Korea's Big Leap Into Europe

The chaebol are poised to pour in billions

His friends call him "King Kong." And O.S. Kong, a 46-year-old South Korean executive, is certainly living up to that chest-thumping nickname. As president of Western European operations for Korea's LG Electronics, Kong hopes to spend upwards of $1.5 billion on a semiconductor and consumer-electronics factory in Britain.

That's a big leap from LG's modest array of assembly plants for TVs, VCRs, and refrigerators in Europe. But LG, like Korea's other chaebol, has decided this is the moment for dramatic expansion in Europe, especially in sophisticated products such as cars and custom-made chips. For many reasons, such as rising wages back home, saturated markets in the U.S., and a desire to go global, Korean giants are spending billions in Britain and on the Continent. Fierce protests are certain from such companies as Peugeot that have already suffered from a Japanese incursion. Yet the hugely ambitious Koreans won't stop until they have grabbed big chunks of Europe's markets.

EVERY BIT. These plans call for spending far more than the $2 billion the Koreans have plowed into Europe over the last decade or so. Last fall, Queen Elizabeth II and Samsung Chairman Lee Kun-Hee inaugurated a $700 million plant for microwave ovens and personal-computer monitors. Now, Samsung may bid for troubled Dutch aerospace group Fokker. Daewoo Corp. has bought several Eastern European car plants and plans to spend $3 billion upgrading them. It is also negotiating to buy Britain's Lotus Cars Ltd. from luxury car group Bugatti International. Hyundai Corp. is considering a $1.3 billion chip plant in Europe and is scouting Romania for a car-assembly site.

European governments facing an unemployment crisis want every bit of Korean investment they can get. On his Mar. 5 visit to Seoul, Prime Minister John Major announced $90 million in deals between British and Korean companies, including investments by three Korean electrical-engineering companies that will create hundreds of jobs in northern England. Major knows that Japanese auto makers helped revive British manufacturing by placing orders with the country's auto parts suppliers. He and other European leaders hope for a similar boost from the Koreans--and other Asians. QPL Holdings Ltd., a Hong Kong chipmaker, will spend $347 million expanding its wafer plant in Wales. And computer maker Acer Inc. of Taiwan wants to set up 21 joint ventures in Eastern Europe by 2001.

The Koreans, however, are leading this Asian push. Prodded by last year's Asia-Pacific Economic Cooperation agreement on free trade, European and Asian leaders gathered for a Mar. 1-2 summit in Bangkok to boost economic and political connections between the two regions. The European Union and Korea inked a pact to improve access to each other's telecommunications and financial-services markets.

Until recently, Koreans poured most of their money into faster-growing Asia and the U.S. But while Korea's investment in Europe was just 3.4% of its world total five years ago, it's now 19.4%. "Suddenly, Korea realized that the only other market that could absorb its expensive products was Western Europe," explains Chong Ju Choi, a professor at London's City University Business School, who advised Hyundai on its European strategy.

The chaebol sometimes find it cheaper to produce in Europe than to ship goods from home. "In certain parts of northern England, labor costs are lower than they are in Korea," says LG's Kong, whose company has expanded a TV and microwave plant in Britain employing 475. Also, despite the pledges to increase European-Korean trade, some Korean companies see operations in Europe as insurance against a protectionist backlash. The EU "wants to protect itself from outsiders," says Sang Il Lee, a sales director for Daewoo Motor Co. in Western Europe. "We have to overcome these barriers" by manufacturing locally.

PARTNERS. But Koreans are also looking to Europe for a step up the technology ladder. Samsung might use Fokker's planemaking technology to support its global plans in aerospace. Daewoo's interest in Lotus may lie more in the company's skills as an engineering consultant than in its troubled sports-car division. Daewoo's pact to buy a 65% stake in Austrian engineering group Steyr-Daimler-Puch followed efforts to develop a new diesel engine together.

Korean companies are also looking to European partners for technology that will help them offer more sophisticated products around the world. On Mar. 5, Samsung announced it would license technology from SGS-Thomson Microelectronics Inc. to develop 32-bit microprocessors for such products as multimedia computers and cellular phones. By putting the microprocessors in its products, Samsung could help the Franco-Italian chipmaker establish its 32-bit technology as the industry standard. "It's better the Koreans help make European technology a world standard than American or Japanese technology," says Philippe Geyres, an SGS-Thomson vice-president.

FAST RACE. Even in the car industry, where animosity toward Asian rivals is intense, some partnerships exist. Ssangyong Corp. has launched a four-wheel-drive vehicle called the Musso using Mercedes engines. The two companies have teamed up on a mini-van for the Asian market. Mercedes owns 5% of Ssangyong.

But for most European carmakers, the Koreans are a threat. Last spring, Daewoo began selling cars in Europe, rolling out its $14,000 Nexia, which competes with Volkswagen's Polo and Opel's Corsa, and its $18,000 Espero, which competes with VW's Golf. In nine months, Daewoo sold nearly 60,000. By 2000, it's aiming for 300,000 a year. That's the same goal that Honda Motor Co., which has been manufacturing in Europe since 1992, hopes to reach by 1999. As Daewoo lacks a strong dealer network and offers outmoded technology, rivals doubt that it will succeed.

But even a flawed Korean effort could force prices lower. Korean carmakers sold almost 179,000 cars in Western Europe last year, grabbing 1.5% of the market, up from 0.9% in 1994. European auto makers, in turn, sold only 4,300 cars in Korea last year. That's why calls by European carmakers for quotas on Korean imports are growing louder. "The Koreans have locked everyone out," insists Louis R. Hughes, president of General Motors Europe.

Whether the new EU-Korean accord will change this imbalance is uncertain. But as the chaebol continues its drive to internationalize operations, its interest in Europe will keep growing. Europeans will have to learn to compete and cooperate with these dynamic Asians.

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