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[Editorial] Let them alone

Profit sharing between large companies and suppliers may dampen business motivation

The government and the ruling party on Tuesday agreed to enact “cooperation profit sharing” between large companies and small and medium-sized companies.

The Ministry of SMEs and Startups vowed to enforce the system in the first half of next year.

The small and mid-sized companies referred to in the system are suppliers of parts, materials or technology to large companies. In Korea, a supplier to a large company is formally called a “cooperation company.”

“Cooperation profit” means profit earned by a large company by selling a product it made using parts, materials and technology from “cooperation companies.”

The basic concept of the system is that “Cooperation profit” is earned through cooperation between large companies and small and mid-sized companies, and it does not belong only to large companies. Therefore it must be shared between the two sides.

In a free market economy, a private company is free to decide whether to offer suppliers incentives for contributing to its profits. They do so through voluntary contracts.

Then, the ministry says it will make the system into a law to offer tax benefits and policy funds to companies which accept it.

The government emphasizes the system is not compulsory.

But it will not be easy for large companies to refuse to join the system. Those companies which boycott the system will be viewed negative to the government. They cannot but feel pressure to accept the system. Particularly for large companies, which cannot but mind the government regulating them tightly, autonomy it says will not mean autonomy literally.

The ministry plans to classify companies in four grades according to their profit-sharing records and differentiate incentives to them accordingly. The system is at risk of being abused to blacklist large companies, particularly those graded third or fourth.

This kind of profit sharing is nowhere to be found in the world. The Moon administration will be the first to try it.

By establishing the system by law, the government means to intervene actively in the relationship between large companies and small and mid-sized companies.

There is already a great concern about the feasibility of the system.

To share profit with cooperation companies, a large company must measure their individual contributions to its profit precisely. How can the company do the job objectively? Samsung Electronics, for one, secures parts and materials from about 800 companies. God only knows if a specific part actually increased sales of a product and by how much.

Due to this lack of objectivity, conflict rather than cooperation will likely develop.

Another issue is that companies downstream in the supply chain, such as subcontractors and sub-subcontractors to suppliers, will be alienated from profit sharing. The ministry has no profit-sharing scheme for them.

And not all cooperation companies are not Korean. There are many foreign suppliers. If they are excluded, they may sue Korean companies and government at the World Trade Organization.

The profit sharing system can also aggravate hardships for small and midsize companies.

To escape troubles over the system, a large company may move its headquarters and factories overseas. Or it may obtain parts only from foreign suppliers.

In the first half of this year, Korean manufacturing companies invested $7.4 billion in building new factories abroad and expanding overseas factories. The amount was the largest ever.

About 20 percent of small and medium-sized companies “cooperate with” -- supply parts and materials to -- large companies. The benefit of the system will be concentrated on them.

The concept of profit sharing is consistent with the economic ideology espoused by the Moon administration, which is defined by such terms as economic democratization and fair economy.

From this viewpoint, a company earns operating profit thanks to cooperation from suppliers, so its profit should be shared.

Making profit sharing into a law and differentiating incentives according to profit sharing records may dampen motive to innovate and start up business to maximize profit.

Profit is an outcome companies accomplish through risk-taking, innovation and great efforts.

It stimulates entrepreneurship, fires up growth engines and sustains market dynamics.

Companies plow part of their profit back into R&D or new businesses. Only in this way, they can keep growing.

Large companies are locomotives of an economy. If a system drags them down, damage is inevitable to small and medium-sized companies as well as the national economy.

The government and the ruling party should reconsider enacting the system and let companies share profits voluntarily. If they want to help small and mid-sized cooperation companies, they may as well find other ways, such as redistribution through taxation.