S. Korea Wants Big Business to Shed Affiliates : Competitiveness: Government wants family-run conglomerates to stop diversifying and focus on core activities.

Samsung, Hyundai and other conglomerates have wheeled and dealed for decades, gobbling up businesses, making fortunes and fueling South Korea’s rapid rise in industrialization.

But President Kim Young Sam, worried that they are becoming too powerful and could hurt the economy by smothering smaller competitors, is trying to tame the tigers.

The government believes the family-controlled conglomerates, called chaebol , have become bloated, inefficient and poorly equipped to compete in a changing global market. It wants them to slim down by shedding affiliates--usually controlled by brothers and sons through stock cross-ownership--and concentrate on the areas where they perform best.

The effect of the strategy could go a long way toward determining the economic future not only of chaebol but of the whole nation.

The 30 largest chaebol groups account for one-third of South Korea’s industrial output and lead its export-driven economy. They supply one-quarter of the world’s computer memory chips and account for about 30% of the commercial shipbuilding orders.

TVs and VCRs from Samsung and Goldstar (now known as LG) flood inexpensive-electronics sections at stores around the world. Hyundai cars compete in the low-end automotive market.

“The chaebol are in a way the locomotive of our economy. We rely on their continued success. Without that we cannot move,” Prime Minister Lee Hong-koo said earlier this year. “On the other hand, they have become too big.

“If Samsung thinks they are the best in semiconductors, OK, then you do it. But don’t try to do everything. The medium and small industries will eventually be wiped out. We cannot allow that to happen.”

The situation is ironic in that the government has always been the best friend of the chaebol .

Past military-backed regimes used cheap loans and other breaks to encourage them to grow quickly and mass produce for exports. Their huge investment capacities enabled South Korea to become a trading giant, challenging Japanese supremacy in semiconductors and shipbuilding.

A typical chaebol embraces a “fleet” of dozens of cross-funded subsidiaries that make products as diverse as ships and chips, garments and TVs.

Aggressive expansion enables them to provide cheap products for their own affiliates. But they also have been accused of sucking in bank loans, using unfair pricing to kill off smaller competitors and concentrating wealth in a few families.

So far, chaebol expansion has been matched by corresponding demands in the world market. But their decisions are often driven by deep-seated rivalries. When one jumps into a sector, others quickly follow.

The massive overlapping investments raise concerns that South Korea might be left with a lot of expensive under-used facilities.

Under Kim’s new policy, chaebol are to stop diversifying, to focus on core activities and to reduce the amount of assets owned by family members from the average of 42.7% to 20% to qualify for cheap government loans.

Samsung, Hyundai and Daewoo recently announced plans to comply by trimming the number of affiliates drastically through mergers or selloffs and concentrating on several key sectors, including automobiles, electronics, shipbuilding and petrochemicals.

But analysts question whether the chaebol really intend to change.

“In the past, their words have not matched their deeds. When they talked about reducing their size, they were actually getting bigger,” said Lee Sung-shin, who follows government policy on big business at Seoul’s private Kia Economic Institute.

Samsung, the biggest conglomerate, said in December that it would cut its subsidiaries by half to 24, disposing mostly of unknown, less-profitable units.

At the same time, it obtained government permission for massive investment programs, including a $5-billion project to produce cars with Japan’s Nissan Motor Co. Ltd. by 1998 and a leading role in a South Korea-China venture to develop a 100-seat passenger jet. Samsung has also doubled its shipbuilding capacity.

The company, which is the world’s largest provider of computer chips, plans to spend $2.3 billion to expand this year. It recently bought Japan’s Union Optical, a semiconductor toolmaker, and signed a chip-purchasing agreement with Japan’s NEC.

Hyundai, best known for cars, won approval for a $340-million plan to buy the computer chip operation of Global Information Solutions, a Colorado-based subsidiary of communications giant AT&T; Corp.