South Korea Comes to a Crossroads
Han Mi Sook, a 37-year-old company worker in Seoul, has owned a Daewoo sedan for several years. But riding around town with “Daewoo” on your hood has become a lot less prestigious since last August, when the entire industrial group was brought to its knees financially.
“It’s still running,” she said with a laugh. “But it’s a bit noisy.”
The same might be said for the entire South Korean auto industry these days. Headlines blare daily every step and misstep of an intricate ownership dance that promises to reshape this once-proud South Korean industry for decades to come.
General Motors and Ford have already declared their interest in buying Daewoo Motor, a subsidiary of Daewoo Group, amid reports that Volkswagen, Renault and DaimlerChrysler might also enter the fray. The growing likelihood that foreigners will ultimately take a major stake in one of the nation’s manufacturing jewels has sparked intense soul-searching.
Yet it has also underscored how much this nation has changed since its 1997-98 economic crisis. A government that once audited every citizen who bought a foreign car now preaches open markets and expanded competition.
For many, the future ownership of Daewoo is a litmus test of whether South Korea will let foreigners control not just fat-cat bankers, but also vocal blue-collar workers in huge metal-bashing factories that directly or indirectly account for 10% of the nation’s work force.
The outcome might also lead to some sharp cornering in the global industry race for position. South Korea is among the last few desirable auto properties for the several players with global ambition. The Daewoo Group collapse has set off a round of maneuvering by the biggest names in the industry looking to expand their footprints in Asia.
“This is among the last of the good stuff,” said George Peterson, president of the AutoPacific Group consulting firm in Tustin. “Korea right now is pretty attractive.”
For Ford and GM, Daewoo Motor represents a chance to pick up relatively modern factories in an Asian country with a skilled labor force, relatively low costs and a large domestic market.
As the industry consolidates worldwide, Ford, GM and DaimlerChrysler find themselves well-positioned in the mature North American and European markets but relatively weak in the higher-growth Asian market, with its rising middle class and other promising demographics. Building operations from scratch is too expensive and time-consuming. Buying Daewoo--at the right price--promises a strong domestic and export beachhead in a key region.
Furthermore, the assets have become more valuable as the South Korean auto industry has come roaring back. Production capacity is above 65%, compared with 40% after the country’s bailout by the International Monetary Fund in late 1997. Kia Motors (now owned by Hyundai) reported a record profit of $163 million last year, and it could emerge from bankruptcy protection within months. And domestic sales rose 14% and export sales 6% in 1999, thanks to pent-up demand, recovering consumer confidence and a strong yen that’s made it easier to compete against the Japanese.
There’s also a sweetener. Daewoo’s aggressive push into Poland left it with an updated auto factory in another important region. “Eastern Europe ends up being the icing on the cake,” said Wesley Brown, a consultant with Nextrend, an industry consulting firm based in Thousand Oaks.
That said, the cake is sagging a bit--which may explain in part why South Korea is inviting foreign bidders for Daewoo Motor in the first place. The latest audit found company debts of $16.5 billion and assets of $11.5 billion--although many believe the situation may actually be far worse. And Daewoo’s auto operations have been on rather shaky autopilot as its financial situation festered.
As outlined, those interested must show their intent and pony up bids by the end of March. Creditors will then choose a primary candidate, with hopes of sealing a deal by June 30.
Government officials say they’re taking an arm’s-length approach. “Market principles will apply, and the government will not interfere,” said Lee Yong Keun, chairman of the government’s Financial Supervisory Commission.
But the government has enormous influence through Daewoo’s creditor banks, given that several were in effect nationalized last year in return for massive capital injections.
As South Korea maps its course, it faces several contradictory forces. Politically, although its consumers are increasingly open to foreigners, conservatives and labor unions have repeatedly accused President Kim Dae Jung of “selling out” to foreigners in advance of the National Assembly elections in April.
Financially, there are few domestic players with pockets deep enough to take over the troubled auto company. National leader Hyundai, which now controls 75% of the domestic market, is still absorbing bankrupt Kia and lacks the cash to mount a serious bid. In the last several years, most of the eight other South Korea companies that made cars have been gobbled up or sidelined.
Hyundai also has made noises about taking over Daewoo’s Poland operation without absorbing the rest, but the government seems intent on selling the troubled auto company as a unit. Analysts add that Hyundai appears more interested in keeping a strong foreign player out of South Korea than in expanding its own empire.
An additional concern is South Korea’s broader economic future. Putting nearly 100% of the auto industry in one garage, Hyundai’s, would not only fuel higher prices, but could also keep South Korea insulated from some of the best technology, marketing savvy and management skills that a global player would bring to South Korea. South Korea has been willing to forgo these in the past, but the stakes are arguably getting much higher.
“This time, Hyundai alone can’t bid for Daewoo Motor,” said D.K. Young, analyst with ING Barings in Seoul. “They don’t have the cash, and the government won’t let them.”
In the negotiations, Hyundai has raised alarm bells about the dangers of foreign domination. “We feel Korea should have an independent auto industry,” said company spokesman Stephen Kitson.
But Hyundai also said it has been approached by foreign players, raising speculation that it might field a joint bid with Ford. Hyundai would like a controlling interest, a condition Ford wouldn’t be likely to accept.
