Mention the name Samsung and most people will give a nod of recognition. The Korean corporation is a household name. But mention the name of Samsung's corporate relative, Cheil Jadang, and the response will likely be a puzzled look. This could soon change as Cheil Jadang undertakes an expansion that will bring it face-to-face with consumers.
Lee Jay Hyun, Cheil Jadang's vice-president, is transforming the company from a low profile food processing corporation into a multi-faceted conglomerate. The make-over will give Lee a chance to achieve his ambitious goals of placing Cheil Jadang among Korea's top 10 businesses and to reach sales of 28 trillion Korean won (about US$31.1 billion) by the year 2005, more than 10-fold its current US$2 billion sales level.
The expansion programme is already taking Cheil Jadang into strange new lands. Starting from a foundation in food processing, such as refining sugar, the corporation has branched out into activities as diverse as making movies. It also plans to move into distribution and trade, construction and bio-engineering.
Cheil Jadang got its start when the late Lee Byung Chull created the Cheil Sugar Company shortly after the 1953 Korean war armistice. Like many other Koreans, Lee had seen his businesses devastated by the fighting. Starting again with Cheil Sugar, Lee created one of the first successful companies to rise from the ashes of that bloody conflict. For the next decade, the sugar company became a money machine. This enabled Lee to resurrect his pre-war business, Three Stars Co, better known by its Korean name Samsung. The company went from strength to strength, becoming one of South Korea's great chaebol. Cheil Sugar was left to plod on in food production.
When Lee died in 1987, control of Samsung passed to his younger son, the current chairman, Lee Kun Hee. The eldest son, Lee Maeng Hee, got what was widely perceived as a consolation prize, control of what was by then known as Cheil Foods & Chemicals.
By 1994, Cheil Food was looking distinctly sad, with a net profit of US$9.4 million on sales of US$1.59 billion, a margin of just over 0.5%.
But in that same year, the company began a metamorphosis that today makes the 'consolation prize' look more like a winning lottery ticket. That was the year Cheil started to separate itself from Samsung in preparation for a complete spin-off.
Young bosses lead away
Driving the company's expansion has been a corps of elite young managers led by Lee Maeng Hee's son. The 36-year-old 'Jay' Lee started as a manager at Cheil Food in 1983 after earning a law degree at Seoul's Koryo University and spending two years with Citibank. His 38-year-old sister, 'Miky' Lee Mi Kyung, a graduate of Seoul National University and Harvard University, is executive director.
Following the spin-off from Samsung and another name change, Cheil Jadang began to expand into more diverse food-related businesses, such as restaurants and mineral water. It also started a drive into non-food businesses, such as cosmetics, video entertainment and multimedia.
So far the strategy is working fine. By 1996, Cheil Jadang had pushed sales up 26% to US$2 billion, and increased its margin to 1.2%, creating a net profit of US$24 million.
Most of the company's income continues to comes from food and 88% of its business is still domestic. But Cheil Jadang's young bosses expect great things from their non-food, non-South Korean businesses, and have been putting major money behind their expectations.
Their most spectacular move came in 1995. Cheil Jadang invested US$300 million to buy an estimated 11% of the newly-formed Hollywood movie studio Dreamworks SKG, set up by Jurassic Park director Steven Spielberg and Hollywood agents Jeffrey Katzenberg and David Geffen. The reason for buying in, Cheil Jadang's officials say, is to become 'Asia's biggest general entertainment group.'
Pundits in the movie industry question the wisdom of this move. They recall the Japanese electronics giants whose fingers got badly burned when they bought into Hollywood. Miky, who headed up the deal, is unruffled. 'We satisfied consumers with food. Why not with movies?' she said recently. 'We are not becoming singers or actors. The movie industry is marketing and advertising, just like marketing food.'
Cheil Jadang is unique in Korea in being a producer, merchandiser and distributor of both Hollywood and Korean movies, with its own multi-screen cinemas. These are being built through another joint venture with Hong Kong's biggest film-maker Golden Harvest, and Australian cinema developer Village Roadshow. The plan is to have 20 Cheil Golden Village multiplexes open by 2000.
Other Korean corporations have made forays into entertainment. Cheil Jadang's one-time parent, Samsung, paid US$60 million two years ago for 7.4% of independent Californian film-maker New Regency Productions. But none of them has anything like Cheil Jadang's vertically-integrated setup.
Cheil Jadang was officially recognised by the government as a 'stand-alone' group in May and, as such, no longer part of the Samsung Group. The cutting of the apron strings has taken two years and involved the selling of most of Cheil Jadang's holdings in Samsung's affiliates. But there are significant financial advantages.
