industrial age, as they were neglected by young people and large corporations. The Argus looks into the problems and causes that small businesses are facing and find ways to solve them.
Phenomenon 1. Difficulty in securing human resources
In South Korea, you can frequently overhear people say things like “I’ve been living as a job seeker for years, us to get a job in a big corporation,” or “Your friend got a job in a major company! But what have you been doing unemployed!” As such, getting a job at a large corporation is a symbol of success in our country. Indeed, this is evidenced by statistics. According to a survey conducted by the Korea Small Business Institute in 2017, the average monthly wage gap between Korean conglomerates and smaller businesses, including welfare costs, remains wide at 3.6 million and 2,000 won (US$ 3,017.68). Kim Hye-rin, a consultant at HUFS’ career center, said, “When I consulted with students about finding a job, students tended to more highly prioritize getting a job at large companies and public companies to SMEs. Kim Dong-chul, who runs a SME specializing in waste disposal, also said, “These days, young students prefer large companies that can provide a good environment at work like high wages and good corporate welfare systems. As a result, preference for SMEs has naturally fallen, and there are unusual cases happening where even if a company has capital to invest in their business, it is difficult to start a business because there is no one to develop the technology,” he said.
Phenomenon 2. Difficulties in the licensing process
No matter how wide the gap is between SMEs and conglomerates, that does not mean that they can avoid competition among companies. Therefore, it is inevitable to build new factories or expand them in order not to fall behind the competition. However, it is not an easy thing to do. Instead of simply setting a site and starting construction, we should check things like where in the city it is built, and how much the construction will affect the traffic conditions nearby. Then after confirmation, construction can begin only after visiting various state agencies and obtaining approval. It is so difficult that it can be a major headache for companies.
Although the process has been simplified overall compared to the previous 11-month licensing period, it is still a difficult to complete the construction within a year from when the construction permit was granted. In addition, if construction is miscarried, it can deal a serious economic blow to SMEs that do not have diverse sources of income. CEO Kim said, “Currently, the factory licensing system in South Korea is very difficult for companies. In order to build factories, SMEs have to go through seven departments, such as urban planning and environment. In the licensing process, a company should invest great capital. Thus, conglomerates have to operate the factory and produce products as soon as possible to recoup their invested capital. However, with the current system, companies are forced to bear the damage in the licensing process.”
Phenomenon 3. Skills taken by large companies
We are living in an excessively competitive society. As a result, there are companies that violate ethics in order to gain a foothold in the competitive society. There are conglomerates that want to use the technology of the weak exclusively as if it were their own to gain the upper hand over the competition. According to the Ministry of SMEs and Startups (MSS), the number of SMEs that reported having experienced technology leaks at the hands of conglomerates totaled 527 over the five-year period from 2012 to 2016. The total amount of damage reported was 306.36 billion won (US$ 257.81 million), with an average of 581 million won (US$ 488,892.63) reported for each small business. There are many victims who claim to have suffered such damage, but the number of cases of technology extortion that led to actual punishment (such as implementation of fines) was only two in 2015 by LG Chem and 2018 by Doosan Infracore. Also, most of them are not mandatory even when the SME Technology Dispute Coordination and Arbitration Commission ruled on the victim’s side or most of the cases were closed due to lack of evidences. Therefore, conglomerates do not carry out their rulings. In fact, the Korean Intellectual Property Office judged that Hyundai Motors had stolen the idea of taking away the odor through BJC’s microorganisms and recommended that the company to pay for damages to BJC. However, Hyundai Motors disregarded the ruling, so BJC received no financial compensation.
Cause 1. The Problem of gap between big businesses
It is “welfare” that draws as much attention as wages to jobseekers these days. Consultant Kim said, “When we talk to students about getting jobs these days, many students consider economic factors and they also consider other factors like corporate welfare.” In fact, many SMEs had poor working conditions and welfare systems in the past. In 2012, 50 percent of the nation’s top 100 companies implemented an optional welfare system, according to an index by Statistics Korea. For example, Samsung offers various welfare programs such as special discounts when purchasing in-house products and education fees for employee’s children. However, the need for improvement in the welfare of small businesses was pointed out since only about 18 percent of them used selective welfare services. Not only the size of employees compared to large businesses was significantly smaller, due to problems with realistic welfare costs. However, according to a survey released by the Ministry of Employment and Labor on “2018 Corporate Labor Costs,” the indirect labor costs, representing welfare costs, accounted for only half of large companies, and welfare was only 43 percent larger than those of large companies. As such, welfare remains a thorny issue for small and medium enterprises.
