Paralysis In South Korea

Ever since rising from the ashes of the Korean War, South Korea's economy has been dominated by a tightly knit group of military-backed technocrats and top politicians who have showered favors on powerful business families. The heads of these business groups, or chaebol, in turn contributed campaign funds to the politicians. It was this Korea Inc. that challenged Japan by building up huge shipbuilding, automotive, and electronics industries. Despite periodic feuds, the elite Korean families were intermarried and shared a common purpose of nation-building. They believed in the marital concept of il sim dong chae, or one mind, one body.

But the days of harmony may be over. South Korea is facing its most difficult transition since 1987, when former President Chun Doo Hwan, in the face of massive street protests, engineered the election of another former general, Roh Tae Woo. After five years in office, Roh must step down in February. His ruling Democratic Liberal Party on May 19 decided to run a former dissident, Kim Young-Sam, as Roh's handpicked candidate. But challenging this plan is the founder of the $50 billion Hyundai business group, Chung Ju-Yung, who on May 15 made it official: He is running for president in the December elections.

That sets the stage for a grueling power struggle at the top of the Korean establishment. It also is triggering new conflicts among the chaebol themselves. Korea could pull through the turmoil and become more democratic and, ultimately, more competitive. But it's also possible the power struggle will rock the stability of Korea's elites, threatening the country's increasingly fragile economic gains. A third candidate, opposition leader Kim Dae-Jung, could siphon off votes from Kim Young-Sam and give Chung an outside chance to seize the presidency. "For the first time in Korean history, the business community is vying for political power," says David I. Steinberg, professor of Korean studies at Georgetown University.

GRIDLOCK. While this plays out, decision-making in Seoul has ground to a standstill, even as the economy stumbles. While Korea could rack up growth of 7% this year, that's in the face of high inflation, a worsening trade deficit, high interest rates, rising bankruptcies, and declining investment. The chaebol are also holding back on key investments and are losing ground to the Japanese. "The government and the chaebol should be working together to improve Korea's competitiveness, but sadly, no one seems to be interested," says Sun Han-Bong, a director of Hanshin Securities Co.

The gridlock is affecting foreign perceptions of Korea. One striking vote of no-confidence: Korean company stocks once sold like hotcakes to international investors. But despite the formal opening of Korea's stock market on Jan. 3, foreigners have bought a minuscule $800 million worth of shares. "We've a lot of inquiries on Korea, but we're afraid to recommend anything," says one U.S. banker in Seoul. Some U.S. executives are nervous about their joint ventures with the chaebol, particularly Hyundai.

At the core of the battle is a bitter, personal feud between Chung and President Roh. Chung, 77, blames Roh's government for Korea's ailing competitiveness, corruption, and increased cost of living. So, the Korean-style Ross Perot formed his own political party, and in March his Unification National Party won 17% of the votes and 10% of the seats in a National Assembly election.

SQUABBLING. Roh, it seems, will stop at nothing to block Chung. The government arrested his fifth son, Chung Mong-Hun, vice-chairman of Hyundai's shipping unit, in April, on charges of tax evasion. Although he has formally retired from Hyundai, turning it over to a younger brother, Chung himself is under investigation for "borrowing" funds from Hyundai. The government has also engineered a financial squeeze on Hyundai, forcing its engineering unit to the brink of bankruptcy. An angry Roh even summoned Hyundai Chairman Chung Se-Yung and the heads of the Daewoo, Samsung, Lucky-Goldstar, and Sunkyong groups to the Blue House presidential palace on Apr. 25 and warned them to stay out of politics.

The chaebol have traditionally cooperated among themselves, in part because the sons and daughters of the founding families are intermarried. But they, too, are increasingly at odds with one another. Daewoo Chairman Kim Woo-Choong in March called Chung's political ambitions "unfortunate," creating the appearance that Daewoo is pro-government. Samsung and Lucky-Goldstar have sought to remain neutral.

Other conflicts are erupting. Samsung has taken aim at Daewoo in a nasty dispute over one of Korea's most sensitive subjects: business ties with Communist North Korea. Since visiting North Korea in January, Daewoo's Kim has increased his trading activities by buying North Korean cement and zinc and shipping it directly to South Korea, a potentially lucrative privilege denied to other companies.

Critics are alleging that Daewoo is taking unfair advantage of its connections with Roh's government to secure this access: Kim's daughter's father-in-law, Kim Jun-Sung, is a former Deputy Prime Minister and thus well-connected. Samsung was so irked that it took an unprecedented step: It went to the press, complaining about Daewoo's ability to "monopolize North-South Korean trade."

In a separate dispute, Goldstar for the first time brought a patent-infringement suit against a fellow Korean company, Daewoo. Sogang University Professor Kim Kwang-Doo says he expects more confrontations to break out: "This is only the beginning."

With a personal net worth of $4 billion, Chung clearly has benefited from good relations with the government. Even so, he now seems to be enjoying the prospect of dismantling some of the cozy links that make up Korea Inc. "That is good for Korea," says Chung, who argues that government-business ties are the source of political corruption, though Chung admitted he provided Roh with huge contributions while running Hyundai.

Chung says he will press for profound changes in how the chaebol operate. The vast conglomerates have been run by single founders and their families through a maze of cross-investments. Now, Chung argues that different operating units should function more independently from the founding families--and with their financial ties diluted, they'll become more competitive. "Economically, the chaebol have outlived the need for them," Chung says.

Roh wants to go further, perhaps even breaking up the chaebol and ridding them of family influence. Finance Minister Rhee Young-Man is proposing to legally ban the owners from managing the chaebol. Says Rhee: "The owners become ineffective when the chaebol become as big as they are today."

Before this battle can be resolved, Korea faces months of paralysis. Korea's big companies are scaling back their investments in new plants and equipment because of the politically inspired credit crunch. For Samsung, a lack of financing could delay in building a new wafer-fabrication plant for its 16-megabit dynamic random-access memory chips, putting the company a step behind Japanese competitors.

PUNISHMENT. A lack of funds could postpone Hyundai Motor's planned introduction of successors to its five-year-old Sonata and Grandeur models. Goldstar, too, is running into financial limits. "The government wants to punish the owners," says a senior Goldstar official, "but what they are doing is punishing the companies--all in the name of reducing the chaebol's power."

At stake is the future of Korean capitalism. The betting is that the founding families' roles in the big chaebol will fade and more professional managers will be brought in to operate smaller, more specialized units. This could transform them into organizations closer in substance and style to Japan's keiretsu. If the Koreans can make that leap, loosening the ties that bind Korea Inc. may be a long-term winner, no matter what pain it causes today.

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