Chaebol vs. The Microbrewer
Who controls the past, controls the future. Who controls the present, controls the past.
— George Orwell, 1984
On a chilly March night, I crossed the dock over the bobbing waters of the Han River and onto a river boat full of a Korean novelty: really good beer. As a band on board fiddled with their guitars while the sound guy checked the levels, and people made one last mad-dash for a bathroom before the boat pushed away from the dock, the first keg of what seemed an endless supply of beer was tapped. Boat cruises are standard practice on the Han River, but this excursion was sponsored by one of the only craft breweries in Korea, KaBrew, who also imports the Canadian ale, Alley Cat. Standing in line with my red cup, awaiting my first sip of real Pilsner since leaving the States eight months ago, I let out a sigh worthy of any Cheers barfly, “This is some fine maekju.” My command of the Korean language is limited, but like most expats, it includes “maekju,” the Korean word for beer. Taking a congenial crack at the watery beer made in Korea, a fellow foreigner beside me piped in with a joke tossed around Seoul’s expat community.“Maekju,” she said, “is actually a Korean delicacy.” The only beer in Korea, the joke goes, is imported.
For those with the mildest interest in good beer, it can be hard to reconcile the beverage marketed by a handful of Korean conglomerations as beer, with the actual centuries-old, alcoholic concoction of malt, hops, and water that people the world over know and love. Max, one of the corporate-controlled beer brands in Korea, markets its beer with the slogan, “a delicious idea.” For most beer here, that is as precise a moniker as one could give. Reminiscent of keg beer served to anyone with five bucks in grungy college houses, most Korean beer is, sip-by-skunky-sip, a reminder that better beer waits elsewhere in the world. Subtly countering the lackluster flavor offered by a few brewing giants with a monopoly on the domestic market, some resourceful homebrewers have started making their own beer. Good luck to thirsty individuals seeking this homebrew in bars and stores, however. The deck couldn’t be more stacked against those wishing to sell their craft beers. Beneath the glare of the ever-present branding and multimillion dollar operations of Korea’s beer tycoons, however, lies a small but rapidly growing movement of individuals passionately curious about brewing beer.
Necessity: The Mother of All Entrepreneurship
Among these enterprising people is Rob Titley. A man of few words, Titley is a Canadian citizen. He left his job as a civil engineer in Canada seven years ago to teach English in a public school in a Seoul suburb, and never left. In an industry where one-year contracts are the norm, and teachers usually stay for one or two of them before moving on, seven years of residence in South Korea makes Titley a veteran. About two and a half years ago, craving better beer, he commenced brewing his own. Today, he runs Homebrew Korea, an online forum and website for those interested in homebrewing. Titley isn’t out to make a profit, but to serve as a gathering space to aide the burgeoning community of brewers around Korea. “When I started homebrewing I never expected this to happen,” Titley said. “I don’t even know how people found [the site] and eventually I changed my blog into a forum and it’s really satisfying how I can help people out.” He’s currently preparing to host an event in June 2010.
In the outskirts of Seoul, competitors will come armed with their own creations made only from a single malt and a single hop, and ready to taste. For the aptly name SMaSH-Off (Single Malt and Single Hop), Titley has rented an entire bar for the small but sold-out event to accommodate a few dozen people, reflecting what Titley calls a “small, close-knit, word of mouth” community. To have built up such a strong circle around something so rare in a foreign country, “is awesome,” Titley said. “Brewing beer has become a passion, so if I can help people out then all the better.”
Titley is not alone. Many folks, in Titley’s words, “are definitely satisfying their need for good beer.” As Titley says, “If you can’t get it, you have to take it upon yourself to make it.” In addition to Homebrew Korea, there is a similar community on the Korean web portal, Daum. Titley says this portal has about 13,000 members, which certainly constitutes a scene, even if it is small in the context of a 22 million resident metropolis. “I can’t believe there are actually that many people brewing, I’ve been to some of their events and there’s maybe 50-100 people there,” Titley says, “but there’s definitely a scene there.” The Daum Cafe offers a similar service to Titley’s but is considerably less accessible to non-Korean speakers. The cafe’s proprietor, Daeyong Shin, is a local source on all things beer. He even wrote two books on the process, ingredients, and science of brewing beer in the Korean language. A Daum presence is a near requirement in Korea. As the country’s preferred search engine and social network, it would be nearly impossible to brew without consulting either Shin’s cafe or Titley’s site.
These sites provide community support, but not goods. Neither sell beer, equipment or any other materials, but two companies exist that together can provide any and all the resources necessary to brew in your home, even if it consists of one room in an office-tel apartment. One of these companies, Beerschool offers a discount to members of Titley’s site. The other, Goodbeer, not only sells ingredients and equipment but also offers a venue in which to brew. For just under $10, aspiring brewers can come to Kim Uk-yeon shop and prepare either all-grain or kit beers. Kim provides the water, stoves, and kettles (not to mention a consistently full drink to sip on and frequent snacks) needed to brew a 5 gallon batch. Customers can bring their own recipe, or create one with Kim’s advisement.
