Asia Times: Korea's chaebol see early results of reforms



	December 16, 1999	atimes.com

Asian Crisis

Korea's chaebol see early results of reforms
By Suh Hae-seung

SEOUL - After much arm-twisting and nagging, changes began to show this year in the nation's biggest conglomerates, or chaebol, whose delayed restructuring was an issue of repeated concern by the country's financial supervisor, the IMF, and foreign investors.

The top five chaebol, whose sales take up nearly 40 percent of the country's gross output, were pinpointed as the main culprits in forcing the country to seek a record bailout of $58 billion from the IMF in December 1997 through reckless expansion. Their reform became the top priority of the Kim Dae-jung government and the IMF.

But because the corporate giants were unwilling to go along with the reform plans, the government changed laws to apply financial sanctions to those that did not comply.

The bullying worked. The chaebol agreed to a set of government-organized business swaps, to bring their debt-to-equity ratios down from over 500 percent to under 200 percent by the end of the year, and to end guarantees covering debts of sister companies by March next year.

Following are the major changes for the chaebol in seven industrial sectors targeted by the government for the "Big Deals" or business swaps.

Automobiles

What used to be a five-way competition was reduced to a race between two players this year after the failures of auto makers Kia, Ssangyong and Samsung.

Hyundai may be left as the only domestic auto maker if Daewoo Motor is taken over by foreign companies next year. Global auto giants General Motors, Ford Motor, DaimlerChrysler, Fiat and Renault are reportedly interested in taking over the debt-stricken Daewoo Motor.

The comeback of Kia was a major headline in the industry. Kia, which retained its autonomy after being taken over by Hyundai, turned a surplus in just over a year.

Samsung Motor's fate remains uncertain with its potential takeover candidate Daewoo Motor facing bankruptcy as well. It may be sold in package with Daewoo Motor.

Despite the industry's turbulence, the auto market has seen its condition return to that of pre-crisis days. Domestic sales soared 66.6 percent to 1.15 million units as of November this year and exports increased 15.6 percent to 1.38 million units. The country returned to the list of the world's top five largest auto makers.

Semiconductors

Despite initial worries, the consolidation of Hyundai-LG semiconductor operations is now resolving over-capacity and redundant investment. Samsung and Hyundai have now taken the dominant position in the global DRAM market. The consolidated Hyundai Micro-Electronics is ahead of Samsung Electronics and Micron of the United States with its output accounting for 23.5 percent of global production, according to the latest IDC study.

But whether the union will turn out a success is still a mystery. Many doubt the synergistic effect of the merger, citing the different design systems and business line structures of Hyundai and LG and the combined debt ratio of over 400 percent.

Sales of Samsung, Hyundai and LG accounted for 40.9 percent of global sales last year, beating Japan's 36.3 percent. Hyundai and Samsung's combined sales barely reached the 40-percent level this year, meaning that not all buyers of Hyundai and LG continued business with the consolidated firm.

Petrochemicals

What was expected to be the easiest sector to merge turned out to be the most difficult.

Samsung General Chemical and Hyundai Petrochemical, both based in the Daesan industrial complex, agreed last year to form a merged company and become the biggest Asian producer of ethylene.

The combined debt of 5.7 trillion won ($5 billion), however, served as a major stumbling block. A resolution seemed to be in sight after Japanese trading houses Mitsui and Sumitomo offered to take part in the consortium.

Creditors were to hold the largest stake of 26 percent in the new company after debt-for-equity swaps, the Japanese consortium 25 percent, Hyundai 24.5 percent and Samsung 24.5 percent. But a settlement was delayed with Japan demanding complete right of sale in other Asian markets. The government, creditors and the concerned parties want to settle a deal by the end of the year, but prospects are poor.

Aerospace

Boeing, Lockheed Martin, British Aerospace, and other leading aerospace firms are busy wooing Korea Aerospace Industries, which was launched in October through the consolidation of Daewoo's, Samsung's and Hyundai's aircraft units.

The consolidated company, which is likely to receive priority in future fighter jet projects as well as mid-sized plane project, said it will offer a 50-percent stake to foreign companies.

Rolling Stock

Hyundai, Daewoo and Hanjin produced the first successful "Big Deal" in July by merging their rolling stock units to attain a better position in winning overseas orders.

The company is trying to attract foreign equity investment and may see some results with executives from Siemens, Alstom and other leading firms showing sincere interest.

The consolidated company hopes to attain sales of 650 billion won ($573 million) next year and 2 trillion won by 2008.

Power Generation

Hyundai and Samsung agreed to hand over their power generation and ship engine production lines to Korea Heavy Industries and Engineering (Hanjung) in September last year.

The three companies involved all agreed on the need for a merger to address heavy competition and overcapacity, but an agreement was only possible nearly a year after the Federation of Korean Industries stepped to mediate due to strong differences over pricing.

The consolidation will reduce the country's output of power generation equipment to 3,450 megawatts from 9,250 megawatts.

Oil Refining

The oil refining sector saw the easiest restructuring of all the Big Deal targets.

Hyundai Oil took over Hanwha Energy in April after seven months of negotiations, reducing the number of domestic oil refining companies to four from five.

Ssangyong Oil, whose planned takeover by SK ended in failure, is now looking for a buyer from abroad.

(Asia Pulse/Yonhap)