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."