Ailing Daewoo to Be Broken Up, Sold Off

By MARK MAGNIER

Aug. 17, 1999 12 AM PT

TIMES STAFF WRITER

TOKYO — Daewoo, a conglomerate whose dramatic ascent and troubled slide mirrored that of modern-day South Korea, agreed with creditors Monday to effectively dismantle itself--a watershed in the nation’s economic reforms.

The demise of Daewoo, which had been approaching for weeks, is seen as fostering meaningful reforms among other conglomerates, or chaebol, which have resisted many of the Seoul government’s restructuring demands in the wake of the Asian economic crisis.

“Daewoo is providing a very good example of what will happen if they don’t restructure,” said Franklin Poon, economist with ABN Amro Asia.

Indeed, the settlement came a day after a tough speech by President Kim Dae Jung calling for stronger reforms at Daewoo and four other top chaebol--Hyundai, Samsung, LG and SK.

Chaebol, giant corporations that make everything from ships to bedsheets, helped to make South Korea a global economic power by using cheap capital and government favors. But over time, their size, dominance, insularity and questionable accounting crowded out new business and propped up inefficient operations.

Like a beached whale being sliced apart, the Daewoo Group now faces the sale or disposal of 16 of its 22 companies by year-end--with those remaining largely concentrated in the auto business.

Daewoo accounted for a staggering 17% of South Korea’s 1998 gross domestic product, a dominance that in the United States would require a merger of more than 100 of the nation’s largest corporations.

Although Daewoo’s failure is a jolt to the South Korean economy, it probably will not trigger domino-like turmoil.

In addition to resolving a long-festering problem, the forced sale could give the public a clearer look at the accounting tricks that the top chaebol have long been accused of using to dominate the South Korean economy and target market share over profits.

“Daewoo is one of the last big problems for the Korean economy,” said Seok Yun, equity director with CS First Boston. “Once they resolve this, the medium term is much brighter.”

In the end, South Korea’s second-largest chaebol, a company once called too large to fail, ran out of time, cash and maneuvering room.

Chairman Kim Woo Choong, who founded the chaebol as a modest textile trader in 1967, chose not to show up for Monday’s denouement, the signing of agreements by creditors and the heads of Daewoo’s subsidiaries.

Over the last three decades, Daewoo grew to become one of the world’s largest companies, with combined assets larger than the GDP of the Philippines.

But with at least $50 billion in debts, including $9.9 billion owed to foreign companies, Daewoo endured a worsening cash crunch in recent months that distracted top government planners amid fears that its collapse might push South Korean banks back over the edge.

South Korea is much better positioned than even a year ago, however, to endure this latest body blow, analysts say, given a recapitalized banking system, rising stock market and improved reserves of foreign capital.

By the time Daewoo capitulated, stock markets had absorbed the inevitable. The main Korean share index fell 1.1% on Monday, mainly for unrelated reasons. The index has pulled back 12% from its recent high, but is still up 61% for the year.

The behemoth’s blood on the beach, meanwhile, has attracted foreign buyers hoping to make their own killing. Beverly Hills-based investment fund Walid Alomar & Associates is eyeing a controlling stake in Daewoo Electronics for $3.2 billion.

Also expected are the sale of Daewoo Securities, Seoul Investment Trust and construction unit Keang Nam Enterprises, among others.

Creditors vowed Monday to sell collateral immediately should Daewoo stall on the Dec. 31 sales deadline.

Daewoo’s troubles have been out in the open for months. That undercut its ability to raise capital, even as its competitors were using South Korea’s rising stock market to issue more shares, reduce their debt and trim some operations.

Daewoo will be left with its auto business. But its shortage of cash, new models and top-end technology at a time of global auto overcapacity means it will probably need to find a foreign partner or buyer fast to avoid losing momentum. The most likely candidate is General Motors, which has voiced interest in buying control of Daewoo Motors. “They need an injection,” said ING Barings auto analyst Chikao Masuzawa.

This will likely leave Daewoo stripped of its power, ambition and reach. “Daewoo is history,” said one analyst.

Nor is the cleanup process likely to be tidy. Daewoo is an intricate operation involving multiple companies with cross-guarantees, foreign operations and opaque accounting.

“No one knows what’s under the surface,” said Stella Um, analyst with Barclay’s Capital.

Foreign buyers will almost certainly balk at absorbing all of Daewoo’s massive debt. Seoul and foreign buyers will also face off over how quickly and extensively investors can lay people off at bloated Daewoo companies.

Though founder Kim is now being pilloried here, the Daewoo chairman has many attributes admired in today’s Western entrepreneurs--including brains, drive, vision and dedication. In the end, though, bad timing, pride and an unwillingness to recognize new rules of the road were his undoing.

“While the chaebol have never lacked for boldness, Daewoo’s founder was even more reckless than most,” said Peter Beck, research director with the Korea Economic Institute of America.

In March 1967 at age 31, Kim started a small textile trading business with five employees in a small office in Seoul. Known as a brilliant salesman and a workaholic, Kim soon opened his first textile plant in Pusan and started his first overseas office in Australia in late 1969.

Drawing on his growing government contacts, Kim gained exclusive export rights for certain polyester textiles and garments to the U.S., Hong Kong and Canada in 1971 and, by 1974, had exports exceeding $100 million.

To reach his goal of building one of South Korea’s top five chaebol, Kim acquired a series of troubled industrial companies in the 1970s in machinery, vehicles and shipbuilding. Taking these off government hands put him in Seoul’s good graces, ensured access to cheap government capital and sharpened his political skills.

As Korean wages and labor unrest grew in the 1980s and ‘90s, Kim aggressively expanded overseas, first in Indonesia and Myanmar, then in places such as Poland, India, Romania, Vietnam and Uzbekistan.

He authored a bestseller in the early 1990s, “The World Is Big and There’s a Lot to Do,” that won him plaudits as a visionary for criticizing South Korea’s insulated society.

But Daewoo was getting stretched dangerously thin. Several factories failed. And when developing economies crashed and South Korea’s currency plummeted in December 1997, Daewoo--unlike other chaebol--kept trying to expand. Kim hoped to ride out the crisis, testing the government’s resolve to cut the financial umbilical cord to the chaebol.

Said Cho Dong Sung, economics professor at Seoul National University, “He may have wanted to grow using old tricks in a new era.”