s o u t h  k o r e a

Cruel Recovery: South Korea has shown clear signs of life, but they come mixed with continued hardship. The job remains: reform, restructure, rebuild 'There Will Be No Favorites': The new finance minister preaches reform Trial By Debt At Daewoo: Kim Woo Choong has survived close scrapes before, but this is his closest yet

IN 1996, SOUTH KOREA WAS HOME to five car makers - Hyundai, Daewoo, Kia, Ssangyong and new entrant Samsung - who together sold 1.7 million passenger cars in the domestic market and another 1.3 million vehicles overseas. Industrialists and officials boasted that the nation would soon overtake Germany and France to become the world's third-largest car maker, after the U.S. and Japan. Today, two manufacturers remain - Hyundai took over Kia last year while Daewoo absorbed Ssangyong Motor and is in the process of buying out Samsung Motor - after the Crisis drove domestic car sales down to less than 780,000 in 1998. And the survivors still face crushing debt loads, massive overcapacity, and an ever more competitive global market. Can they make it?

Kim Soo Joong, the executive sent by Hyundai Motor to revive loss-making Kia, thinks his business can. "When I came here earlier this year, I thought it would take three years to turn around," Kia's new president says. "Now I think we can do it faster than that." Kia remains an independent unit of Hyundai and will continue making and selling its own marques. However, the two have consolidated their research and development organizations, cutting costs. Over the next five years, they will also slash the number of manufacturing platforms they use from 23 to seven. Analysts figure that the reduction in platforms and R&D costs could save the Hyundai/Kia combination $1 billion a year. That, plus the $6 billion in debt written off by Kia creditors to support Hyundai's takeover, puts the once-moribund car maker, which lost $5.6 billion in 1998, well on the road to recovery, Kim says.

Also helping is a revival in domestic demand. "People postponed purchases of big ticket items like cars last year," says Kim Nui Myong, executive vice president of Hyundai Motor. "This year we are seeing a big recovery as there is huge pent-up demand and consumer confidence is returning." Industry sales in the first quarter rose a huge 55% over the same period in 1998. Sales for the year as a whole are expected to increase anywhere from 20% to 35%. That said, the sharp percentage jump is more illustrative of how dismal last year was than how good this year is. "It will take three to four years for us to go back to the high levels reached in 1996," admits Hyundai's Kim. A slightly more optimistic picture is presented by exports, especially those headed for North American and European markets that did not suffer from the Asian crisis and continue to show growth.

Hyundai currently has about 45% of the domestic market while Kia has some 25%, making the combination the dominant force in the Korean car industry. Daewoo Motor is in a more difficult position. Along with its parent group, the company is the focus of rumors about financial strains, which it regularly denies. On the plus side, Daewoo Group Chairman Kim Woo Choong says most of the $7.5 billion that the group plans to raise through asset sales will be channeled into its automotive arm in order to transform it into a major global player. On the minus side, Daewoo Motor is already struggling to pay for and absorb numerous plants it bought in Eastern Europe and built in emerging Asian markets. It will have to spend more billions for Samsung (a final decision on the price is expected any day now), which will give it more capacity it cannot utilize. And while it has enjoyed rising sales recently along with its rivals, Daewoo's failure to come up with new models to match those offered by Hyundai and Kia could see it losing ground.

Kia's Kim says Korean car makers used to be obsessed with market share, blindly piling up heavy debts in order to expand production and giving short shrift to customer needs. Three companies did not learn their lesson fast enough. The two survivors say they have. Maybe. Both face similar problems of excessive debt, sluggish demand and overcapacity - the industry's capacity utilization was just 48% last year. Few analysts lose sleep over Hyundai/Kia's immediate future. Daewoo, on the other hand, may need a big capital injection soon in order to survive, adding urgency to on-again, off-again talks with U.S. giant General Motors. (GM held 50% of the Korean company until 1992 and last year signed a fresh agreement to find areas of cooperation.) There is no shortage of pessimists who think even two Korean car makers may be too many in the super competitive world market. Says Lee Kyung Taek, president of the Korea Institute of Economic Policy: "We have the competitive advantage to manufacture automobiles, but I am not sure we need two automobile manufacturers."

With reporting by Laxmi Nakarmi/Seoul

A drastic drop in domestic demand last year put a spoke in the wheels of South Korea's efforts to become the world's third-largest car maker. The domestic market should rebound somewhat this year, but overseas sales may carry more promise