Freed From Daewoo, The Daewoos Thrive

Many of the failed chaebol's subsidiaries have restructured and are gaining market share

Choi Jin Keun is feeling confident again. The chief financial officer of Daewoo Heavy Industries & Machinery Ltd. has spent much of the past four years overseeing the company's struggle for survival, and hanging his head in shame at its history as a unit of the scandal-ridden and now-defunct Daewoo conglomerate, or chaebol. Today, though, Choi's company is independent, profitable, and focused on catching up with construction equipment industry leaders Komatsu Ltd. and Caterpillar Inc. (CAT ). With ties to the chaebol severed, "we can concentrate all our resources on improving our competitiveness," Choi says.

Remember Daewoo? In 1999, South Korea's No. 2 chaebol collapsed under $70 billion in debt, and founder Kim Woo Choong fled abroad before prosecutors indicted his lieutenants on fraud, breach of trust, and other criminal charges. Korean authorities have accused Kim of masterminding one of the biggest accounting frauds in history, though they have suspended legal action until he returns home. Kim's lawyer, Seok Jin Kang, says Kim admits accounting manipulation and violating foreign exchange laws but denies committing fraud.

Whatever Kim's culpability, it's becoming clear that Daewoo's problem wasn't with its businesses. Freed of the constraints of working under the chaebol, many Daewoo units are roaring back to life. In spite of its financial woes, Daewoo boasted some of Korea's top talent and best factories. Today, all but two of Daewoo's 12 primary subsidiaries have either found new owners or are in the process of selling their restructured businesses. The auto, shipbuilding, heavy machinery, construction, and trading units -- which together represented more than two-thirds of the group's assets -- are gaining market share at home and abroad. "Many Daewoo companies had viable businesses," says Kang Dong Soo, a senior researcher at the Korea Development Institute. "With the debt burden gone, they have returned to profitability."

But the pain isn't entirely erased. Daewoo's bankers and other creditors took a $49 billion haircut. Government arm-twisting forced financial institutions to take on bad Daewoo paper that continues to destabilize the financial system -- and has already cost taxpayers billions of dollars as public funds were used to shore up banks made wobbly from holding too much Daewoo debt. Today, Daewoo Corp., what's left of the chaebol's trading arm, is still struggling to sell off assets after taking huge write-offs. Similarly, a much-shrunk Daewoo Heavy Industries is holding over $5.8 billion in debt from the Kim era and looking for buyers for its assets.

"So far, so good"

Letting Daewoo fail, though, would likely have hurt much more. When a Daewoo implosion seemed imminent, Korea was already reeling from the Asian financial crisis, and Daewoo's debt equaled 14% of the country's gross domestic product. Worse, a collapse easily could have triggered a chain of bankruptcies among thousands of suppliers and subcontractors. "We faced the danger of disrupting the whole system," says Jung Chang Mo, head of credit analysis at the Financial Supervisory Service, Korea's banking watchdog.

Fixing Daewoo meant the various units had to adopt a whole new business model. For instance, when Daewoo Heavy was part of the conglomerate, insiders say, only about 1% of its profits went toward its own operations, with the rest earmarked for other group activities. "This absurd practice was eating into our future growth potential," Choi says.

But today, even the group's most troubled asset, Daewoo Motor Co., is looking up. The unit was at the center of Daewoo's undoing after founder Kim established car plants from Poland to Uzbekistan to Vietnam, a global expansion that far outstripped the company's financial and management capabilities. Prosecutors say Kim covered up the diversion of hundreds of millions of dollars from the chaebol's shipbuilding and trading companies to bankroll the car company. Last year, General Motors Corp. (GM ) bought a controlling share of the auto maker for $1.8 billion and rechristened it GM Daewoo Auto & Technology Co. Today the company holds 9.7% of the Korean car market. GM launched sales of Daewoo-built cars in the U.S. and China this year, doubling exports to 385,930 units in the 11 months through November. Overall sales are projected to climb 59%, to 600,000 vehicles this year, and the company expects to be profitable within three years. "It's too early to declare victory, but so far, so good," says Alan Batey, a former GM Europe exec who oversees GM- Daewoo's sales and marketing.

The shipbuilding business was quick to bounce back, too. Daewoo Shipbuilding & Marine Engineering Co. lost so many customers during the turmoil that in 2000 it was unseated as the world's second-largest shipbuilder by Samsung Heavy Industries Ltd. Freed of its burdensome ties to the chaebol, the unit has restructured its finances, reducing debt to $511 million, from $1.6 billion in 2000. Today it has jumped back into the No. 2 spot, behind archrival Hyundai Heavy Industries. And its focus on higher-value vessels such as liquefied natural gas carriers is expected to boost pretax profit margins to more than 12% this year, compared with less than 3% at Hyundai. "We've become lean and clean, and we are better placed to adapt to the changing world," says Daewoo Shipbuilding President Jung Sung Leep. Investors appear convinced, giving the company a market capitalization that's 15% higher than Hyundai Heavy's, even though Hyundai's sales this year are more than twice Daewoo's $3.12 billion. The state agencies that own 59% of the company are working on a plan to sell their holdings.

Equipment maker Daewoo Heavy pulled off an equally dramatic turnaround. New managers cut employment by a third, to 4,500, and stopped making some 20 unprofitable products. This year, the company expects earnings to rise 60%, to $194 million, and margins to top 10%. Next year, the government organizations that control Daewoo Heavy are preparing to auction off their 58% stake in the company to new investors. Daewoo Heavy's stock price has more than tripled, to $8.56 this year. At the current price the state share should fetch at least $824 million.

The money raised will pay back public funds used to bail out Daewoo -- which suits financial chief Choi just fine. "I no longer have to worry about accusations that we pushed the country to the brink of bankruptcy," he says. In fact, these days he ought to forget his shame. The Daewoo drama is showing that chaebol companies can prosper when forced to stand alone -- a good lesson not just for Daewoo, but for all of Korea Inc.

By Moon Ihlwan in Seoul

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