'Being legally released from Samsung means Cheil Jadang's management can be more aggressive in entering new businesses because it can raise money more easily from selling land it owns. It is also freer to loan money to its subsidiaries,' says Park Hee Jung of Ssangyong Investment and Securities, a Korean stock broking firm. With more money available, Cheil Jadang's thrust abroad is gaining momentum. Its roots in the food industry are far from forgotten.
It recently made major investments in farms and food processing operations in China, Indonesia, the Philippines, Turkey, and Uzbekistan. All of the investments are either up and running or are expected to come into operation during the next couple of years.
Vertically integrated business
'We will keep building up our overseas manufacturing base until we generate 50% of our sales from abroad,' says Oh Hyong Jine, Cheil Jadang's overseas project manager. 'Our concept is like a turnkey-based project: we plant and raise crops, process them, and sell them locally.'
The ride has not been entirely smooth. Before it was spun off from Samsung, Cheil Jadang got into trouble with its first offshore food processing project, PT Cheil Samsung Indonesia (PTCSI). The project started making lysine, an amino acid used as a foods supplement, and the flavour enhancer monosodium glutamate (MSG) in 1989. 'We had to pour in much more money than we originally planned, because of the higher than expected cost of collecting and distributing raw material,' says Oh.
The investment is paying off. Due to improved productivity and massive price rises for lysine (to US$4,000 a tonne from US$1,000 a tonne in five years), PTCSI revenue climbed to US$150 million last year from US$25 million in 1991.
This success led Cheil Jadang to expand its MSG and lysine production capacity. PTCSI opened an animal feed factory and a poultry farming operation. A second processed foods complex is now under construction.
Oh points out, for example, that Indonesia produces only about 4 million tonnes of animal feed a year, less than one-third of South Korea's total.
The chicken farm makes sense given that Indonesia's Islamic majority shuns pork. Ninety per cent of the meat consumed in Indonesia is chicken. Construction of the processing facilities began last year, with US$22 million earmarked for investment by the year 2000 to achieve annual output of 63 million chickens.
'What we are doing abroad,' says Oh, 'is what we have done at home during the past four decades - we are building up a vertically integrated business.' And food, he says, is a good business to be in right now. 'Korea's drive into international high-tech business is destined to [put it on a collision course] with Japanese and Western rivals. But the food markets that we are going into are relatively untrodden and still thirsty for our know-how.'
After Indonesia, the Philippines was Cheil Jadang's next target. In June last year, it started CJ Philippines, an animal feed joint-venture with distributor Great Harvest Co. The plant, about 60 kilometres north of Manila, is 80% owned by Cheil Jadang, which has invested US$10.5 million. In China, Cheil Jadang operates the joint venture Beijing CJ Chang Ning Foods Co.
It wants to become one of the top five beverage companies, rivalling Coca-Cola and PepsiCo. Established last September in a US$20 million deal with Chang Ning Group of China, the joint venture will begin production this year. Its products will include fruit juice, carbonated drinks, 'hangover relief' drinks and canned fruit. 'So far we have rarely been exposed to Asian consumers since Cheil Jadang's customers have been the local food suppliers who source raw material from [us],' says Oh. 'To let [consumers] know us, we will focus on one food item through which we will spread consumers' awareness about our brand.'
In April this year, Cheil Jadang announced that it invested US$5.8 million to build a flour processing plant in Inner Mongolia. The plant recently began operations.
All this expansion has drawn a mixed response from stock analysts.
While they generally agree that it was inevitable that Cheil Jadang would move beyond food manufacturing, they worry that this may be a mini-chaebol in the making, sprawling into too many businesses in too many sectors.
'Cheil's sales have grown [mostly from its existing food and chemicals], but its profit is unlikely to grow as fast as sales so long as it keeps pouring money earned from food into new businesses,' says an analyst at the Daewoo Research Institute. Shin Sung Woo of Dongsuh Securities says that Cheil Jadang won't see 'real big money' for another two or three years.
'Cheil [Jadang] had to spend a lot on Dreamworks, which will not be profitable until 2000 at least. But if it can last until then, its multimedia business [can] turn out to be a major cash cow in a sector that none of Korea's conglomerates has yet entered.'
All this expansion may make sense in its current circumstances; the new 'stand-alone' has to make the most of what it has. But without a clear focus, Cheil Jadang risks becoming just another chaebol saddled with too many businesses. In the not-too-distant future, it may have to spin off some of its businesses, just as Cheil Jadang itself was spun off from Samsung. In the meantime, the jury is still out.