Even Global Giants Fell Victim... GE's Split and Hengda's Collapse [The Trap of Overexpansion]

③GE Split into Three After 130 Years
Controversy Over Evergrande Spreads to Audit Firms
Toshiba Faces Massive Layoffs Following Delisting

Editor's NoteThe number of subsidiaries under major domestic conglomerates has increased by nearly 1,000 over the past five years, raising concerns about the deterioration of profitability and financial soundness among group companies, especially centered around Kakao, which has faced intense criticism for overexpansion since last year. As global conglomerates also face increasing cases of being split up or collapsing entirely due to indiscriminate overexpansion, caution is growing. We examined the actual state of conglomerates' overexpansion amid the tension between entering new industries and overexpansion controversies.

Since last year, as inflation and economic uncertainty have risen worldwide, cases of global conglomerates that pursued overexpansion collapsing have emerged in various places. The original overexpansion company, the U.S. General Electric (GE), was split into three companies after 130 years, and Evergrande, which symbolized the myth of invincibility and boasted endless business expansion, eventually went bankrupt and was ordered to be liquidated. Toshiba of Japan, which once dominated almost all electronics markets, was delisted after 74 years due to deteriorating profitability. As globally renowned brands have fallen one after another, voices warning against indiscriminate expansion are growing louder.

The Original Overexpansion Company Split into Three After 130 Years

[Image source=Reuters Yonhap News]

The GE split process, which began in November last year, was completed on the 2nd of this month. GE was divided into three companies: GE Healthcare, GE Aerospace, and GE Vernova.

GE originally started as an electric lighting company founded by the inventor Thomas Edison in 1878 and was newly established through a merger in 1892 as a home appliance company. Since then, it expanded into various fields including home appliances, medical devices, aircraft and automobile engines, nuclear power plants and power facilities, and finance. Through overexpansion, it succeeded in growing into a 'giant' and became a representative American company.

The trigger for GE's management crisis was the massive losses and accounting fraud allegations that surfaced in January 2018. GE reported a loss of $9.83 billion (about 10.5 trillion KRW) in Q4 2017, of which $6.2 billion was from GE Capital. Subsequently, profitability worsened, and by the end of 2018, debt exceeded $120 billion. GE was also removed from the Dow Jones Industrial Average, where it had been listed for over 100 years since 1907. In 2018, then-CEO Larry Culp launched a large-scale restructuring to reduce debt, pushing for spin-offs or sales of many business units.

CNN analyzed GE's overexpansion by stating, "GE was a general store providing almost everything for American households," adding, "It even ventured into subprime mortgages (low-quality home loans)."

The Myth of Evergrande's Invincibility Shattered... Audit Firm Also Caught in Controversy

[Image source=AFP Yonhap News]

China's mega real estate developer Evergrande is currently undergoing liquidation after being fined astronomical amounts for accounting fraud last month.

Evergrande defaulted in December 2021 by failing to repay $22.7 billion in offshore bonds. In January this year, the Hong Kong High Court ordered liquidation after determining that Evergrande had no ability to repay or restructure its total debt of $328 billion. Last month, Evergrande was fined 4.18 billion yuan (about 680 million USD) by the China Securities Regulatory Commission for accounting fraud amounting to 564 billion yuan (about 104 trillion KRW). This controversy also engulfed PricewaterhouseCoopers (PwC), which had audited Evergrande's accounts for over 10 years.

Before bankruptcy, Evergrande was a symbol of invincibility in China, living up to its name. Founded in 1996, Evergrande Group was the largest construction company in China by asset size until 2020 and showed aggressive expansion. Following its core Evergrande Real Estate and property management company Evergrande Property Services, it expanded into finance and new technology sectors with Evergrande Life, Evergrande Auto, Evergrande Healthcare, and Evergrande High-Tech. It also entered seemingly profitable fields indiscriminately, such as Evergrande Children's World and the food and beverage company Evergrande Bingqian.

Toshiba's 150-Year Tradition Collapses... Delisting Followed by 5,000 Job Cuts

[Image source=AFP Yonhap News]

Japan's representative electronics company Toshiba is seeking a breakthrough for revival by announcing large-scale restructuring after the delisting decision at the end of last year. Toshiba announced plans to cut 5,000 employees in Japan this month. Toshiba employs about 67,000 people in Japan. The announcement of Toshiba's large-scale layoffs has caused significant tension in related industries.

Founded in 1875, Toshiba symbolized innovation during Japan's economic boom in the 1980s and 1990s. Toshiba developed the world's first flash memory in 1980 and launched the world's first laptop in 1985. Based on its advanced technology, it ventured into fields such as artificial intelligence (AI), quantum computing, and nuclear power. However, indiscriminate expansion continuously worsened its financial soundness. The crisis deepened in 2015 when an accounting scandal broke out.

In 2015, it was revealed that Toshiba had inflated profits by 156.2 billion yen (about 1.39 trillion KRW) over seven years. Subsequently, it was fined 7.37 billion yen (about 66.59 billion KRW), the largest fine in Japanese history. Market trust plummeted, and it was further hit by massive losses at its U.S. nuclear power plant subsidiary, plunging it into severe management difficulties.

Ultimately, Toshiba was acquired by the private equity consortium Japan Industrial Partners (JIP) in September last year and was delisted after 74 years at the end of last year according to JIP's rehabilitation plan. Given the wide scope of its business expansion, large-scale restructuring is expected to continue across various sectors going forward.