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Will Samsung survive corruption verdict?

Julian Ryall | Fabian Kretschmer
August 25, 2017

The future of South Korea's electronics giant Samsung hangs by a thread after a court in Seoul sentenced the company's heir Lee Jae-Yong to five years in prison. What would be its impact on the South Korean economy?

Lee Jae Yong
Image: Getty Images/AFP/J. Yeon-Je

The heir to South Korea's massive Samsung Electronics conglomerate has been sentenced to five years in prison after being found guilty on bribery and embezzlement charges in connection with the corruption scandal that ultimately brought down President Park Geun-hye earlier this year.

A handcuffed Lee Jae-yong, the vice chairman of the global brand, was later pictured being escorted aboard a prison bus after the hearing at the Seoul Central District Court on Friday afternoon.

In its verdict in a case dubbed "The Trial of the Century," the court said Lee was involved in Samsung providing 7.2 billion won (4.98 million euros) in bribes that were spent on equestrian training for the daughter of Choi Soon-sil, a friend and confidante of Park while she was president. In return, it was alleged, Samsung received business favors. Both Park and Choi are still on trial in connection with a number of connected cases.

Read more: Toppling of South Korean President Park Geun-hye sparks widespread protests

The court also found Lee guilty of embezzlement, concealing assets overseas and perjury.

Handing down the court's ruling, the judge said, "The crux of this case is close collusion between political and capital powers," the Yonhap news agency reported.

"It appears to be difficult for the people to recover from the disappointment that collusive ties between the president and a large conglomerate existed not in the past, but in the present," the court added.

Prosecutors had demanded a 12-year sentence for Lee, who is expected to appeal the verdict.

Analysts say the ruling is a significant step forward in the campaign to break the close links between big business and politics in South Korea.

Samsung Galaxy Note 7
Samsung generates almost one-fifth of South Korea's GDPImage: picture-alliance/AP Photo/A. Young-joon

A blow to Samsung

The ruling could deal a major blow to the image of the global electronics behemoth, which may struggle with a leadership vacuum. Some have even gone as far as to suggest it may not survive. But analyst Geoffrey Cain in Seoul believes it will "not have too much influence outside Korea."

"The withdrawal of the Galaxy Note 7 proved to be a bigger setback for the company," Cain told DW. "As long as the recently launched Galaxy 8 sells well, Samsung does not have to worry about the company's immediate future. In fact, Samsung was able to score record profits in the last quarter while Lee was already under investigation," he added.

Read more: Samsung posts biggest quarterly profit since 2013

Stephen Nagy, a senior associate professor of international relations at Tokyo's International Christian University, shares a similar view. "The sheer size of the organization [Samsung], its tentacles through every part of the national economy, and its importance in the regional economy as well as on the global stage, mean it should be able to isolate this problem and move on," Nagy told DW.

"But there is no doubt that the company - and other conglomerates - will have to start acting differently. Inevitably, they will have to find new ways to obtain preferential treatment from the government without it looking like outright bribery," he added.

The nation's huge conglomerates – Chaebols - play an incredibly powerful part in Korean life, but the election of Moon Jae-in as president and the prosecution of Lee and other senior members of Samsung show that the pendulum is swinging in the opposite direction.

Read more: Samsung Galaxy Note 7 resurrection?

Südkorea Park Guen-hye
Former President Park 'was seen as being part of the old links between business and politics'Image: picture alliance/AP Photo/B. Seung-yul

Implications for economy

Samsung generates almost one-fifth of South Korea's GDP and no other company is more closely linked to the country's economic well-being than Samsung. While the brand is internationally famous for its smartphones, it is also the largest life insurance enterprise in South Korea, runs amusement parks, issues credit cards, and has shopping centers and food chains all over the country.

Despite their contribution to economy, the public mood in South Korea about family-run conglomerates has changed considerably in the past few years. In May's election, a possible Chaebol reform was regarded as the most important issue for South Korean voters - ahead of the conflict with North Korea.

Riding on these sentiments, the left-leaning Moon Jae-in won the presidential election with a big majority. Moon has often spoken out against the privileges for corporate directors and he wants to introduce more transparency to the business sector. He still has to prove whether he can implement his plans.

But not everyone in South Korea is in favor of what they see as President Moon's populist drive against the big businesses that are largely to thank for building the nation's current high standard of living.

"I am very concerned at the outcome of this case, but also the direction of the policies of this government," Song Young-chae, a professor in the Center for Global Creation and Collaboration at Seoul's Sangmyung University, told DW.

Südkorea PK Moon Jae-in
President Moon is riding high in the opinion pollsImage: Reuters/Jung Yeon-Je

"This decision - and other future prosecutions related to this case - could severely affect the economic activities of big companies and then impact the national economy."

"This is a political prosecution and the impact could be disastrous," Song added. "I also feel that this new government is trying to control big companies, the media and education far too much," underlined Song.

The expert pointed to criticism by the government of Munhwa Broadcasting Corp., a move that Song believes encouraged labor unions to target the company and its leadership.

Moon's 'populism'

Moon, however, is still riding high in the opinion polls. With fully 78 percent of South Koreans supporting his administration, he has the mandate to push forward with the changes he outlined before he won the election.

"Moon had sweeping plans and he still has them," said analyst Nagy. "This court case will enable him to move his agenda forward and do something for the people, not the chaebols."

"The courts are sending a clear message about the ties that have bound politics to the chaebols of Korea for such a long time," said Nagy.

"Moon Jae-in campaigned on that message when he ran for president earlier this year and he swept into power," he said. "Park was seen as being part of the old links between business and politics and her defeat showed that the people of South Korea wanted to move to a different model of socio-economic development. They do not want the chaebols to play such a powerful part in the economic and everyday lives of ordinary people," he underlined.

South Korea's big business faces change

Julian Ryall
Julian Ryall Journalist based in Tokyo, focusing on political, economic and social issues in Japan and Korea