Fair Trade Commission files charges against Hankook Tire for 'unfair transactions'... 8 billion won fine imposed

Fair Trade Commission Files Criminal Complaint Against Hankook Tire... Imposes 8 Billion Won Fine
Subsidiary Inflated Costs... 15% Higher Than Competitors
Operating Profit Margin Nears 50%... 10.8 Billion Won Dividends Paid to Family of Chairman

On November 13 last year, officials from Hankook Tire were servicing participating vehicles at the '2021 Asia Economy Fuel Efficiency King Competition' held at the Korea Expressway Corporation Metropolitan Headquarters in Hanam-si, Gyeonggi Province. Photo by Dongju Yoon doso7@

[Asia Economy Sejong=Reporter Lee Junhyung] Hankook Tire has been fined over 8 billion KRW for unfair internal transactions and will face legal sanctions. The allegation is that it provided excessive benefits to the controlling family by unfairly supporting its parts affiliate.

On the 8th, the Fair Trade Commission announced that it imposed corrective orders and a fine of 8 billion KRW on Hankook Tire & Technology for unfair internal transactions and will file charges against Hankook Tire. Hankook Tire & Technology is accused of unfairly supporting its group affiliate, Hankook Precision Works, from February 2014 to December 2017. The Fair Trade Commission judged that the controlling family gained unfair profits amounting to 10.8 billion KRW in dividends and other benefits through such internal transactions.

The Fair Trade Commission found that Hankook Tire & Technology purchased tire molds from Hankook Precision Works at excessively high prices. Hankook Precision Works was acquired by Hankook Tire in 2011. Previously, in 2014, Hankook Tire established and implemented a new pricing policy that allowed Hankook Precision Works to achieve an annual sales profit margin of over 40%. Under this policy, Hankook Tire guaranteed 10% selling and administrative expenses and 15% profit on molds purchased from Hankook Precision Works, an unprecedented method not used in the industry or within the Hankook Tire group.

Additionally, Hankook Tire inflated the manufacturing cost by more than 30% during the mold price calculation process for Hankook Precision Works. Hankook Tire also implemented a policy where molds with large price increases under the new price list were mainly ordered from Hankook Precision Works, while molds with relatively smaller price increases were ordered from non-affiliated companies. According to the new price list, Hankook Tire procured molds from Hankook Precision Works at prices about 15% higher than competitors.

Equity stakes owned by the business group 'Hankook Tire'.
[Photo by Korea Fair Trade Commission]

Thanks to Hankook Tire's unfair support, Hankook Precision Works' performance soared. In 2014, when Hankook Tire began inflating mold costs, Hankook Precision Works' sales reached 20.8 billion KRW with a sales profit margin of 47.1%. From February 2014 to December 2017, when the new pricing policy was applied, Hankook Precision Works recorded an average sales profit margin of 42.2%, which was 12.6 percentage points higher than competitors.

The success of Hankook Precision Works led to a 'dividend party' for the controlling family. From 2016 to 2017, Hankook Precision Works paid a total of 10.8 billion KRW in dividends to Cho Hyunbeom, chairman of Hankook & Company Group and second-generation controlling family member, and Cho Hyunsik, advisor to Hankook & Company. This was a result of significantly improved performance, including an increase in Hankook Precision Works' domestic mold market share from 43.1% in 2014 to 55.8% in 2017, a rise of 12.7 percentage points.

The Fair Trade Commission viewed that Hankook Tire provided excessive benefits to the controlling family by unfairly supporting its affiliates under the pretext of vertical integration. A Fair Trade Commission official said, "We thoroughly investigated Hankook Tire's pricing method and proved that it used methods such as overestimating costs as a means to preserve affiliate profits," adding, "We will continuously monitor acts that unfairly benefit related parties and strictly respond to violations."