Kim emanates with a boyish excitement for all things, especially beer. Youthfully bobbing around his shop to analyze the consistency of a heating mash or bottle a new batch of beer, Kim is rarely still. When he’s not contemplating a beer recipe tending to brewing matters, he is soon tinkering with a drill or fixing a shelf, and constantly cooking. Kim’s expertise and passion for beer is surprising because, as he says, “most Korean people don’t know anything but the three major beers,” Cass, Max, and Hite. Their distribution is so ubiquitous that it is hard to imagine any other beer ever being popular, let alone existing. This is no market coincidence. There is a reason that residents and visitors rarely see any more than three beers on tap.
First, malt is immensely expensive, not because of a mark-up on the supplier’s end, but due to a nearly 275% Korean import tax on the grain. This tax brings Kim’s balance sheet to 5,000 won (roughly $5) per kilogram of his primary ingredient—a decent beer will have about five kilograms of malt per five gallon batch. Every five gallons of beer costs $25 in malt, at least another five dollars for enough hops to give your beer some bitterness (and that would be a somewhat weak beer), and $15 for yeast brings the grand total to $45 without the 5 or more gallons of water required to steep the mash, boil the hops, and cool the tank. A five gallon batch yields about 40 pints—the standard glass and bottle size. The total cost of this batch is already more than $1 a glass before it’s kegged and bottled. Kim includes the cost of using his kegs in the $10 paid up front, but plastic bottles will cost another $10 (glass bottles run between $45 and $55 a set), and caps $1.50. Even if Kim could sell his beer to the masses, even the weakest of beers would cost his customers more than a 1.75 liter bottle of Cass, Hite, or Max if Kim is to turn any kind of profit.
Another blockade to bringing better beer to the masses is the legal structure in place for establishing a brewery. According to Kim, if he wanted to turn his shop into a brewery and sell his beer to others—which he is already outfitted for—just one thing prevents him: the law. In order to sell his beer, the law requires him to meet a brewing volume set by the tax agency at 100,000 kiloliters per month. That means that Mr. Kim cannot legally sell his beer in South Korea unless he produces 100,000 kiloliters every month—equal to more than 850,000 barrels, 26,000,000 milk jugs, or enough beer to fill more than 700,000 Hummer H2 fuel tanks.
For perspective, the Summit Brewing Company—a 21 year old regional brewery in St. Paul, Minnesota—has an annual capacity of roughly 250,000 barrels, or nearly 8 million milk jugs. That works out to fewer than 3,000 kiloliters, or 792,000 milk jugs, a month. Summit is sold in gas stations, liquor stores, on tap at any bar worth its salt in the Twin Cities, and no Twins game is complete without a Summit Extra Pale Ale in hand. Even Target sells Summit. Yet, this small but successful US microbrewery does not even produce enough beer in one year to meet the required amount Korean breweries must produce in one month just to be legally aloud to sell their beer. Woodinville, Washington’s Redhook brewery, distributes its beer across the USA, from Seattle to Boston and everywhere in between, yet produces fewer than 400,000 barrels per year. In Korea, these breweries wouldn’t have a chance at existing, and microbrewers like Mr. Kim don’t have the option to start small and grow. Obviously the only companies that can meet these requirements must be big, really big, with access to millions of dollars in start-up funds.
All of this begs the question of where these laws come from, and why they are still in place. It’s hard to say definitively what that answer is, but it may lie in South Korea’s history of protecting big businesses.
Chaebols: The Lifeblood of Korea Inc.
South Korea is no longer the land of morning calm wistfully remembered from the past. In the last hundred years, Korean economics, like its political history, can be adequately summed up with one word: dynamic. The country’s wealth and prosperity is a relatively recent phenomenon. As an emerging market, South Korea stands more in league with fellow G20 states like Brazil, India, and China than the United States, United Kingdom, and Japan. Its modern economy, and the large corporations like Samsung, Hyundai, and Doosan that define it, is just over half a century old.
Korea has a long and bitter history with Japan that dates back before World War II, when the imperial country brutally mistreated the Koreans as colonized people. After World War II the peninsula was governed by the American military for four years until the Republic of Korea was founded. Shortly thereafter the Korean War broke out, a war that left the Korean nation divided, and the peninsula battered and war-torn. Korea’s economy stagnated, and the government, led by the military dictator Park Chung-hee, ventured into an import substitution strategy to keep its people working and supply the country with goods it was once bringing in from abroad. When post-war aid from the United States disappeared, Korea began an export-oriented strategy led by heavy industry. Part of what allowed Korea to survive the last forty years was the economic and political power of the chaebol, large conglomerate corporations that have their tentacles everywhere.
Earlier this year the Korea Times, one of the English language newspapers in Korea, published an article about Nam, a former Prime Minister and Finance Minister of Korea. Since 1969, Mr. Nam has been among the forces driving the change in Korean economics, boldly transforming it into the leader it is today. In the article, Nam explained that there is a “holy trinity” of sorts throughout the last fifty years of development, and when these three things were doing well, that is when Korea is at its best. The three pillars of the economy are political leaders, chaebols, and entrepreneurs.
