The crisis had long since laid bare the rickety financial structure of the country’s second largest conglomerate, including a monstrous $48 billion debt load. But Kim had managed to fend off government attempts to break up his company, part of a larger effort to reform South Korea’s five major business groups, or chaebol. No more. A spokesman for the country’s tough new Financial Supervisory Commission confirmed last week that a soon-to-be-finalized restructuring plan will force Kim to sell nearly all of Daewoo’s 41 companies. Kim won’t just lose less desirable bits such as Daewoo Electronics, whose $3.2 billion sale to an American firm Daewoo trumpeted last week, after having promised it for months. The jewels are going on the block, too–including highly profitable Daewoo Securities, the country’s biggest broker. When the process is complete, Daewoo will consist of just six companies concentrated in the automobile industry.
For 40 years, the chaebol largely had their way with creditors and South Korean politicians–borrowing heavily, growing willy-nilly and flexing their political muscles whenever anybody challenged their expansion schemes. The prevailing philosophy was that they could conquer almost any industry if they threw enough money at it. That strategy–lift sales today, worry about profits and paying down debts tomorrow–stopped making sense 20 years ago. Whenever cracks in the system started to show, the groups papered them over by borrowing even more money and branching out into yet another new business.
But the Asian crisis made borrowing impossible. Prompted by IMF demands–as well as by his own belief that the chaebol were too powerful–South Korean President Kim Dae Jung proved willing to take them on. So, too, have the country’s bankers. At the same time that Daewoo’s fate was being determined, another group of Korean creditors met in Seoul to consider the fate of Samsung, the third largest chaebol. Many of the moneymen who gathered in the Hanvit Bank boardroom last week had spent 20 years fueling Samsung’s rise. But after three hours of heated debate, they came to a stunning decision: no more money for Samsung, which has refused to cover the debt of its bankrupt automaker.
For the tycoons who founded the chaebol, it’s a bitter denouement. Daewoo’s Kim started his company with a $10,000 loan in 1967, as a yarn exporter. Soon after, he began investing in other industries–electronics, shipping, construction, finance, heavy machinery. By the mid-1990s, Kim, now 62, had built a global giant with 100,000 employees and $80 billion in sales–and he felt invulnerable. “A big ship never sinks,” he declared last year, at the height of the crisis. While some chaebol began bowing to market and government pressures to cut costs, Kim wrangled more money from local creditors and tried to grow the company out of its problems. Those tactics caught up with him in July when he was forced to ask creditors to extend payments on $6 billion in debt–and pump an additional $3.3 billion into Daewoo to keep the company alive.
Daewoo’s downsizing will represent a significant change in the South Korean economy. It will no longer be quite so provincial, or protectionist, because it can no longer afford to be. The country has long resisted the idea of selling firms to foreign competitors. But with the government, the chaebol and financial institutions all struggling for cash, pragmatism is nowadays more important than nationalism. Daewoo’s profitable shipbuilding company will probably be sold to a Japanese competitor–and even the country’s hard-line labor leaders will likely go along. Daewoo’s trade union said last week that it favored the breakup of the group “to give subsidiaries the opportunity to regain competitiveness on their own.” The group also said that Kim should be fired. Kim Hojin, head of Korea’s labor-relations committee, said that there would be no strikes in protest. “Nobody fights on a sinking ship,” he said. “The workers know that strikes would not save titanic Daewoo.”
Naturally, chaebol leaders don’t like seeing their influence wane. “Does penalizing the chaebol help enhance Korea’s global credibility?” asks Yu Han Soo, secretary-general of the Federation of Korean Industry, a chaebol lobby. “I don’t think so.” In fact, though, Yu has it exactly backward. Yes, investors have returned to South Korea as the crisis has eased, and the market fell on Friday as they worried about side effects from Daewoo’s dismantling. Set Kim Woo Choong loose again, though, and they might just head for the hills.
