Korean carmakers headed for a fall

SOUTH KOREA's fast-moving, overcrowded auto industry is careening toward a crackup, analysts and insiders fear.

According to a report in USA Today, the country's auto industry will need a significant restructuring if it is to survive.

Four of the country's giant corporate conglomerates, called chaebol, are building cars, and a fifth -- mighty electronics manufacturer Samsung -- will start by March, using technology provided by Nissan.

The most powerful chaebol in the auto business -- Hyundai and Daewoo -- talk incessantly about climbing into the ranks of the top 10 global automakers by the year 2000.

All this in a country that already makes nearly twice as many cars as its people buy a year.

Last year, total production of cars and trucks in South Korea reached 3 million, with domestic sales reaching just 1.64 million.

This problem will be further exacerbated with the carmakers planning to roughly double South Korea's carmaking capacity over the next four or five years.

An executive with the U.S.-based Boston Consulting Group, Dave Young, said: "I have trouble believing in the long term you could have this many auto companies. I'm afraid there are going to be some hard lessons to learn."

The strains of overcapacity and such rapid growth are already beginning to show.

Last week, lenders had to rescue Kia, freezing the troubled automaker's debt payments and agreeing to extend additional credit to keep it afloat.

The South Korean government vowed to pressure the lenders to honor their loan guarantees to Kia.

Even so, key supplier Pohang Iron & Steel cut off steel shipments to Kia Friday, citing unpaid bills. And Kia warned that, without Pohang steel, it might have to shut down its auto assembly lines.

In addition to Kia's own problems, the competition among chaebol is getting nasty.

Samsung, which will join Hyundai, Daewoo, Kia and Ssangyong in the auto business, is shaking things up already, months before it has built its first car.

In May, word leaked that a young Samsung analyst, fresh out of graduate school with a doctoral thesis on South Korea's auto industry, had written a report calling for a massive restructuring of the country's car business -- meaning wipeout for rivals Kia and Ssangyong.

The other chaebol were outraged.

"The latecomer, producing no cars yet, is trying to wield a restructuring sword," said Kia chairman Kim Sung Hong.

"Unethical," said Ssangyong President Lee Chong Kyu.

"Samsung is not qualified to discuss restructuring of the industry," said Chung Mong Gyu, chairman of Hyundai, South Korea's biggest automaker. "On the contrary, Samsung is subject to restructuring if necessary."

The dispute comes at a sensitive time.

Economic growth is slowing to 6 percent this year from the 8 percent or 9 percent South Korea is used to.

On top of this, South Korea is slowly deregulating an economy in which the government has worked hand-in-hand with industry, sometimes arranging mergers to eliminate "wasteful competition".

Since South Korea joined the World Trade Organization, it's gradually had to lower trade barriers.

Foreign motor vehicles, once simply not seen here, are entering the country in small numbers -- about 25,000 last year.

The economic changes and increased competition have raised questions about how many of the chaebol can survive.

"The top five are getting bigger," said chaebol expert Kang Hee Bo, a special assistant to President Kim Young Sam. "The lower ones are not doing so well."

"There is a showdown in business," said Park Nei Hei, a professor of business at Sogang University. "The biggest chaebol can extend their business enterprises like an octopus."

The problem, he said, is that "Korean chaebol are too overextended, too diversified" and some of them are suffering in a period viewed here as an economic slump.

Indeed, all of the five biggest chaebol raked in fat profits last year, but four of the next five biggest posted losses, including a US$120 million loss by number six Ssangyong and about $150 million by number seven Kia.

Kia's troubles have attracted the most attention recently. It has been overtaken by Daewoo as South Korea's number two automaker behind Hyundai.

Kia's share of the South Korean market shrank to 19.2 percent the first five months of 1997 from 25.8 percent a year earlier.

And Kia's troubles are rattling the country.

"If Kia suspends production lines, it will be a hard blow to the provinces where their plants are," says Kang Dong Hyun, auto industry analyst at Coryo Securities.

"This is a crisis because of the likelihood that 5,000 subcontractors will go down like dominoes," says Song Chi Young, an economist at the Korea Institute of Finance.

"The impact is going to be felt throughout the economy."

This could also have an effect on the Timor car, as Kia remains its sole source of cars.

Then again, others say a shakeout is just what South Korea's overgrown chaebol need.

"The weak chaebol will die," predicts Kwak Manh Soon at the Korean Economic Research Institute. "That's a good sign. That's competition."