hankyoreh

Hyundai Glovis

By Lee Jeong-hun, Lee Wan and Lee Seung-jun, staff reporters

Amid calls for economic democracy, more attention is being paid to the plans of Samsung SDS and Hyundai Glovis to expand their operations in the area of logistics. Both of the two companies are starting to look more and more like logistics companies. While one assessment is that they are creating a new kind of business, the actions are also being criticized as just another form of work funneling.

Most notable is the fact that the main investors in both of these companies are the heirs apparent to their respective groups: vice chairman of Samsung Electronics Lee Jae-yong and vice chairman of Hyundai Motor Chung Eui-sun.

On Jan. 13, the Hankyoreh acquired Samsung SDS’s 2013 Air Freight Bid Proposal, which indicates that Samsung SDS is gaining a monopoly over the logistics work for companies in the group including Samsung Electronics, Samsung Display, and Samsung SDI. The scope of logistics operations spans the entire globe, covering Europe, the Americas, Southeast Asia, the Middle East, and Africa.

Until recently, Samsung Electronics had been making direct contracts with logistics companies, but starting this year Samsung SDS is pushing the other companies out of the way. Logistics work inside Korea is still handled by Samsung Electronics Logitech, but all of the overseas shipping is being handled by Samsung SDS.

“Starting this year, we have taken over the logistics for Samsung Display and Samsung SDI, which are closely related to Samsung Electronics in terms of the parts supply system,” a source from Samsung SDS said. “We are planning to expand our operations to cover not only air freight but also ground and ocean transportation as well.”

All of this is predicted to substantially increase the revenues for Samsung SDS. “Generally the logistics cost amounts to 7-8% of revenue,” said Lim Jae-guk, research fellow with the Distribution and Logistics Center at the Korea Chamber of Commerce and Industry. “Considering the fact that Samsung Electronics’ revenue last year was 201 trillion won (US$189.31 billion), we can expect that Samsung SDS’s revenue will expand to 14-16 trillion won (US$13.25-15.14 billion) a year.”

Recently, Hyundai Glovis inked a crude oil supply deal with Hyundai Oilbank, a subsidiary of Hyundai Heavy Industry Group, part of the larger Hyundai family. The scale of the deal is 1.1 trillion won (US$1.04 billion) over the ten years starting in July 2013. The role of Hyundai Oilbank is to transport the crude oil from the Middle East to Korea. Through this deal, Hyundai Glovis has effectively secured a steady revenue stream worth more than 1 trillion won.

In exchange, Hyundai Glovis has placed an order for four oil tankers through Ship Fund (High Gold Ocean 11), which is operated by Hyundai Industrial Group’s HI Investment and Securities, yet another subsidiary in the Hyundai Heavy Industries group. “Hyundai Glovis first approached the Ship Fund, offering to transport the crude oil for the lowest possible price,” said a source from Hyundai Oilbank in regard to this deal. “I understand that the Ship Fund made a proposal to the shipping company and signed a contract with Hyundai Glovis.”

The main shareholder at Samsung SDS is Lee Jae-yong, vice chairman of Samsung Electronics, who controls 8.81% of the shares. Meanwhile, the primary shareholder at Hyundai Glovis is Hyundai Motor vice chairman Chung Eui-sun, with 31.88% of shares. Lee and Chung are heirs to the family fortunes of Samsung and Hyundai groups. In the end, as revenue at the two companies increases, it’s the primary shareholders who get the largest share of the profits.

But looking further ahead, as companies grow according to increasing revenues, they eventually reach an economy of scale that gives them the power to begin snatching logistics orders from other companies. In South Korea, the proportion of gross domestic product accounted for by national logistics costs is 11%, higher than the 7-8% found in the US or Japan.

In addition, global logistics corporations such as FedEx and DHL have not been able to make inroads in the market. This indicates just how much potential there is for logistics in Korea to function as a new engine for growth.

In particular, this also has the effect of helping Hyundai Glovis lower the proportion of internal deals, which were as high as 87% in 2011. With the Fair Trade Commission announcing that it will begin taxing companies’ internal deals, Hyundai Glovis’ logistics projects with Hyundai Oilbank will help the company lower the risk of taxation. This is because Hyundai Oilbank is legally part of a separate group, though it is still a member of the larger Hyundai group.

“Hyundai Motor Group has to extricate itself from circular equity investment, so it has no choice but to start building up Hyundai Glovis, in consideration of the structure of the succession,” one analyst said. “However, the company has already gotten as big as it can get through handling the logistics work of the other subsidiaries. To some extent, it’s possible to see this contract [with Hyundai Oilbank] as a component of Hyundai Glovis’s search for a new growth engine.”

With the situation as it is, logistics companies are starting to voice complaints. “All this time we have been making major investments in infrastructure in order to build our logistics business.” said a source from one such company. “Now we suddenly find ourselves in a position where we must either become a subcontractor for Samsung SDS or watch Hyundai Glovis rob us of our logistics contracts.”

“The government keeps saying that it will help support logistics companies, but if it lets one chaebol take care of all the logistics work, there is nowhere for the other companies to go.”

Please direct questions or comments to [english@hani.co.kr]