Among the foreign candidates, GM is the best positioned. It controlled 50% of Daewoo Motor in a rocky 15-year marriage that ended in 1992. And for two years ended last November, it enjoyed exclusive negotiating rights for the company, which enabled it to kick every tire in Daewoo’s many factories.
But its hardball negotiating stance and some high-profile anti-GM campaigning by Hyundai and local suppliers have undercut its position at a time when some local press reports are calling the U.S. company “arrogant and opportunistic.”
“People have little understanding of what we’re trying to do,” counters Kay Lee, a Seoul-based GM spokesman. “Korean parts suppliers will have huge opportunities if GM acquires Daewoo.”
As South Korea’s economy has bounced back faster than anyone expected, Ford has shown a Johnny-come-lately interest. And it’s played the P.R. game much better, hinting at a joint bid with Hyundai and suggesting that it would preserve jobs, work with local companies and absorb more debt than GM would.
“Ford will be very conscious of Koreans’ sentiments toward possible foreign control of a major industrial firm,” Wayne Booker, Ford’s vice chairman, told South Korean reporters.
Two other prospective players--DaimlerChrysler and Toyota--are apparently not serious contenders. The recently merged DaimlerChrysler is still integrating its own operations and has shown relatively little interest, at least publicly. And Toyota is already well-positioned in Asia, not to mention its being a lightning rod for criticism at the prospect of a Japanese giant’s taking over a Korean icon. “I don’t think that would go over too well,” said Nextrend’s Brown. “That would be political fire.”
A South Korean wire service reported that Volkswagen is also interested. The company declined to comment, but analysts say Volkswagen may want to deepen its tire tracks in Asia.
Another possibility in this complicated dance is that Ford may only be playing spoiler. Ford was all set to buy Jaguar several years ago for $1.7 billion when GM swooped in with its own bid, forcing its arch-competitor to spend $800 million more to get the British luxury car maker, said AutoPacific’s Peterson. “It could be Ford’s time to get even.”
In yet another side show is South Korea’s Samsung auto group, which is also in need of a financial overhaul. France’s Renault, which recently took control of Japan’s troubled Nissan, entered exclusive negotiations to acquire the Samsung operations, and a decision is expected sometime this month. Samsung was the last to enter South Korea’s auto market in 1996, just before the economy collapsed, in a move that became a symbol of South Korean corporate recklessness.
“Samsung would like to forget this big failure in the 20th century and concentrate on our new challenges in the 21st century,” said Park Jong Hwan, general manager in Samsung’s restructuring division.
On the face of it, Renault is struggling just to turn Nissan around; tackling Samsung smacks of reckless driving. But analysts say it might make sense at a reasonable price. Samsung’s plant in Pusan, really the only valuable part of the franchise, was built using Nissan technology, with production specifications based on the Nissan Maxima.
Production costs in South Korea are 20% less than in Japan, analysts say, and the plant could boost Nissan’s access to the South Korean market.
Finally, Renault could play a catalyst role in the Daewoo bid. Reports suggest that it also is interested in Daewoo’s truck unit, which Ford and GM are not, at around $700 million.
In the end, the next few weeks could prove an important test for South Korea’s open-economy policy. As the country’s political and economic establishment agonizes over its future course, however, many consumers seem to be taking it all in stride.
“I’m not worried at all about foreigners taking over Daewoo,” said Park Sung Han, a 29-year-old businessman, as he signed a contract for a new Daewoo Rezzo in a showroom in Seoul’s snazzy Upkujong neighborhood. “They can’t very well take the factory away, and they have to use local employees. So why worry?”
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Undergoing an Overhaul
Sales of cars in South Korea tumbled by half in 1998, hastening the industry’s consolidation:
Car sales in South Korea, in millions:
1994: 1.56
1995: 1.56
1996: 1.64
1997: 1.51
1998: 0.78
1999: 1.27 million
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A Short History of Daewoo Motor
1952 Founded as Shinjin Motor Co.
1972 General Motors buys 50% stake
1978 Daewoo Group becomes GM’s partner
1983 Shinjin is renamed Daewoo Motor Co.
1992 Daewoo Motors buys out GM
1995 Expands production to Germany, China, India
1996 Expands production to Poland, Vietnam, Uzbekistan
1998 Ships first cars for sale in U.S.
1999 Daewoo Group suffers financial collapse
2000 Daewoo Motor put up for sale
* Sources: Korean Auto Manufacturers Assn.. Daewoo Motors
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Car Trouble
South Korea’s once-diverse auto industry has shrunk from nine vehicle makers to four during the economic turmoil of the last few years, and more changes are expected. The country’s auto makers and where they stand now:
Hyundai Motor Co.: Industry leader, has 75% of domestic auto market
Daewoo Motor Co.: Heavily in debt, up for sale
Kia Motor Co.: Acquired by Hyundai Motor in December 1998
Hyundai Precision Co.: Merged with Hyundai Motor in July 1999
Asia Motor Co.: Acquired by Hyundai in June 1999
Daewoo Heavy Industries: Merged with Daewoo Motor in September 1999
Ssangyong Motor Co.: Acquired by Daewoo Motor in January 1999
Samsung Motor Co.: In receivership, up for sale
Samsung Heavy Industries: May be acquired with Samsung Motors
* Source: Times files
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Chi Jung Nam in The Times’ Seoul bureau contributed to this report.
