Korea considers banning corporate affiliates from public projects


The government is considering banning system integration companies affiliated with conglomerates from competing for public sector SI projects for fear of stamping out the smaller players, the Ministry of Knowledge Economy said on Thursday.

The move comes amid criticism that these companies receive “perks” from their conglomerate parent companies because they are usually offered more projects compared to their smaller rivals with no such ties.

The perks are being seen to trigger dumping in the industry, thereby causing the smaller SI companies to suffer because they are unable to match the cheap bidding prices offered by the conglomerate-affiliated firms, causing them to suffer and possibly even go out of business, industry sources said.

The government also said in addition to the ban, it is considering tightening the current rules limiting the participation of conglomerate-affiliated SI companies that have track records of receiving large volumes of SI project orders from their parent firms or other sister firms.

Under the current regulations, SI companies with 800 billion won ($745 million) or more in annual sales are forbidden from competing in public sector SI projects worth 4 billion won or less.

To tighten the rules, the government is considering raising the ceiling so that companies with such annual sales and half or more of their projects come from their parent companies will not be able to participate in projects worth 6 billion won or less.

The bigger SI companies also will not be allowed to compete in the market for smaller SI businesses through their affiliates.

Ahn Cheol-soo, renowned IT guru and dean of Seoul National University’s Graduate School of Convergence Science and Technology, recently said that the current downturn in the software market is partially owing to this structure where conglomerates and their affiliated SI companies dominate the market and smaller subcontractors.

“This is leading to problems in the software business, causing it to decline and depend on the larger companies as they are unable to get the big projects, and also because their contractors, the conglomerates, usually try to dump the costs on the smaller subcontractors,” he said.

The government said it was aware of such problems, but to help phase in the new regulations with minimized impact on the larger SI companies, the ministry said it would allow a grace period.

Almost two-thirds of domestic SI companies are reportedly relying on project orders from their conglomerate parents to in turn use those profits to cut their bidding prices in the public SI market.

By Kim Ji-hyun (jemmie@heraldcorp.com)