The Fair Trade Commission (FTC) has launched an on-site inspection into brand royalty transactions among affiliates of Hanwha Group (000880). The central issue is whether the royalties that affiliates have paid to Hanwha Corp. for using the "Hanwha" trademark were calculated based on reasonable standards, and whether internal review procedures were properly followed.
According to industry sources Friday, the FTC has been conducting on-site inspections of major Hanwha Group affiliates, including Hanwha Corp., Hanwha Solutions (009830), Hanwha Life Insurance (088350), and Hanwha General Insurance (000370), since the previous day. The inspection is expected to last about a week.
The matter under review concerns internal transactions surrounding group trademark royalties. Hanwha affiliates have signed brand license agreements with Hanwha Corp. and paid for the use of the "Hanwha" trademark. Brand royalties are generally known to be calculated by multiplying a certain rate against the amount remaining after subtracting advertising and promotion expenses from revenue.
The point of contention is whether this calculation method sufficiently reflects each affiliate's industry characteristics and the actual benefits derived from brand use. Controversy could arise over whether it is appropriate to apply identical or similar standards to affiliates with different business structures, such as manufacturing, finance, and insurance. Some have pointed out that Hanwha Group's brand royalty rates are high compared with those of other conglomerates.
In particular, the issue of brand royalty payments by financial affiliates could come under scrutiny again. Hanwha Life Insurance and Hanwha General Insurance previously paid hundreds of billions of won to Hanwha Corp. in brand royalties and received management caution measures from the Financial Supervisory Service (FSS). In the case of insurers, since premium income and investment operating profit are reflected in revenue, questions have continued over whether it is appropriate to calculate royalties in the same way as for manufacturing affiliates.
The FTC has monitored trademark royalty transactions among large conglomerates as an internal transaction category that could lead to unfair support among affiliates or illicit gains for controlling families. Brand royalties themselves are not illegal, but the commission takes the view that they could become a problem under fair trade law if the calculation standards are opaque or if they are operated in a way that imposes excessive burdens on affiliates.
There is also discussion that this inspection may not be limited to Hanwha Group. Many large conglomerates have structures in which affiliates pay brand royalties to a holding company or core group affiliate. Observers say that if the FTC identifies problems in the calculation method or transaction procedures during its Hanwha Group inspection, the review could expand to other conglomerates that have conducted similar brand royalty transactions.
