Commentary: The Chaebol Are Swapping Businesses. Big Deal

Two cheers for the restructuring news coming out of South Korea. President Kim Dae Jung's pressure on the big business groups, or chaebol, has resulted in business swaps, dubbed the "Big Deal." The goal is to create fewer, stronger companies that concentrate on what they do best. It's part of the biggest shakeup since strongman Chun Doo Hwan shuffled the chaebol like playing cards after he stormed to power in 1980. A Daewoo-Samsung swap allows Samsung Group a graceful way out of its disastrous $3 billion carmaking venture in exchange for taking over Daewoo's sagging electronics operations. Expect more such swaps and mergers to come.

But tough as they may be for Korea's size-obsessed conglomerates, swaps are just a start. The hard part of managing lies ahead. The chaebol need to show they can run businesses for a profit in global markets. Simply merging companies into bigger ones won't solve Korea's nagging productivity problems or increase profits. That will require layoffs. Yet Kim and the chaebol want to keep job losses to a minimum.

WIMPY BANKS. Korea's banks also remain an obstacle to change. Bankers so far have little stomach for getting tough with defaulting borrowers, preferring to let bankrupt companies control the pace and timing of asset sales. As a result, cash-raising sales of bad assets are only creeping along. One of Korea's newest buildings, the Seoul Finance Center, sits empty because the project's bankers are unwilling to write off their loans to the bankrupt developer and sell the project at a loss. Without an efficient workout regime, political problems will only increase for Kim and the costs to taxpayers only rise.

The cornerstone of the Big Deal--the restructuring of the auto industry--has some big holes, too. Mergers won't solve the problems of overcapacity in the industry, now running at 53%. Korean auto makers have also failed to develop strong, independent suppliers and are a long way from the just-in-time inventory management that is commonplace in Japan and the U.S. As a result, productivity is barely half that of Japanese auto makers.

Restructuring that industry inevitably will mean some triage. But that doesn't seem to be in the plan. Just look at Daewoo's announced acquisition of Samsung Motors. Samsung's midrange cars are based on a licensing agreement with Nissan Motor Co., and they compete against Daewoo models that are based on a completely different Honda technology. Merging Samsung's and Daewoo's operations will involve costly retooling, especially at Samsung's new Pusan factory. If the new entity continues to make competing models, it would make a mockery of the merger. Perhaps it would be wiser simply to shut down Samsung's car plants. But in Korea's pride-driven, layoff-averse corporate culture, that's not an option. Some 3,000 people would be affected.

As for the banks, if the deal is going to have a whisper of a chance financially, they have to sharply write down Samsung Motors' $3 billion debt and take a large chunk of equity in return. Yet if they write down too much, it's a giveaway of taxpayer money--and perpetuates the notion that the chaebol will always get bailed out.

There's also no sign that steady government pressure on the chaebol has changed their mindset. A U.S. buyout manager recently met with executives of a chaebol shopping one of its units. An impressive six-hour presentation covered just about everything in the business--except profitability. "They never once mentioned the `p' word," marvels the executive. As a result, his firm decided to end talks.

But President Kim's chaebol busters haven't given up. His economic team seems committed to building a financial system that rewards winners and punishes losers as the only way to move forward. Their next gambit will be to cut credit lines to chaebol that don't focus on core business areas. It's a strong-arm tactic, but probably a necessary one. The crisis has shown the chaebol to be remarkably deft at maintaining the status quo.

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