For The Chaebol, A Crawl Toward Reform

Daewoo's slow restructuring will get a lift if Ford buys a chunk

When the South Korean government declared Daewoo Group insolvent in July, 1999, and slated it for restructuring, investors around the world cheered. If Daewoo, a sprawling conglomerate that makes everything from cars to VCRs, wasn't too big to break up, then other indebted Korean corporations might get the message that the era of political patronage and government bailouts was over.

A year later, the reviews are decidedly mixed. So far, not one of 12 key Daewoo units in a workout program has been closed or sold to a foreign bidder, though Ford Motor Co. is expected to go ahead with an offer for Daewoo Motor by the end of September. None of the 12 companies has put in place the financial architecture that would make them competitive. And their combined debt is still nearly $80 billion--$26 billion more than their assets.

The slow-motion dismemberment of Daewoo reinforces the sense that neither Korea Inc. nor the government of President Kim Dae Jung is willing to absorb the short-term pain. The Kim administration is loath to close sick companies because it could spur unemployment and further weaken the nation's shaky banks. For their part, Daewoo executives are reluctant to bring in foreign turnaround specialists, who could help make their outfits more attractive to buyers. "What you need is a cold-hearted CEO who can wield a knife left and right," says Rhee Namuh, research director at Samsung Securities. "But you still have people with links to the past."

South Korea's sizzling overall growth rate--which is expected to reach as much as 9% this year--is giving the government some breathing room to break up Daewoo without disrupting the economy. But the cleanup at Daewoo and other embattled chaebol isn't proceeding fast enough. Last year, 25% of manufacturers failed to earn enough to service their debt, depending instead on new loans from banks that are themselves dependent on state bailouts.

The attempt to save Daewoo Electronics is typical of the problems facing Korea's ailing companies. That unit's debt is modest compared with other Daewoo companies--$2.8 billion more than its assets--and its products, while basic, are of reasonable quality. In January, 40 creditors agreed to swap $1.3 billion of Daewoo Electronics' debt for equity and convertible bonds. And they agreed to slash interest rates to 1% on $2.5 billion in unsecured loans for the next three years.

Even that may not be enough because Daewoo Electronics' debt-rescheduling plan projects revenue gains that the company probably can't meet. Executives aim to keep borrowing costs to about 5% of revenues in 2003 and 2004. But that assumes that Daewoo Electronics can boost sales to $6.3 billion--nearly twice what it expects to sell this year. If those dream results don't materialize, the company could be overwhelmed by debt once more.

A MESSAGE. The moment of truth for Daewoo Group will arrive in the next few weeks, when Ford is expected to make an offer for the automobile division, which comprises nearly 30% of the chaebol's assets. The sale would send a message to other chaebol that if they don't speed up restructuring, they could face a similar fate. It would also, for the first time, open to foreign competition a long-protected strategic industry.

The Ford deal is by no means assured. The initial bid in June was said to be $6.9 billion, but, having reportedly discovered hidden losses, the U.S. auto giant may offer half that. If the talks break down, the only other likely savior is General Motors Corp., which is unlikely to offer much more than Ford.

The best thing that could happen is for pragmatism to prevail. Ford needs the deal to work because to compete globally, it requires a greater presence in Asia and Eastern Europe--regions where Daewoo is well-entrenched. Daewoo's very survival hinges on a successful conclusion. The future of Korean economic reform does, too.