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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

CHAEBOL ON THE BRINK

Korean companies face reform or the axe

By J.K. Sprague and Laxmi Nakarmi / SEOUL


Promises, Promises an the Chaebol keep their pledge to reform?

Family Affairs: Korea's networks of family, school and palmgrease

IN JANUARY 1997, NA Seung Yuel was all smiles. The South Korean tycoon had just taken control of Saehan Merchant Bank after paying state-owned Korea Development Bank (KDB) a hefty $165 million for 37% of the merchant bank's equity. Back then, Na's Keopyung Group was a rising star among Korea's chaebol - the family-controlled conglomerates that dominate the economy. On May 12 this year, Na was no longer smiling. Faced with the bankruptcy of three of his chaebol's companies, he asked KDB to take back the Saehan stake. It did, for free. Now the issue is the $432 million Keopyung Group borrowed from Saehan and cannot pay back - like the rest of the group's $1.17 billion in total debt.

The clock is ticking for Korea's once mighty chaebol and bells may begin tolling for many of them soon. "Steps must be mapped out by the end of this month to classify ailing firms and let them collapse," South Korean President Kim Dae Jung said last week. Under government prodding, the nation's banks are doing just that. They are going through their loan portfolios, looking at chaebol and companies that required emergency loans in the past year, accumulated debts exceeding annual revenues, posted net losses for three years in a row, went bankrupt at least once in the past six months, or have negative net worth. Those deemed unable to restructure their way out of the hole will be cut off from further loans and allowed to die.

Now restructuring is the name of the chaebol game. The top five - Hyundai, Samsung, Daewoo, LG and SK - all met a government-imposed May 10 deadline to submit restructuring plans (see box below). Not all the details were made public, but President Kim, who saw the complete plans, pronounced himself pleased. He should be - if the plans work. The Big Five, which control more than 200 firms and hold more assets than the next 25 groups combined, said they would raise a total of some $30 billion of foreign funds by 2002 by bringing in foreign partners and selling off existing assets - measures that were unthinkable just a year ago. "We are doing our best," says Ji Seung Ryul, the point man for Samsung's restructuring.

But those that cannot restructure can expect no mercy. The debt-burdened banks themselves are under the gun of the Financial Supervisory Commission, charged with cleaning up the fragile financial sector, so the first corporate euthanasia may come as early as June. "It is not important what [the companies] did in the past or what they are doing now. The issue is whether they can survive in a normal business environment," says Lee Hun Jae, chief commissioner of the FSC. The toll is expected to be devastating: while the top five are expected to be fairly safe, the fates of a dozen smaller chaebol are hanging in the balance. "Domestic-market oriented chaebol are finished," says Stephen Marvin, director of research of Ssangyong Securities. Analysts say as many as 200 individual companies could fail, and 10% of listings on the Korea Stock Exchange could vanish this year.

Why the rush to close these companies? President Kim is under pressure from the International Monetary Fund and financial markets to act quickly and resolutely. Credit rating agency Moody's downgrade of the ratings of three state-run banks and 16 commercial banks this week underlined yet again the urgency of tackling the debt problem. The longer action is delayed, the higher the cost to the economy and people, says Kim Byung Joo, professor of economics at Sogang University. Workers are also getting angry. While unions unwillingly swallowed the prospect of increasing layoffs, they don't want to be the only ones to feel pain. "We want to see good progress on chaebol reforms," says Lee Kap Yong, head of the radical Korean Confederation of Trade Unions. "Otherwise we have to go on a national strike soon."

Businessmen are starting to grumble too. While acknowledging many companies will fail, they are unhappy that the government is pushing actively for closures. "President Kim reneged on his own promise to let the market decide the fate of these chaebol," says one senior executive. But because the nation is broke, Kim has to convince the world that Korea is serious about reform, so that the world puts up the billions necessary to restructure the chaebol and recapitalize the banks. "We need investment and more investment," says Han Duck Soo, State Minister for Trade. "If we fail to attract foreign investment, we will be in deep, deep trouble."


PROMISES, PROMISES

SOUTH KOREA'S TOP FIVE chaebol laid out similar plans for business restructuring, debt reduction, layoffs, investment of controlling-family assets, and management transparency. While the plans have generally been welcomed, many crucial details have not been made public, and no one is sure if the huge funds needed to carry them out can be raised from international investors.

HYUNDAI GROUP

Raise $8.5b. from spin-offs and asset sales, focus on construction, cars, heavy and chemical industries and services
Cut debt-to-equity ratio to 194% from 533% by end of 1999
Minimize layoffs
Invest $202m. of controlling-family personal assets in core companies
Dilute family control, empower board of directors

SAMSUNG GROUP

Raise $5b. in foreign capital, sell or spin off units outside core electronics, finance, chemicals and service sectors
Cut debt-to-equity ratio to 197% from 265% by the end of 1999
Will not attempt mass layoffs
Invest $92m. of controlling-family personal assets in core companies
End group-wide CEO meetings

DAEWOO GROUP

Raise $7b. through asset sales and mergers, cut group to 20 members and affiliates from 37 by 2000 with trade, cars and heavy industry as the core
Cut debt-to-equity ratio from current 413% to 167% in 1999 and 40% in 2000
Adopt internationally accepted accounting principles
Boost number of outside board members to 25% of total

LG GROUP

Raise $6.5b. by selling marginal units, assets and equity, focus on electronics, finance, chemicals and services
Cut debt-to-equity ratio to 199% from 343% by end of 1999
Will not attempt mass layoffs
Empower board of directors as decision-making body

SK GROUP

Raise $5b. by selling two or three key units, cut number of group companies from 45 to 10
Cut debt-to-equity ratio to 200% from 468% by end of 1999
Invest controlling-family personal assets in core companies
End group-wide CEO meetings, strengthen outside directors


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