Commentary: Coddling The Chaebol And Courting Disaster

This time, they just have to change. That has been the view of many investors toward the chaebol, the giant conglomerates that dominate South Korea. As the crisis closed in, it seemed the chaebol's debt was too huge, their profits too slender, and their operations too vast and ill-focused for these companies to survive intact. Even some chaebol execs acknowledged a need to forsake the old ways. Many observers hoped for the reform of the chaebol into slimmer, more profitable companies and the emergence of a free market where small companies could compete.

Nice dream. Too bad it's not going to happen. On the contrary: The top chaebol--Hyundai, Samsung, Daewoo, LG, and SK are jockeying for asset acquisitions to increase their dominance. "Things are moving in a worrying direction," says Jang Ha Sung, a Korea University economist and shareholder activist. "The leverage the top chaebol have over Korea is actually growing bigger." So is the risk they pose to Korea's health, since corporate reform is vital to the country's long-term development.

OFF THE HOOK. The chaebol feel the pressure is easing. An austerity plan has cut imports dramatically, while the cheap won has driven the top chaebol's exports up 14% this year. Korea has a record $41 billion in hard-currency reserves, and interest rates have fallen from 33% in January to 12% now. So the top chaebol can eke out enough cash flow to keep going without radical overhauls.

That means it's back to the old game--expanding at any cost. Take the auction of insolvent Kia Motors Corp. Despite their own massive debts and excess carmaking capacity, both Hyundai and Daewoo want to take it over. Samsung offered to pay $900 million and assume $10 billion in Kia debt--despite Samsung Motor Inc.'s $2 billion debt load. A Samsung exec has written in a newspaper that if his company's bid fails, Samsung might exit carmaking and default on billions in bank loans. "The chaebol are holding the economy hostage for their survival games," says Park Kyung Min, chief investment officer at Asset Korea Management Co.

Kia isn't the only prey the top chaebol are stalking. They are planning bids for parts of state-controlled Pohang Iron & Steel, Korea Telecom, and Korea Heavy Industries & Construction, which are to be privatized. Hyundai's refining unit is buying money-losing Hanwha Energy Co. Highly leveraged Daewoo has added $1.3 billion in new liabilities to take over Ssangyong Motor Co.

Investors had hoped that the top chaebol would start peddling assets aggressively. Some deals have occurred, such as Samsung's sale of its heavy-machinery division to Sweden's Volvo for $720 million. But Daiwa Securities Co. in Seoul estimates that Korean companies have raised only $10 billion by selling assets or equity to foreign investors since the crisis. That's well below 2% of Korea's total corporate assets.

Maybe the chaebol would change faster if they couldn't raise money. But even though debt at the top companies is four times greater than their equity, the five chaebol raised $8.8 billion in local bonds in the first six months of this year, about 80% of all bond issues. And banks aren't cutting off loans for fear of provoking defaults. Instead, they keep rolling over loans or providing new credit. Through June of this year, for example, Daewoo Corp. got $1.9 billion in fresh loans.

Chaebol managers defend their record. "The chaebol's dominance appears greater not because the chaebol are expanding but because others are shrinking," says Hwang Young Key, senior managing director at Samsung. The solution, he says: help smaller companies grow faster. Meanwhile, a credit crunch is ravaging small and midsize companies.

Even the good news isn't so good. The chaebol announced plans on Sept. 3 to merge troubled divisions in semiconductor, petrochemical, and other industries suffering from weak prices. But it's not at all clear that such deals will cut excess capacity, debt, or payrolls. The chaebol still want tax incentives and cheap loans in return for this asset-shuffling. They will probably get them--and Korea will lose another chance for change.