In chapter 3, we discussed how chaebols create synergies between different lines of business. Chaebols also use vertical integration extensively. This chapter will examine the scope of vertical integration in the chaebols and discuss the performance implications of their using it. It shows how vertical integration, which was necessitated by the absence of domestic supporting industries during the economic planning periods, turned inefficient and why chaebols ended up subsidizing unprofitable affiliates.

THE SCOPE OF CHAEBOLS' VERTICAL INTEGRATION

Vertical integration means an internal transfer of goods and services within a firm. In this book, we measure the extent of chaebols' vertical integration by dividing their intragroup sales volume by their total revenue. By doing so, we measure the extent of vertical integration among group affiliates. This measure does not reflect the vertical integration within an affiliate. Table 1.1 manifests percentages of intragroup sales of top thirty chaebols. Anam Group showed the highest level of vertical integration, chalking up 55.9% of intragroup transaction, while Dong Ah Group, which specialized in overseas construction, showed the lowest level of vertical integration. The top five chaebols were 20% to 30% integrated (Hyundai 31%, Samsung 28%, LG 23%, Daewoo 36%, SK 21%). Simple averages, however, can disguise the extent of vertical integration in affiliates. Individual affiliates, which supply parts to chaebols' core manufacturing companies in distinct industries (e.g., chemical and electronics affiliates), usually have a higher volume of the intra-group transactions.