Korea Inc. Balks

So far, the chaebol are refusing to make real changes

For years, no industry seemed too crowded and no market too far-flung to escape the tendrils of South Korea's expansion-minded chaebol. Conglomerates such as the $47.6 billion Hyundai Group boasted of making everything from "chips to ships" from Europe to Latin America. The omnivore strategy seemed to work--until the Korean economy almost collapsed in November under the weight of $150 billion in foreign debt.

Now, with Korea's debt restructuring still in doubt, investors are looking for signs that the chaebol are slimming down into focused companies that can produce steady profits. Investors especially want to see the top four--Hyundai, Daewoo, Lucky Goldstar, and Samsung, who account for more than half of Korean corporate debt--set the course for Korea's new economy.

Yet as the crisis drags on, it looks increasingly unlikely that any changes the big chaebol make will go far enough. Certainly, they will back away from some marginal businesses. But analysts worry they will simply try to muddle along for now, then revert to old practices once the crisis calms down. "Basically, no chaebol chiefs want to lose control over their empires," figures Lee Chae Kwang, head of research at Daiwa Securities in Seoul. "Their tendency is to lie flat on the ground, tough it out, and then resume business as usual."

NEW LIABILITIES. Already, some chieftains are declaring defiance. Kim Woo Choong, chairman of Daewoo Group, gave his employees surprising news in his New Year's address. He pledged more "expansion-looking management" rather than "shrinking in the face of difficulties" in 1998. Debt-burdened Daewoo will soon assume $1.3 billion in new liabilities to take over money-losing Ssangyong Motor Co.'s auto business.

Other executives are sounding less sanguine and have acknowledged that they must lay off workers and sell off parts of their businesses. Samsung Group, the No.2 chaebol with assets of $45 billion, will slash investment this year by 25%, or $1.3 billion, and cut production of electronic goods in Asia by up to 40%. It vows that the growth-at-any-cost ethos is history. "We will consider big deals with other chaebol and spinning out businesses to foreigners," says Hwang Young Key, a Samsung senior managing director. Analysts say the group may sell AST Research Inc., a money-losing computer maker based in Irvine, Calif.

Korea's biggest chaebol, Hyundai Group, has also announced investment cuts of 30% and is delaying a $1.4 billion microchip plant in Scotland. Bankrupt carmaker Kia Motors Corp. and failed shipbuilder Halla Group are sacking workers and selling off assets.

But with the top chaebol expected to post losses for 1997, just tapping on the brakes won't be enough. What's needed is a healthy shakeout of the overbuilt auto, steel, petrochemical, and semiconductor industries. Analysts figure investment needs to be cut 30%, as Samsung and Hyundai have announced, to free up cash to pay down debt loads that now on average approach 4.5 times equity at the top 30 conglomerates.

EXIT AEROSPACE. Many analysts believe the chaebol will have to give up lines of business altogether, rather than just suspend them temporarily. Samsung may need to exit shipbuilding, heavy machinery, aerospace, and petrochemicals and concentrate on four of their more profitable areas: semiconductors, liquid-crystal display panels, computer monitors, and financial services. Such a move would cut revenues by more than 40% but leave Samsung with far better growth prospects.

Hyundai, analysts say, could fashion a stronger group if it stuck with core manufacturing in autos, ships, machinery, and construction and gave up its costly forays into aerospace, petrochemicals, and chipmaking. Daewoo should also concentrate on those industries. LG--which was the least aggressive in expanding and therefore has fewer units to shed--should focus on chemicals, refining, and electronics, where its operations are strong enough to withstand gluts in those industries.

In addition, South Korea may only be able to support two auto makers rather than five. That makes Samsung's $6 billion push into the crowded car market look fanciful at best. "Samsung should have said it will give up the auto business," says Daiwa Securities' Lee. Ditto for Hyundai's plans to sink $3.2 billion into a new steel plant to supply its auto and shipbuilding units. Yet no one is expecting such dramatic announcements. One prediction is that Hyundai will break up--but that the pieces will be run by the sons of the founding chairman, Chung Ju Yung.

Massive divestitures would only be the beginning of real change in corporate Korea. More fundamental issues lie in the balance sheets. Here the chaebol will need to ditch their Alice-in-Wonderland accounting practices. None of the chaebol report results on a group basis. And some analysts think stated revenues are inflated by up to 30%, thanks to transactions within the chaebol that are mixed with external ones. Reported debt levels probably understate the degree of financial problems, given the common practice of one unit guaranteeing another's debt--or even subsidizing it.

Many expect the chaebol to resist international accounting standards and to continue their stealthy cross-lending among subsidiaries, despite a ban as part of the International Monetary Fund's bailout package. They will also probably avoid the hostile takeovers that would get them focused on bottom-line growth.

Until that becomes a reality, few see chaebol chieftains cleaning up their acts. "Hostile takeovers should be allowed immediately," insists Yoo Seong Min, a fellow at the Korea Development Institute, a government think tank. Yet although a ban on foreign companies taking majority stakes in Korean companies was lifted in December as part of the IMF loan package, it is unlikely to result in huge sell-offs. Family-dominated chaebol boards still have the ultimate veto power on acquisitions and are likely to allow only less-important sales of assets to raise cash.

CRONIES. The new government of left-leaning Kim Dae Jung, due to take office on Feb. 25, has pledged to push the chaebol to restructure and pass laws allowing layoffs. Yet some doubt whether the President-elect's economic advisers will push hard on the key issues. Chung Un Chan, economics professor at Seoul National University, points out that a 12-member panel in charge of generating reform ideas has not presented any concrete proposals to improve business transparency and corporate governance. Perhaps one reason is that the panel is led by Kim Yong Hwan, a former Finance Minister under autocratic President Park Chung Hee. "They are the ones who put in place the command-and-control economy," says Chung. "You need infusion of new blood for reforms."

In the end, the chaebol may have no choice. The sprawling concerns are up to their necks in debt and running out of cash. Samsung, Hyundai, LG Group, and Daewoo have had to offer interest rates of up to 30% on their corporate bonds to attract any takers. But only the most ferocious pressure will transform these proud empires.

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