South Korean 'chaebols' are laggards in recovery effort
South Korean 'chaebols' are laggards in recovery effort
By Pauline Jelinek
SEOUL (AP): It was a rare public confession from some of South Korea's richest and most powerful men, the chairmen of four of the nation's five largest conglomerates.
"We deeply feel responsible for the current crisis," they said in a statement shortly after the nation's near economic collapse.
They "humbly" pledged to restructure corporate Korea, whose bloated and inefficient business empires were sinking under the weight of huge debts -- and taking the country down with them.
That was a year ago.
But if they intended to lead South Korea's economic comeback, the heads of the big five conglomerates are proving laggards.
"They are resisting change," Richard Samuelson, at SBC Warburg Dillon Read, said of Hyundai, Samsung, LG, Daewoo and SK.
South Korea's economy has made a comeback, of sorts. But most economists say it remains fragile.
Share prices on South Korea's stock market have doubled in the past three months. The nation's trade surplus hit a record US$39.9 billion in December. Its won currency has strengthened, and interest rates have dropped to eight percent from more than 30 percent. The central bank is forecasting economic growth of 3.2 percent this year.
At the same time, however, unemployment has jumped to 7.3 percent from two percent, and with more layoffs expected at inefficient operations, labor protests still could become a wildcard in restructuring.
If South Korea is rebounding from the financial mess that forced it to go to the International Monetary Fund for $58 billion bailout in late 1997, little credit is due the biggest of the "chaebol," as South Korea's 64 conglomerates are known.
While the government has made strides in reforming the troubled banking sector, the five big conglomerates spent most of last year increasing, rather than shrinking, their debt.
They pared only 35 of their combined 264 affiliates through mergers, selloffs and outright closures, while their total debt rose beyond the $140 billion owed at the end of 1997.
Hyundai, the largest, in the past year has bought bankrupt Kia Motors Corp., expanded its main shipbuilding plant and started a new tourism business in communist North Korea.
Buying, expanding and taking on more debt is what the chaebol are all about -- and it's behind many of their current problems.
As a destitute South Korea struggled to rebuild from the 1950- 1953 Korean war, the family-owned businesses that became the chaebol were encouraged by successive governments through tax breaks and low-interest loans. That partnership fueled the nation's meteoric development.
But chaebol came to value size over profitability. Some eventually included 30, 40 or 60 subsidiaries, and they amassed debt four, six, even 20 times more than the total value of their assets. Buoyed by ever increasing loans, they shuffled money among subsidiaries to mask losing operations.
President Kim Dae-jung came to office a year ago vowing to rein in the chaebol.
It's a promise made but unkept by previous administrations. But analysts say Kim's administration has woven a set of laws and policies they believe will reduce excess debt, excess capacity and excess labor.
"I call it 'taming wild horses'," said Lee Hun-jai, chairman of the commission Kim set up to oversee restructuring.
The conglomerates have agreed to sharply cut debt loads, and new laws will soon require them to stop spending to prop up losing subsidiaries and submit their books to independent, outside audits.
In perhaps the biggest step, the top five chaebol agreed in December to merge or swap some of their overlapping subsidiaries so they could each concentrate on core industries. They also promised to spin off 91 more affiliates this year in an attempt to raise $16.6 billion.
More than a dozen smaller conglomerates are in the process of working out restructuring plans with their creditors.
"Over the last 12 months there's been more restructuring in the corporate structure than in the last 12 years," said Hun Soo- kim of Merrill Lynch International. Whether that's enough "is a wholly different question."