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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

TRIAL BY DEBT AT DAEWOO

Kim Woo Choong has survived close scrapes before, but this is his closest yet

By Assif Shameen and Laxmi Nakarmi/Seoul


s o u t h  k o r e a
Cruel Recovery: South Korea has shown clear signs of life, but they come mixed with continued hardship. The job remains: reform, restructure, rebuild

'There Will Be No Favorites': The new finance minister preaches reform

Two Is Still A Crowd: Korean car makers struggle for traction

A BOOK TITLED EVERY STREETis Paved with Gold dominated South Korea's 1989 bestsellers' list. Neither a racy thriller nor a weepy romance, it was the rags-to-riches story of Kim Woo Choong, who began with $10,000 and created Daewoo Group, Korea's second-largest chaebol. At that time, Kim was struggling to save his shipbuilding arm, one of the world's largest. For 18 months he camped out in his shipyards, unraveling problems, cutting costs and rallying worker morale. He invested his own money and squeezed aid out of the government. And when a rush to build double-hulled tankers boosted demand and the rising yen curbed Japanese rivals, the Daewoo chairman emerged not only a successful turnaround artist but a folk hero.

Ten years on, Kim is struggling to save himself again. Daewoo is groaning under $50 billion in debt, more than the combined foreign debt of the Philippines and Sri Lanka. Interest payments total over $6 billion per year. In a liquidation situation, bankers say their loans may be worth just 20 cents to the dollar. Much of the chaebol's core business is in sunset sectors like construction, while its future depends on success in hyper-competitive industries like automobiles. Worst of all, the environment that nurtured Daewoo - in which expansion equaled success, banks were eager to lend and officials were always supportive - is changing. And the government of President Kim Dae Jung is pushing Daewoo to get with the program. "How they handle Daewoo will tell us how serious the government is about corporate restructuring and changing old ways of doing business," says Bill Hunsaker, research head at ING Barings in Seoul. The question may no longer be "Can Kim Woo Choong save Daewoo?" but "Will Korea let Daewoo collapse?"

Chairman Kim knows time is running out. He unveiled a sweeping restructuring plan in April aimed at raising capital by selling off some $7.5 billion in assets (including his prized shipbuilding division) and focusing Daewoo's business on cars and finance. The plan's intentions won applause, but its execution is proving anything but easy. "Daewoo's problem is that nobody really wants to buy whatever they are selling - and certainly nowhere near their asking price," says Lee Namuh, a director at Samsung Securities. Daewoo wants to sell its shipyards to a Japanese company for some $4 billion. But in an era of overcapacity, Japan plans to halve its own large shipyards, so the chaebol is now hoping for at least a joint venture. Daewoo also wants to sell its two Hilton hotels in Seoul and Kyongju. It reportedly wants $250 million for one in downtown Seoul, but a source familiar with the deal says offers have been nearer $180 million.

The problem goes beyond price. "Daewoo never had a brand name; they were never a leader in anything; they never invested much money in research and development," says Hunsaker of ING Barings. "Hyundai may be as deep in debt, but it has a reputation, a brand name, and has invested in technology. You can't say that about Daewoo." That makes finding buyers for redundant assets difficult. Daewoo also wants to pay for its planned purchase of the Samsung Group's car division partly by transferring its electronics unit to Samsung Electronics. The trouble is, Samsung does not really want the lackluster and debt-ridden division. "The only reason Samsung might want to buy Daewoo Electronics is to shut it down," says a Seoul-based banker.

And if Daewoo cannot raise funds through asset sales, it is going to be squeezed. The government used to prod Korean banks to lend to chaebol in order to fund their expansion; now it threatens to freeze lending if chaebol balk on their restructuring commitments. Foreign lenders tend to be leery of the secrecy Daewoo wraps around its finances. "We have stayed clear of Daewoo," says a European banker who has lent heavily to other chaebol. "We really don't know what they do and how they do it." True, Daewoo was able to issue $10 billion in bonds in 1998, accounting for 80% of that year's Korean corporate bond market. But that was when interest rates were peaking and few other companies were borrowing. And as for plans to raise another $3.9 billion through rights issues? The Seoul stock market is booming and foreigners are pouring in money. But while foreign ownership of stocks affiliated with other chaebol rise to 50% or more, it is under 5% for listed Daewoo units, says Samsung's Lee: "No foreigner wants to be associated with Daewoo."

At the root of Daewoo's troubles is Kim Woo Choong and the corporate culture he created. Daewoo began as a textile trader in 1967 but quickly grew. A crucial helping hand was then-Korean president Park Chung Hee. Park was a student of Kim's father and wanted to help the son. He gave Kim bankrupt companies that the government wanted to save, along with generous official assistance. Kim's mantra was continuous expansion - funded by government-approved borrowing - with scant attention to profitability. His damn-the-torpedoes strategy worked brilliantly for 30 years and Daewoo grew to become the world's 18th-largest corporation. But times have changed and, so far, Daewoo hasn't. Says a senior Seoul-based banker who has worked with chaebol executives: "In Samsung, the majority thinking is to keep the best and to get rid of the second best. In Daewoo, the executives never talk about making changes." Kim may have started changing his spots by talking of restructuring, but analysts wonder if it is too little, too late.

Chaebol reform in general is criticized as too timid and slow. The Big Five - Hyundai, Daewoo, Samsung, SK and LG - do seem to be dragging their feet. But much has happened. Smaller groups like Halla, Kohap, Hyosong, Jinro, Anam, Haitai, Shinho, Hanbo, Kia, Doosan and Ssangyong have all disappeared as chaebol. And President Kim's program to get the remainder, and especially the Big Five, to restructure is on course, says Finance Minister Kang Bong Kyun. Cross-guarantees among chaebol units is now against the law, international accounting standards are being brought in, and minority shareholders have been given stronger rights. And with the regulations in place, the government would be violating its own laws if it does not vigorously pursue its reform policies, Kang says.

And what of Daewoo? With 320,000 employees and $65 billion in assets (at book value), don't count it out. "No nation has ever allowed a business as big as Daewoo to fail," says Yoo Han Soo, executive director of the Federation of Korean Industry (whose current head happens to be Kim Woo Choong). "The collapse of a large chaebol like Daewoo would create another banking crisis that Korea cannot afford." Officials say that while Chairman Kim may have underestimated President Kim's determination on chaebol restructuring, he now seems to have recognized his error. Minister Kang says Chairman Kim promised to work doubly hard to cut Daewoo's debt-to-equity ratio from the current 527% to the government-dictated target of 200% by the end of 1999. Kang refuses to specify what will happen if Daewoo fails to deliver, but bankers say they understand that the government will install new managers and put Daewoo through a debt workout should the target not be met. If that happens, that would be a sad end to one of Korea's most charismatic business leaders. He can always update his autobiography. Judging by the last installment, it could be a huge money-spinner.


HOPES AND FEARS

- Chaebol have cut their cross guarantees of corporate debt by 70% so far and must eventually cut all cross guarantees

- Chaebol have agreed to reduce their debt-to-equity ratio from 430% to under 200% by year-end

- Of the 30 largest chaebol in June 1997 - 11 have collapsed between July 1997 and June1999

- Two of the biggest chaebol, Daewoo and Hyundai, have combined debts of $110 billion - almost as much as the total foreign debt of Russia


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