People around the world know and love Korean chaebol companies, even if they might falter in naming them. Anyone with an LG cell phone, Samsung television, or Hyundai automobile (which did very well under the cash for clunkers program last fall) is tied to a chaebol. One need not buy a Korean brand to support these horizontally integrated firms. The company Doosan, for example, operates within the United States under several different names. One of them, Doosan Infracore, owns Bobcat, the all-American, born-and-raised on the North Dakota frontier machinery manufacturer. In addition to Bobcat, Doosan Infracore also produces diesel engines for vehicles and machines, as well as marine engines, an array of machine tools, construction equipment, and most parts for any of their products.
Doosan is primarily an industrial company, but it also has a dizzying list of what it calls “consumer brands.” Doosan operates all of South Korea’s Burger Kings and KFCs, two apartment complex brands, ten education companies including a text book company and several schools, a professional baseball team, and western print magazines, including Vogue, GQ, and Allure in Korean. In fact, Doosan once also owned a not-so-small beer company called The Oriental Brewing Company, or OB for short.
The Doosan Group started OB in the 1950s and retained control over the company’s brands and operations until 1998 when the brewery was sold to InBev, the same multi-national Belgian beverage giant that recently merged with Anheuser-Busch to form AB-InBev. According to a 2009 press release, OB was again sold, this time to an investment group, as AB-InBev tried to deleverage some of its assets to pay back debt. Under the agreement, OB retained rights to distribute AB-InBev brands like Budweiser, Becks, and other beers, and AB-InBev has a right to repurchase OB in five years if it desires.
OB stands alone for now, disconnected from a conglomerate parent, but remains one of the largest breweries in the country, let alone the world. The largest, however, is Hite, a conglomerate that emerged in the 1930s as the Joseon Brewing Company. According to its website, Hite distributes its self-named brand and another lager, Max, along with a Stout, and a new experimental brew called S that contains a high amount of fiber. On top of these brands, Hite also distributes Kirin and Fosters beers, two whiskies, one wine, and its own flavor of soju—Korean rice liquor—in the Republic of Korea. According to Reuters, Hite Holdings Company purchased a 55% share of Jinro, another soju manufacturer in June 2009.
In 2007, Hite set a record as the best selling beer after moving more than 20 billion bottles of its eponymous brand which overtook OB’s 70% market share stronghold just three years after it was introduced. The keys to Hite’s success lie in impeccable marketing and the same horizontal integration strategy that allow Korea’s other chaebol to stand tall and embody Korea Inc. Between the Hite Industrial company and the brewery, Hite Holdings is able to produce nearly everything they need to make their beer inside their own company. Hite even has a company manufacturing golf clubs for their sponsored player.
Tomorrow’s Korea Inc.
Conglomerates are certainly a strong point of the economy, and the government is cognizant of that. Newspaper and economic commentators all agree that without the conglomerates, particularly those in electronics, Korea would not have prospered through the recent economic recession as well as they did. The R.O.K. was one of the only countries whose economy did not collapse over the course of the global financial meltdown. This is in part due to the amazingly diverse array of products produced by companies like Samsung, but also to South Korea’s global diversification. In a recent opinion piece that provides a brief history of the chaebol, The Economist pointed out that South Korea’s exports are so widely spread across the globe that only ten percent of its business is done in the United States. According to The Economist:
This meant sales lost in America were partly made up for by those gained in fast-growing emerging markets like China. Thanks to generous promises of government stimulus, South Korea, one of the rich world’s most export-dependent countries, pulled off the surprising feat of surviving the worst slump in global trade since the second world war with only a fleeting dip into recession.
It hasn’t always been roses and rainbows for the chaebol, however. During the Asian market collapse of the late 1990s, these mammoth companies were the targets of harsh criticism from the people, government, and international organizations like the IMF, over catastrophic mismanagement and careless finances. Following the slump, the Economist writes: “South Koreans, many of whom had flocked to hand over their gold jewellery in a patriotic gesture to help pay off the foreign debt, were appalled at the level of government and business collusion that came to light.” The early 2000s saw prosecution and reorganization of these major firms, as well as all out failure of “more than half of the then top 30 conglomerates.” As part of this prosecution, Mr. Lee Kun-hee of Samsung was convicted of tax evasion, which would have stripped him of his company had he not been pardoned by President Lee Myung-bak, demonstrating that the old friendship between business and government—the same nature of the insider relationship that started the chaebols in the 1950s and 60s under dictator Park Chung-hee—is far from over.
With all this protection from the government, it is hard to imagine anyone or anything competing with companies this size. In the case of beer, it is nearly impossible. In spite of all this, you can’t walk through the streets of Seoul without feeling the hopeful tides of change and development moving rapidly through this country. The chaebols are the backbone of the Korean economy of yesterday, but innovative entrepreneurs like Mr. Kim are the face of the developing economy of tomorrow. These entrepreneurs will ultimately shape the next twenty years of Korea’s development as it moves even further from being an outsider to an insider in the realm of global economics. Prime Minister Nam saw the entrepreneurs as crucial to building Korea into the region’s fourth-largest economy, and it is difficult to imagine a Korea of the future without them.