Cause 2. Difficult work due to differences in company size
One can think that the licensing process is not just a problem for SMEs because of a process that all companies have to go through. Of course, it is true that companies have to go through a hard licensing process. However, large companies are so big that they have departments to divide and handle complex paperwork. In addition, the failure of certain construction projects and the repetition of the same procedure will not deal a serious blow to conglomerates headquarters. They will minimize the economic damage inflicted on the company through various sources of revenue, including subsidiaries in other industries. Unfortunately for SMEs, however, they are not in the same position as big businesses. CEO Kim said, “Our positions are clearly different from large companies. SMEs are smaller than conglomerates, so there are few departments that can specialize license procedures. Also, since delays in the process can deal a serious economic blow, the costs and time are heavily spent on the process and all departments have to put forth their very best. In contrast, conglomerates are enormous in size, allowing various departments to specialize each part of the process and complete the licensing process much easier than us,” he said.
Cause 3. SMEs’ dependent structure on large enterprises
Not all SMEs are not taking action against the tyranny of big businesses. Some companies have engaged in legal battles about their unfairness even if it is like bringing a knife to a gunfight, and many are borrowing the power of litigation groups specializing in related industries called patent trolls. However, many companies have been forced to shut their mouths. According to the 2017 SME Survey, 41.9 percent of SME manufacturers provide parts for conglomerates, and 81.4 percent of their sales depend on the delivery of parts to large companies. In other words, it is the SME side of things for which cooperation between large and small businesses is desperately needed, and that has settled relationship between subordinates and superior.
Maeng Sung-ryul, professor of the Department of Electrical and Electronic Engineering at Wooseok University said, “Large companies demand technical data like blueprints, mainly in the name of promising to guarantee years of delivery to SMEs or giving an excuse that they need it to experiment with their own technology. But large companies naturally take the technology away by handing it over to their subsidiaries or working with other companies (such as universities) to patent it just like they have developed it.” He also said, “However, even if SMEs were unjustly robbed by big corporates, they avoid suing because they fear getting out of business with any other company in the industry, which would make it difficult to maintain the company. Also, if they get into a legal battle, it is unlikely for them to win against ―a well-established conglomerates’ legal team. Even if they win, they just get a compensation less than a tenth of the actual damage because it is impossible to generate profits with the relevant technologies during the litigation period.”
Solution 1. Welfare is not just for big businesses
Now, the government is also moving to improve the welfare of SMEs, which has long been pointed out as far short of large companies. In neighboring country Japan’s private sector, the government and local government joined hands together to narrow the welfare gap between small and large companies. According to a report by MSS which visited Japan in June, Japan is supporting the welfare of SMEs, focusing on 340 “SME Workers’ Welfare Centers” nationwide. The center was set up by the central and private sector together. In 1994, the SME Workers Welfare Center established the “National SME Workers Welfare Center,” which serves as the hub of regional centers. The center began providing corporate welfare services linking all parts of Japan with the aim of gathering and efficiently providing welfare needs of various companies.
Currently, the central government’s support has grown to the point of discontinuing the program, and it is operated through its own income and support from local governments, such as membership fees and membership fees of 2,000 won (US$ 1.68) to 3,000 won (US$ 253). It is offering discounts on the condition of signing contracts with hotel chains and amusement parks, which are available to workers at small and medium-sized companies at low prices. In addition, SMEs that have joined the center on regional networks are offered with mutual discounts. Restaurants that have joined the center will receive a certain discount if their members visit. Through such networks, members can expand the benefits they can enjoy, and local SMEs, which offer discounts along small business owners also have the effect of enjoying marketing effects Minister Park said, “We will improve SME’s welfare by benchmarking the success story of Japan. Our goal is reducing the welfare gap between SMEs and large enterprises nationwide.”
There are also companies that specialize in systems that can help small and medium-sized companies establish advanced welfare methods. In a bid to shed the poor welfare image of SMEs, Easywell Fair, the nation’s largest welfare service provider, has developed a welfare system called “Weltree.” Weltree is a system that helps SMEs operate their in-house welfare systems more easily based on a dedicated system which can choose a service for themselves among various welfare service sectors, including education and medical care by consuming welfare points for it. It is an advanced welfare system, also called a “cafeteria welfare service.” As such, efforts to improve welfare are continuing so that they do not fall behind in competition with large companies.
