Korea's Kim: War On Two Fronts

Both labor and the chaebol are ferociously resisting reform

It was a close call. On Feb. 12, Korea's militant labor unions were just hours away from calling a general strike that would have crippled the country's economy. The idea was to force President-elect Kim Dae Jung to drop his plans to make layoffs legal. At the last minute, labor leaders called off the strike, when the lack of public support became evident. Yet even after backing off, the Korean Confederation of Trade Unions made it clear that it would continue to fight any moves to shed workers.

Give credit to the 75-year-old Kim. Since winning the election in December, the former dissident has proven a tough leader willing to stand up to entrenched interests. But with his formal inauguration just days away, the historic struggle to change Korea is just beginning. Although the forces of the old order have suffered some setbacks, they are yielding only stubbornly. Most important, it's not just the unions that oppose Kim's most dramatic proposals. The chaebol, the conglomerates that dominate the economy, already are throwing up roadblocks. Unless the chaebol change their position, Kim will be fighting a two-front war against labor and management that could doom serious reform.

Of course, the chaebol publicly support restructuring. But privately they criticize Kim's actions. "Kim Dae Jung is pressing for too much too quickly," says a manager at a top company. "He is in such a hurry that he is imposing changes artificially instead of letting market forces to do the job." So the chaebol and their supporters have been slowing Kim down, often more successfully than labor. A bill allowing hostile takeovers by foreigners passed in Parliament on Feb. 14--but not before legislators sympathetic to the chaebol inserted an amendment postponing implementation of the law by up to 10 months.

Opposition legislators from the Grand National Party have weakened other crucial legislation as well. A new law gives minority shareholders access to a company's books. That's a major issue in Korea, where outside investors often have no idea of a company's true finances, or how much profit it is diverting to a corporate parent. The law as drafted would have let shareholders look at the books if they held as little as 0.03% of a company's outstanding shares. But at the last minute, the chaebol got the minimum shareholding boosted to 1%--a much harder threshold to reach for outsiders. Buying 1% of Samsung Electronics, for example, would cost some $60 million.

It's not just in Parliament that the chaebol and their allies are fighting back. Kim wants the banks to stop lending to big companies at preferential rates. But just in the past six weeks, banks have provided nearly $1 billion in "emergency relief loans" to sickly chaebol. Seoulbank provided $140 million to Dong Ah Group, for example, while Hanil Bank lent $190 million to Kohap Group and $280 million to Han Wha Corp. "The loans are offered at far below market rates, and this is a distorted distribution of limited resources," laments Lee Chae Kwang, head of research at Daiwa Securities in Seoul.

One way the chaebol get these funds is by asking the courts to help them restructure their loans and procure cheaper rates. The banks that lent the money have the right to refuse such court mediation, especially since most of these companies are in such bad shape. But analysts say banks go along with the court requests anyway, just to avoid classifying the loans as nonperforming.

The result is bizarre: Despite a string of widely publicized failures, no big company has shut down any major factory. Giant Hanbo Iron & Steel Co. entered court receivership a year ago, but it is still churning out steel. So is Sammi Steel Co., which failed in March, 1997. Carmaker Kia Motors Corp. supposedly collapsed last fall. Yet it keeps shipping cars to the U.S., Europe, and Asia. "While other companies are paying interest rates of some 30%, these failed companies are paying half that rate or lower as interest," says Min Sang Kee, an economics professor at Seoul National University.

DUMPING? The result is excess industrial capacity that plagues the economy. Four Korean steel companies on Feb. 16 urged Kim's top policymakers to sell off Hanbo's plants to overseas buyers or shutter the company completely, arguing that Hanbo was undercutting prices by up to 16%. Hanbo officials say the company is not dumping, and that Hanbo has just raised its prices.

Some Koreans are getting alarmed as these damaged companies linger on. Rhee Namuh, executive director at Samsung Securities Co., points out that Korean banks risk creating a long-term structural recession by following the example of Japan's banks, which kept offering credit to sick companies so they would not default on loans. "Too much capital is being employed in inefficient industries," says Rhee.

Kim's crisis-management team is aware of the chaebol's foot-dragging. His advisers are wondering when companies will produce understandable balance sheets. "The chaebol have expressed willingness to improve their financial structure, but their methods are too abstract and their timetables too loose," complains Kim Yong Hwan, head of the team. The big fear now is that Korean companies will soon be able to lay off employees but will still resist all calls to restructure dramatically and improve shareholder rights. The result would be rising unemployment, social turmoil--and no fundamental change in the way Korea Inc. runs its affairs. Business as usual. That's the last thing Korea needs.

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