Business
Major firms withdrawing from MRO business
Published : Aug 8, 2011 - 19:16
Updated : Aug 8, 2011 - 19:16
Amid rising criticism over an oligopoly in the market, Korea’s large businesses are to keep their hands off affiliates in charge of sourcing spare parts, stationery and repair services for office equipment.

SK Group became the latest conglomerate on Sunday to step back from its lucrative procurement service unit, MRO Korea, by transforming it into the country’s largest social enterprise.

The company, which procures maintenance, repair and operation supplies, was set up in 2000. SK Networks, the group’s trading arm, holds a 51-percent stake and U.S.-based Grainger International the remainder. Sales reached 102.4 billion won ($95.9 million) last year.

The envisioned social enterprise will spend two-thirds of profits on social purposes and hire more than 30 percent of its workforce from the underprivileged, SK said. But the firm will continue its services for the group.

“The social enterprise will create a new model of cooperation between large industrial groups and their smaller partners for mutual growth,” SK said in a statement.

Last week, Samsung Group announced a plan to dispose of its 58.7 percent share in iMarketKorea, an MRO firm it launched in 2000.

Korea’s top family-owned chaebol said its decision was made “to respond to society’s call for support for small- and mid-sized companies.”

Such decisions came in the wake of mounting criticism that the giant players erode the growth of smaller MRO firms and disable competition by giving all orders to their subsidiaries.

In the early 2000s, many business groups including LG, SK and POSCO set up MRO firms to ready materials at any time without wasting time and money.

But controversy flared when it was revealed that chaebol owners have used MRO affiliates to dodge taxes and amass wealth within their families, as many of the firms are operated by their children or relatives.

LG’s ServeOne is the front runner, fetching nearly 3.85 trillion won in sales last year, followed iMarket Korea with 1.55 trillion won, POSCO’s eNtoB with 603.6 billion won, Kolon Group’s Korea ePlatform with 464 billion won.

In efforts to stave off some groups’ shady practices, the government has been seeking to levy inheritance and gift taxes on the wealth transferred via intra-group transactions. It plans to revise related laws as early as this month to be implemented next year.

In response to public criticism, Hanwha Group withdrew from Hanwha S&C in July.

But others are maintaining a wait-and-see stance. LG Group says it will “follow the direction society takes as a discussion is underway from a number of different angles.”

POSCO stressed that eNtoB, its MRO company, does not make much profits given its operating profit margin hovers between 0.2 percent and 0.4 percent. The steelmaker holds a 64-percent stake.

“It’s a win-win situation as eNtoB helps POSCO simplify procurement processes and insure product quality, while its smaller partners secure stable clients,” a company official said last week.

But some skeptics say the conglomerates’ retreatment will have limited impact because the distribution network is already distorted and embraces ruthless practices by the major MROs including forcing price cuts for supplies.

“It wouldn’t make much difference because the MRO giants will continue to work with large companies using their extensive retail networks,” an industry official said. “They’ve already established a multi-layer structure in the market, in which SMEs on the bottom tier can never move up the ladder.”

By Shin Hyon-hee (heeshin@heraldcorp.com)
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