A Nation on the Brink

Another month of plunging overseas sales has dashed South Korea’s hopes for an export-led recovery and cast more doubt on the widely held notion that the sharp devaluation of Asia’s currencies will translate into an export boom.

In spite of a weakened currency that has lowered production costs, South Korean manufacturers are trapped in a crippling downward spiral of depressed sales and escalating debts at home and shrinking markets and stepped-up competition abroad.

The depth of their despair was seen earlier this month when the government said the nation’s overseas sales suffered a second month of double-digit contraction, including sharp declines in its most lucrative exports, automobiles and semiconductors.

August exports fell to $9.9 billion and imports plunged to $7.2 billion, down 10.8% and 37.5%, respectively, from last year’s figures. That added up to a trade surplus of $2.7 billion. Exports of semiconductors declined by 9.6% and automobiles were off a shocking 66% over the previous year, in part because of a lengthy strike at Hyundai Motor Co., the nation’s largest auto maker.

If this trend continues, South Korea’s yearly export total will show its first decline since 1958.

In recognition of its desperate straits, the South Korean government announced this month that it will increase the money supply by $4.9 billion to reduce interest rates and boost lending to corporations, small and medium-sized firms and consumers, according to JyoungTaik Hwan, an official with the Ministry of Finance and Economy.

The government also agreed to complete the first phase of a massive bank restructuring program by the end of this month. That includes a $37.5-billion infusion of government funds to help South Korea’s debt-laden banks boost their capital to meet tougher international standards.

If this cash infusion fails, the South Korean economy will surely slide even faster into a deep recession that is expected to slash up to 8% from the growth rate and leave more than 2 million people jobless by year-end.

The industrialized world had braced itself for an export boom as the problems of South Korea and other countries worsened and the pressures to export accelerated.

In some areas, such as steel and textiles, where South Korean manufacturers are extremely competitive because of their low-cost operations and the weakened currency, the won, the surge is well underway. Exports of steel mill products to the U.S. during the first six months of this year totaled 1.4 million tons, an 89.5% increase over the same period the previous year, according to the American Iron and Steel Institute.

This has provoked outcries from aggrieved U.S. manufacturers who complain they are being undercut. These tensions are certain to escalate as the global economy slows and Asia’s slowdown starts to cut even deeper into sales and corporate earnings in the industrialized world.

“What happens when the U.S. economy slows down and the Koreans are still exporting rivers of $7,000 cars, $400 PCs and $50 microwave ovens?” asked Kenneth Courtis, chief economist at Deutsche Bank in Tokyo.

Many Factors at Work

But South Korean officials argue that with the exception of a few isolated cases, the world will not be awash with the country’s products. They said their exporters are being undermined by global financial instability and the cyclical nature of this Asian financial crisis in which one country’s problems quickly spread to another as trade and capital flows are disrupted.

Even the surge in South Korea’s exports during the first six months of this year was deceptive, according to Cho Seung Jae, director of the Korean International Trade Assn. He said those export numbers were artificially inflated by the sale of gold collected by South Koreans and the liquidation of used equipment and airplanes.

South Korea’s efforts to boost overseas sales have been thwarted by the lagging demand in other Asian countries, the weakening of the yen, the collapse of Russia and a slowdown in its most promising export markets in the U.S. and Europe, Cho said.

South Korea depends on the rest of Asia for half its overseas sales, but those economies have collapsed, significantly depressing sales to that region. From January through August, South Korea’s sales fell 19% to Japan, 29.2% to Southeast Asia and 7.2% to China.

Efforts to divert production to healthier markets have been only partially successful because the weakening of the yen made Japanese manufacturers more competitive. South Korean manufacturers compete directly against the Japanese in about 50% of their markets in the U.S. and Europe.

Even the savviest South Korean exporters are struggling to stay on top. The announcement of yet another month of double-digit declines in South Korea’s exports hardly comes as a shock to J.H. Yoon, a manager at a small consumer electronics factory at the Namdong Industrial Complex near the port of Inchon.

Along the narrow lane where Unix Electronics Co. churns out hair dryers, hand massagers and massage chairs for sale around the world, only one other factory is still operating. Six others have shut down.

“Buyers want Japanese quality for Chinese prices,” said Yoon, assistant manager of the factory.

Back at the company headquarters in Seoul, Unix Family Co. executives have trimmed their payroll by 30% through attrition, cut overhead by 20% and found local replacements for imported components. Some of its vendors have even agreed to supply materials at cost to keep Unix in business.

J.W. Seo, trade department chief at Unix, said his firm, which claims about 50% of the shrinking domestic market, is developing more sophisticated products--such as an upscale massage chair--in hopes of appealing to the U.S. and European markets. These efforts have paid off. In spite of a drop in sales to Asia, Unix’s exports will double this year to $8 million because of orders from the U.S.

But the cost-cutting efforts won’t help Unix if the yen weakens further or China, under pressure from its struggling exporters, devalues its currency, the yuan, according to Seo.