Solution 2. The answer to simple procedures is one-stop service
In fact, there are ways to avoid having to set up such a “stamping expedition” to expand or build new factories. The answer is one-stop service. For instance, Ireland is one of the nations with great national development through one-stop service. Ireland’s Industrial Development Agency (IDA) is an agency dedicated to foreign companies and has 24 offices to arrange foreign investment in the country. Foreign companies that decide to enter the market are provided with services like factory sites, location selection, and joint support. It also provides consulting and other follow-up management for companies that have already joined on previously. In short, IDA has established a system that can handle all services related to attracting foreign companies in one place.
Like this, one-stop service can be used not only to welcome foreign companies, but also a way to boost SMEs in the domestic market. It can easily handle issues from licensing factory construction. In fact, Cheonan City Hall received simultaneous applications for factory construction and factory founding, initially since the reorganization of the organization on July 23 of last year. They implemented a “one-stop licensing” policy to allow quick factory licensing. Kyung Yeong-mi, head of the corporate licensing team at Cheonan City Hall said, “The previous method required permission separately because the department in charge of factory licensing and the department in charge of building licensing permission were divided. However, Cheonan City, where the two departments are combined, has implemented a one-stop service that resolves the licensing issue in one place, which used to take 60 days because it took about 15 to 30 days when receiving documents related to factory founding and seven to 30 days for building permission, but now it only takes 15 to 30 days for the entire process, which greatly helps the operators.”
Solution 3. A new shield for small businesses is exemplary damages.
The reason why small businesses’ technologies are robbed by large companies is because there is no law that can compensate small businesses through substantial punishment. As mentioned earlier, the Korea Intellectual Property Office ruled that the use of microorganisms should be suspended and Hyundai Motors should pay BJC compensation as punishment for stealing the microorganism idea from BJC. Although the Korean Intellectual Property Office sided with BJC, they could not receive any compensation because there was no forcibleness in the ruling. On the other hand, exemplary damages and a discovery system are being implemented in foreign countries to prevent such technology from being stolen. The exemplary damages are a way of preventing such crimes from occurring in the future by imposing damages or fines far greater than the profits the company earned through illegal activities. There is also a discovery system aimed at guaranteeing the right of individual plaintiffs to secure evidence in fact-checking and evidence-gathering procedures.
There was a precedent in such cases in the United States. The U.S. court ordered XTAL, a semiconductor company, to pay US$845 million for stealing software technology from ASML, a Dutch semiconductor stepper maker. On ASML’s website, ASML explicated all five charges filed by a jury at the U.S. High Court Santa Clara against XTAL for stealing its software technology, along with the exemplary damages ruling. The ruling dealt a devastating blow to XTAL, causing them to file for bankruptcy, as it paid far more compensation than the profits it had gained with the stolen technology.
In order to prevent such continued damage to technology developed by SMEs, the exemplary damages ruling was introduced in July this year. After long discussions, the National Assembly implemented a law which request paying compensation up to three times the amount earned by companies that stole the technology. Many people, however, say that the punishment is too weak to block technology theft at the source, and that a change is needed. As a result, at the 2019 SME Technology Protection Conference, Kim Min-ju, a lawyer at Eden Law Firm, announced the idea of the Korean-style Discovery system as a plan to rescue companies affected by the technology takeover. Lawyer Kim said, “The Discovery system is a system of launching evidence that allows the court to impose strong sanctions on victims if they request necessary evidence from the other side. The introduction of a legal-fitting Korean-style Discovery system in South Korea will ease the difficulty for companies filing lawsuits in the U.S., where the Discovery system is located, and ease the relief of victims along with the upgraded 10-fold exemplary damages,” she said. It will finally be a good shield for companies affected by technology takeovers if such a system gets implemented.
The response of job seekers like “SMEs are not my goal,” reflects the current status of small businesses. Like this response shows, SMEs are rated inferior in comparison with large companies. But SMEs are trying and developing to contend with the difficulties they face in order to keep up with the competition. If this pace for improving SMEs keeps up, SMEs can be the hidden champions that can beat big corporations soon enough.
By Yoo Chan-heum
Staff Reporter of Global & National Section