Subsidiaries of Large Corporations Increase by 993 Over 5 Years... Sometimes Poisoning Performance [The Trap of Overexpansion]

②Subsidiary Performance Slump Shakes Entire Group
Rapid Increase in Large Conglomerate Affiliates Over 5 Years
SK Sets New Record with Over 200 Subsidiaries

Editor's NoteThe number of subsidiaries under major domestic conglomerates has increased by nearly 1,000 over the past five years. Amid intense controversy over sprawling expansion centered on Kakao since last year, concerns over the profitability and financial soundness of group companies have grown. As global conglomerates also face increasing cases of being split up or collapsing entirely due to indiscriminate sprawling expansion, caution is rising. This article examines the actual state of conglomerates' sprawling expansion amid the tension between entering new industries and the controversy over overexpansion.

The city center viewed from Namsan, Seoul on the 26th. Photo by Jinhyung Kang aymsdream@

The number of subsidiaries under South Korean conglomerates exceeded 3,000 for the first time last year. While this is a result of diversification efforts in response to an unstable global business environment, the side effects of sprawling business expansion are significant. Some conglomerates have subsidiaries whose losses are severe enough to shake the entire group's performance, leading to calls for restraint on excessive business expansion and the need to streamline low-profit subsidiaries.

Number of Conglomerates Increased by 22 in 5 Years... Subsidiaries Surged by 993

As of May last year, according to the Fair Trade Commission's Corporate Group Portal, the number of conglomerates (publicly disclosed corporate groups) was 82, with 3,076 subsidiaries. Over the past five years since 2018, the number of conglomerates increased from 60 to 82, a rise of 22, while the number of subsidiaries surged from 2,083 to 3,076, an increase of 993. The Fair Trade Commission, which announces conglomerate data annually, is scheduled to release the newly adjusted designation results on the 1st of next month.

Among conglomerates, SK has rapidly increased its number of subsidiaries in recent years, growing its size. The number of SK subsidiaries rose from 101 in 2018 to 208 last year, more than doubling in five years. This is the first time a conglomerate's subsidiary count has exceeded 200 since the conglomerate designation system was introduced in 1987. Kakao, which faced heavy criticism for sprawling business expansion last year, saw its subsidiaries increase from 72 in 2018 to 175 last year, a 2.4-fold surge.

The main industries newly entered by conglomerates through subsidiary establishment or acquisition have concentrated on sectors with high profitability in recent years, such as real estate and construction. According to an analysis by the corporate analysis firm Leaders Index of 2,177 subsidiaries of the top 50 asset-based groups from 2013 to last year, the most entered industry was real estate rental (310 companies), followed by construction (292), distribution (285), energy (233), services (201), content and entertainment (181), and manufacturing (179).

Half of the Top 30 Groups Expanding Subsidiaries

On the 27th, an employee is working overtime at the Samsung Seocho Building in Seocho-gu, Seoul. Photo by Jinhyung Kang aymsdream@

According to the Fair Trade Commission's Corporate Group Portal, half of the top 30 conglomerates expanded their number of subsidiaries last year. Despite overlapping domestic and international challenges such as recession concerns and prolonged wars in Ukraine and the Middle East, conglomerates actively pursued entry into new businesses to prepare for the future. Those that increased their subsidiaries compared to the previous year include Lotte (13), SK (12), Kakao (11), Hanwha (5), Hyundai Department Store (5), POSCO (4), Samsung (3), Hyundai Motor (3), GS (2), Youngpoong (2), Nonghyup (1), Hanjin (1), LS (1), HDC (1), and HMM (1), totaling 15 companies. Conversely, those with decreased subsidiaries include LG (-10), CJ (-9), Kumho Asiana (-7), HD Hyundai (-4), Harim (-5), Mirae Asset (-4), Naver (-3), Jungheung Construction (-3), Samra Midas (SM, -2), Shinsegae (-1), and DL (-1), totaling 11 companies. KT, Doosan, Booyoung, and S-oil maintained the same number of subsidiaries.

Subsidiary Performance Slumps Shaking Headquarters

On the 26th, SK headquarters in Namsan, Seoul. Photo by Jinhyung Kang aymsdream@

Many conglomerates have subsidiaries in real estate and construction unrelated to their core businesses, so the concerns over real estate project financing (PF) defaults that began in the second half of last year have directly shaken the overall group performance. The slump in subsidiary performance, triggered by the downturn in the real estate and construction sectors, has disrupted the entire group's performance and strategy.

LF Group, which focuses on the fashion business, reported consolidated sales of 1.9007 trillion KRW last year, down 3.45% from the previous year, and operating profit fell 66.38% to 66.2 billion KRW. The significant impact was due to the operating profit of its subsidiary Koramco Asset Trust dropping 90.6% year-on-year to 8.5 billion KRW amid the fallout from real estate project financing (PF) defaults. In 2022, when the real estate market was hot, Koramco Asset Trust's operating profit was 90.6 billion KRW, accounting for nearly half of LF Group's total operating profit (185.2 billion KRW).

Emart, a core company of Shinsegae Group, recorded its first-ever deficit due to massive losses at its subsidiary Shinsegae Construction. Emart posted a consolidated operating loss of 46.9 billion KRW last year, turning to a deficit, with a net loss reaching 187.5 billion KRW. This was due to Shinsegae Construction's operating loss of 187.8 billion KRW last year.

SK, which has the largest number of subsidiaries among conglomerates, saw its holding company's accumulated deficit grow due to frequent mergers and acquisitions (M&A) and increased management costs of rapidly growing subsidiaries. SK's holding company reported a consolidated operating profit of 5.0563 trillion KRW last year, down 39%, and a net loss of 406.3 billion KRW. Interest payments alone amounted to 3.3086 trillion KRW, a 54% increase from the previous year, due to financial costs incurred by over 200 subsidiaries.

Kakao, which faced intense criticism for sprawling expansion, recorded a net loss of 1.8166 trillion KRW due to massive costs incurred from M&A. The impairment loss on goodwill, which refers to the premium paid over the net asset value of acquired companies during acquisitions or mergers, amounted to 1.4833 trillion KRW, as the acquisition costs far exceeded the corporate value.