Commentary: Korea Inc. Wimps Out Again

Korea's industry is sending a scary message: It cannot fix itself. If that's true, then the implications for the country's recovery are deeply alarming.

Recent events in South Korea's auto industry highlight this inability to restructure. One is the end of union protests over layoffs at Hyundai Motor Co. on Aug. 24, thanks to a compromise between management and labor. Another is the auction of bankrupt Kia Motors Corp. set for Sept. 1. On the surface, both developments sound promising: Layoffs and forced sales look like the painful steps the industry needs to take. Korean auto makers suffer from a serious capacity overhang, too much debt, a 50% drop in sales, and some $5 billion in collective losses so far this year. So drastic action is necessary.

But take a closer look at these events and you see massive resistance to change. First, the Hyundai strike. For more than a month, thousands of pipe-wielding workers blocked the gate of the Ulsan plant of Korea's No.1 carmaker with gasoline-filled containers and brand new sedans. Production was at a halt until mediation by Labor Minister Lee Ki Ho and the ruling party finally averted a bloody confrontation.

OMINOUS SIGNAL. Hyundai wanted to lay off more than 1,500 workers. Yet the compromise forces it to lay off only 277--almost two-thirds of them female cafeteria employees. The company should be shedding thousands of workers even after losing about 6,000 employees to early retirement schemes and unpaid leave. Hyundai Motor has almost half the workforce of Toyota Motor Corp. but barely one-tenth of Toyota's revenues.

So the settlement sends a signal to the chaebol: Mass layoffs are off-limits, and recent legislation permitting firings is essentially a dead letter. Investors had optimistically predicted a wave of corporate downsizing in the fall--provided Hyundai had carried through. Now, says Mark Neale, head of research at Dresdner Kleinwort Benson in Seoul, "the whole process will be slowed."

Then there's the auction of Kia and its truckmaking affiliate, Asia Motors. The big question is whether Ford Motor Co., the only major foreign bidder, will be allowed to take control. "That will mean the start of free-market competition in Korea," says Cho Dong Sung, economics professor at Seoul National University. Such a development would deal a major blow to Korea's traditional protection of local industry, which helped the chaebol to expand recklessly into profitless businesses.

But the auction has taken an unsettling turn. Korea's auto makers are in no position to buy Kia: The industry has $25 billion in debt to worry about already. Realistically, only cash-rich foreign companies such as Ford should be bidding. Instead, Hyundai and Daewoo, are bidding furiously to keep Ford out of the local market. Samsung's in there too: The speculation is that its auto subsidiary, whose first car rolled out in March just as the market collapsed, will have to exit the industry if it cannot take over Kia. Yet it's unclear how any of the Korean carmakers can afford this acquisition. What is clear is that by bidding, the chaebol chiefs are going back on recent promises to act prudently and avoid dicey expansion plans.

Ford, meanwhile, wants the Korean government to assume the bulk of Kia's $9 billion in debt if it wins the bid. That's an understandable position for Ford to take. But if the government does assume the debt, it removes much of the pressure to shut down assembly lines at Kia to save money. Given the parlous state of the local auto industry, some shutdown in capacity is absolutely necessary.

The most discouraging thing about the situation is the role played by the government. Instead of pressuring Hyundai to minimize layoffs, the government of President Kim Dae Jung should have been thinning the ranks of the bureaucracy to convince the public that it is distributing the pain equitably, and so set an example for Hyundai's unions. At Kia, which has been in court receivership for a year, the authorities should have moved much faster to shut down surplus plants and limit bidding to well-financed buyers. But Korea's leaders in government and industry keep trying to avoid the pain. And so the pain just gets worse.

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