By Moon Ihlwan
South Korean President Kim Dae Jung burnished his credentials as a serious economic reformer in July, 1999, when his government declared it would let Daewoo Group collapse. The message was that once-mighty industrial conglomerates were no longer too big to fail. Nearly two years later, however, Daewoo lingers as a poignant symbol of Seoul's inability to follow through on bold promises. Though the massively indebted chaebol is bankrupt, no key Daewoo assets have been sold.
Now, Kim has another chance to establish his legacy before he leaves office in February, 2003. But his government must act fast. General Motors Corp. (GM) says it has begun formal negotiations to buy Daewoo Motor Co., one of the conglomerate's prime assets. On May 30, GM delivered a formal proposal, beginning a process of hammering out the terms of a deal.
STILL FETCHING. Although Daewoo Motor and its auto-related affiliates are mired with $22 billion in debt, they still have substantial allure to GM, since they boast some first-rate production facilities and a 20% share of the Korean car market. By shedding several thousand workers, the company has stemmed its steep losses, posting its first monthly operating profit in years in April. Meanwhile, a deal would slash by one-third the debt of the remaining group, which would still include electronics and general-trading divisions. It would also help restore faith in Korea's financial system and open its car market to competition.
But before any of this can happen, Kim's government, which controls the creditors who now call the shots, must take the painful steps it has been avoiding. The most explosive issue: what to do with Daewoo's oldest plant, in Bupyong, just west of Seoul. The inefficient facility, a hotbed of labor protest, is running at less than half its annual capacity of 500,000 cars. Even though the court-appointed management has laid off more than 3,000 workers in the past six months, Bupyong is still overstaffed, employing 7,000 people. A recent Andersen report commissioned by Daewoo (but leaked to the press) recommends shutting Bupyong and selling its land.
Kim should take that advice. It would be a sharp departure from current policy, which has been to prop up sick companies by forcing banks to roll over loans and attempting to get outside investors to take over all corporate assets--the good and the bad--in order to get the ones they really want. Often, Seoul has pressured buyers to keep weak plants operating for at least a few years. It's clear now that savvy foreign investors won't be tempted by such headache-prone deals.
GM offers a prime example of how government bungling and inflexibility have slowed Korea's recovery. The U.S. carmaker offered $3 billion to $4 billion for Daewoo Motor in 1999, according to analysts. It could have been a perfect fit. Many Daewoo cars are based on GM platforms, since GM had owned half of Daewoo Motor for 15 years until the marriage was dissolved in 1992 over a managerial dispute. Daewoo also badly needs engine technology, and it already buys large engines from GM's Holden Ltd. subsidiary in Australia.
But Kim's economic team thought GM's offer was too low. It then received a nonbinding $5.9 billion bid from Ford Motor Co. (F) Seoul wanted Ford to buy Daewoo in one piece. But the Detroit auto maker backed out after three months, worried about the financial obligations the company may have made to governments in its overseas operations. Now, Seoul is talking to GM again. This time, however, GM is expected to offer about half its far-flung original bid, and only for two newer Daewoo factories elsewhere in Korea and several small foreign plants.
By agreeing to sell only Daewoo's attractive holdings, Kim could break a logjam that has blocked sales of billions of dollars in other salvageable industrial assets. Domestic resistance remains intense. But creditors have already invested $2.2 billion to keep Daewoo Motor alive since 1999 and are wary of sinking in more cash. Kim Dae Jung should close the Daewoo deal and others like it--and leave office as a leader who made the painful decisions needed to restore Korean industry to health. Moon covers Korean business from Seoul.