“We would lose our markets,” he said.

And that’s only part of the problem. Global instability, the collapse of markets in Asia and excess capacity in many areas have fed a deflationary spiral created by too many goods pursuing too few buyers.

Howard Lee, a director at SeAh Steel Corp., a large steel products firm, said every industry has excess capacity thanks to the huge investments made by the giant chaebol, or conglomerates, during South Korea’s boom years. He said last year’s bankruptcy of giant Hanbo Steel was just the beginning of a weeding-out process that will accelerate as competition heats up for shrinking foreign markets.

Because Lee is a top supplier of carbon steel pipe to the largest U.S. steel companies, he remains hopeful that his firm will increase its export volumes by 20% to 25% this year. But he expects the value of those sales to decline because of weakened prices.

“In the first six months of this year, even marginal companies could survive through exports,” he said. “But from now on, the changes will be more severe because the export situation is not that bright.”

South Korean manufacturers have trouble leveraging any gains from the weakened won because they are being crushed by high interest rates and mounting debt, Lee said. And many of them depend on imported raw materials or components whose prices have shot up dramatically because of the weaker currency.

“Any company with even a dollar debt to the banks is in trouble,” he said.

‘Very Peculiar Situation’

Han Duck Soo, South Korea’s minister of state for trade, said this financial paralysis is the most critical issue facing governments throughout Asia.

“This is a very peculiar situation,” he said. “Arguably, a decline in your currency should make you more competitive, but here you have the financial sector breaking down and it can’t help these exporters.”

Faced with this bleak picture, Korean manufacturers are slashing prices to snare orders to pay at least some of their bills, even if they lose money doing so.

Koo Ja Kyoung, president of a small Korean company that produces high-tech washing machines for auto assembly lines, is trapped in this fiscal nightmare.

Koo’s major customers--South Korean auto makers--are in serious trouble. In addition to last month’s prolonged strike at Hyundai and a labor dispute at Mando Machinery, a major auto parts company, South Korea’s auto industry has suffered a 50% decline in domestic sales and a sharp decrease in sales to Asia, its major foreign market,

The recent postponement of the auction of Kia Motors and its sister company, Asia Motors--bidders refused to assume Kia’s hefty debts--adds more uncertainty to the situation.

Although Koo’s Koni Machinery Industrial Co. has a large outstanding order from General Motors Corp. to supply GM’s Delphi subsidiary, there are no new orders yet this year, because of the problems in the U.S. auto industry.

Managers Unable to Plan Ahead

Meanwhile, cutthroat competition from South Korean and Japanese competitors overseas have forced Koo to slash his prices to 1996 levels. Compounding Koo’s problems is the 18% interest he’s paying on money borrowed several years ago for a factory expansion.

Every day, Koo slips a little further behind. But he figures it would be more expensive to close his factory--because of overhead, wages and other hidden costs--than to keep it running. Under South Korean law, companies are required to provide severance pay to laid-off employees.

“If I suspend production, I would have to sustain a [$7,462-a-month] loss,” he said. “If I work, I sustain only a [$5,223-a-month] loss.”

For Koo and many other South Korean businessmen, the greatest frustration is not being able to plan beyond tomorrow. He is certain, however, of one thing. If there is a bright light in his increasingly bleak future, it will come from America, where consumers have dollars to burn.

“It’s the U.S. that will make any difference in our situation,” he said.

There is no question that the U.S. will become an increasingly competitive battlefield.

J.B. Chun, the new president of Daewoo Electronics Co., has spun off his domestic sales and service department into a separate company so he can focus all his company’s energy on selling overseas.

Later this year, Chun plans to launch a campaign to make Daewoo Electronics a household name in the U.S., where it already enjoys a 6.5% share of the color television market through sales of Daewoo products and private-label brands.

Part of Chun’s strategy includes the release of products using a new display technology--activated mirror array, or AMA--that he claims is far superior to liquid-crystal display in its brightness and cost. His target is the corporate projector and burgeoning home theater markets.

“Just modifying and improving existing technology cannot be the ultimate strategy for a company like ours,” he said.

Chun’s stepped-up overseas campaign began just as Daewoo Electronics started construction of Tech Tower, a 45-story headquarters building in Seoul that is scheduled to be completed in 2000.

“They thought we could fill the whole building with our employees,” the president said. “We will be lucky to fill a quarter of the space. Now I look at this picture and wonder, ‘How will we fill this building?’ ”

Chi Jung Nam of The Times’ Seoul bureau contributed to this report.

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Ailing Exports

South Korea’s efforts to boost its exports have been thwarted by the collapse of Asian markets, the weakening of the yen, Russia’s economic free fall and a slowdown in its most promising export markets in the U.S. and Europe. Monthly South Korean exports since last summer, in billions of dollars:

$9.9 billion

Source: South Korea Ministry of Trade