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which started with an initial investment of 44.6 billion won

Hyundai Motor vice chairman Chung Eui-sun made over one trillion won (US$908 million) just in the past six months. The windfall came from selling off his shares in Hyundai Glovis and Innocean.
On Feb. 6, Chung sold off 3,222,170 Glovis shares in a block deal outside trading hours. The value as of closing on Feb. 5 was 805.5 billion won (US$732.2 million). In August, he earned another 300 billion won (US$273 billion) by selling 540,000 of his 720,000 Innocean shares - a 40% stake. Despite the massive selloffs, Chung still owns well over two trillion won (US$1.8 billion) worth of shares: 23.3% of Glovis and 10.0% of Innocean.

How was Chung able to cash in? Behind the massive payday was a typical procedure used by third- and fourth-generation chaebol family members to amass gains: using seed money to form a company, getting hold of equity, and then increasing its value with funneling practices.

Hyundai Glovis was founded in 2001 by Chung and his father, Hyundai Motor Group chairman Chung Mong-koo, who combined to put up 100% of the investment. The son went on to secure an even larger stake with one 1.49 billion won (US$1.4 million) purchase each in 2001 and 2002.

Since then, it has been a cash cow for him - and intra-group funneling has been key to that. According to a Glovis audit report for 2002-04, over 80% of sales transactions were with other Hyundai affiliates. Buoyed by this broad-ranging support, sales rocketed from 198.49 billion won (US$180.4 million) the first year to 905.75 billion won (US$823.2 million) in 2004. The funneling to a family firm is being criticized as stealing opportunities from other affiliates.

Efforts to liquidate the wealth were soon under way. In 2004, Chung Eui-sun saw a roughly 85.02 billion won (US$77.3 million) payday from selling 25% of his Glovis shares to the Norwegian shipping firm Wilhelmsen.

Stock values continued rising all the while. Glovis shares, which had a face value of 5,000 won (US$4.54) were first listed in 2005 at 21,300 won (US$19.36). Less than a week later, they were worth over 60,000 won (US$54.53).

Later growth left Glovis with sales of more than 10 trillion won (US$9.1 billion). The funneling controversy continued to rage as internal transactions passed the three trillion won (US$2.7 billion) mark. By September 2014, just before a controversy over the costly purchase of Korea Electric Power Corporation land sent Hyundai Motor stock values sinking, Glovis stock was valued at 337,000 won (US$306.30). Chung’s own share amounted to 3.484 trillion won (US$3.2 billion) as of late 2014. Steady dividend payouts left him with 92.65 billion won (US$84.2 million) in earnings through 2013. Hyundai Motor said Chairman Chong Mong-koo was spending 850 billion won (US$772.6 million) of his own money on social contribution activities, including the funding of his eponymous foundation with 500 billion won (US$454.4 million) of Glovis stocks in 2011. But his son held onto the shares he had spent 299.3 billion won, swelling his assets to 3.66 trillion won (US$3.3 billion) - a rise of 1,223.66 times - through stock sales and dividends.

From Innocean’s founding in 2005 as a Hyundai Motor Group “family company,” with a 40% stake for Chung Eui-sun, it grew by handling group advertising. By six months after its founding, it was one of the top five companies, with group advertising business of around 140 billion won (US$127.2 million). Internal transactions represented more than half of its business as it continued to grow. After spending 1.2 billion won (US$1.1 million) on shares, Chung collected 16,560,000,000 won (US$15.1 million) in dividends alone through 2013; his sale last year netted him 300 billion won. The equity he still holds is worth 34.35 billion won (US$31.2 million). If share value, sales, and dividends are all factored in, he has seen a 292.43-fold return on his investment ten years ago.

Meanwhile, accusations of nest-feathering and skirting of the law through funneling and depriving other companies of opportunities have also dogged Bontech, Hyundai Wisco (now Hyundai Wai), Hyundai Autoever, and Hyundai Emco (now Hyundai Engineering).

Chung acquired his shares in Bontech through two 1.5 billion won (US$1.4 million) purchases in 2001 and 2004. He later sold them off in 2005, earning profits of 55.5 billion won (US$50.4 million). There, too, funneling of work had contributed to the rising share value. Data from the Economic Reform Research Institute (ERRI) showed internal transactions accounting for more than 90% of business each year between 2001 and 2005. In the eyes of many critics, the company was seen as a source of early funds.

Another recent contributor to asset accumulation has been mergers. A series of affiliate mergers last year was presented as a way of skirting Fair Trade Act regulations on funneling. Not incidentally, they also had the effect of raising the value of Chung Eui-sun’s assets. Last year, the Hyundai Motor Group went ahead with mergers of Hyundai Emco and Hyundai Engineering; Hyundai Wia, Hyundai Wisco, and Hyundai METIA; and Hyundai Autoever and Hyundai C&I. Critics said the arrangements were designed to increase stock values for affiliate that had grown through funneling, while skirting recent legislation regulating the practice.

Indeed, the value of Hyundai Wisco, which was merged with Hyundai Wia, increased by 239.67 times to 93.47 billion won (US$85.0 million) as of September 2014 with the merger. Chung had acquired his stake in 2003 for an investment of 390 million won (US$354,500). Hyundai Autoever, which saw a sevenfold increase in sales within just five years of its 2000 founding, benefited from having over 70% of its business in the form of intragroup work funnelling. Hyundai Emco is another firm that grew through funneling, with business such as the construction of the Hyundai Motor Group’s offices in Seoul’s Yangjae neighborhood. Many now predict its equity will only increase in value once Hyundai Engineering is listed.

In total, Chung has turned 44.55 billion won (US$40.5 million) in investments into 4.54 trillion won (US$4.1 billion) in value for companies dogged by law-skirting allegations. The growth has come either from cashing in on dividends and equity sales, or from increasing the value of stock he currently holds. His assets have increased in value by over 100 times since the group began work on increasing its number of affiliates and paving the way for him to take over after the 2001 spinoff that followed the so-called “princes’ war” between his father Chung Mong-koo and the late group chairman Chung Mong-hun.

Chung’s “ammunition” is also being taken as a sign that the group has finished preparations for the opening salvo in its management succession. The Glovis block deal could mark the first step in a share acquisition that has been described as key for assuming control over the group through a cross-shareholding arrangement tying together Kia Motors, Hyundai Mobis, and Hyundai Motor.

“You can think of different ways of doing it [e.g., founding a holding company or buying shares in Hyundai Mobis], but the process of passing on the management reins has definitely begun,” said ERRI.

For now, Hyundai Motor says that advertising and shipping for new car models needs to be handled through affiliates because of the importance of security.

“The affiliates have seen an increase in sales from the company growing to become one of the world’s top five automakers, not from any deliberate funneling,” the company said.

“Since 2013, Innocean and Hyundai Glovis have considered offering more and more business opportunities for smaller companies,” it added. “The block deal and mergers were ways of honoring the Fair Trade Act, and hundreds of billions of won in taxes were paid on them.”

By Park Seung-heon, staff reporter

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