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June 16, 2000 VOL. 29 NO. 23 | SEARCH ASIAWEEK

Of Father and Sons
Family ties, money troubles, politics and old-fashioned ambition cloud Hyundai's future

Founder's Keepers

CHUNG JU YUNG, 86, founded Hyundai in 1947. Though retired, he still holds office at chaebol headquarters. He now wants family members out of the Hyundai management.

CHUNG MONG KOO, 64, the patriarch's eldest, heads Hyundai Motor and Kia Motors. "MK" edged out his uncle as group chairman in early 1996 and Hyundai Motor boss last year. He wants to stay at the helm of the carmaker -- and has just enticed DaimlerChrysler to take a 10% stake.

CHUNG MONG HUN, 52, is the sixth son whom the founder named group co-chair in late 1997. That angered eldest son MK, then sole group chairman. He tried to oust "MH" in March, but dad made MH sole chairman instead. MH has quit all Hyundai companies except a North Korea venture.

The bombshell came in the form of a handwritten note. Nearly a hundred reporters, photographers and TV news crews milled around the narrow corridors outside the 15th floor meeting room at Hyundai Group headquarters in Seoul. They were called to a press conference, supposedly about the chaebol's latest plan to address financial strains at flagship Hyundai Engineering & Construction. At 2:15 p.m. on May 31, Kim Jae Soo, executive vice president and head of the group's restructuring unit, came in amid a flurry of flashbulbs. His hands trembling a bit, Kim took a long breath and began reading in a soft, subtle voice a note that patriarch Chung Ju Yung dictated that morning.

"Deeply considering the present trend of corporate management and the future of the economy, I strongly believe that independent management by professional managers in each company is the only way to be successful in the globally competitive market," said Chung's note. After a few seconds' pause Kim continued reading the founder's message: "Thus, today, I resign from all management positions at Hyundai, and chairman Chung Mong Koo and chairman Chung Mong Hun [his eldest and his fifth sons] will also resign from all managerial positions." Kim then showed the note to flabbergasted journalists. "The honorary chairman," as Hyundai employees often call Chung, "asked me to keep this secret until now," Kim revealed.

Thus climaxed a family boardroom drama that has rocked Hyundai, the largest chaebol, and Korean business. Those who hoped the patriarch's word was final got it wrong. At 4 p.m., Chung Mong Koo, known to his employees affectionately as MK, announced that he was not going to resign as chairman of Hyundai Motors Co. and Kia Motors Corp. At 6:30 the next morning, he met with Hyundai Motor and Kia directors and got a unanimous endorsement to stay on as chairman. Days later he persuaded DaimlerChrysler to take a 10% stake and mount a joint bid for Daewoo, according to a German banker. DaimlerChrysler plans to take 40% of the bidding consortium, and Hyundai 19.9%.

By contrast, younger brother Chung Mong Hun, called MH in Hyundai, dutifully announced -- also in a handwritten note -- his resignation from all but one of his positions in the chaebol, including the group chairmanship. The only post he kept was the chair of Hyundai-Asan Corp., the affiliate dealing with North Korea, which his father wants him to continue running. Thus, for the first time since its establishment in 1947, the Hyundai chaebol did not have a group chief.

Why did the elder Chung decide to pull the family out of running the chaebol he founded? How will the father-son feud be resolved? And what's ahead for Hyundai, particularly its Hyundai Motor subsidiary, South Korea's largest carmaker and the group's biggest money-spinner? Let's take these questions one at a time, starting with the last. Those worried that Hyundai might do a Daewoo and go belly-up with tens of billions of dollars in debt should keep their fingers off the panic button. Analysts generally agree that Hyundai is no Daewoo. When the latter went bankrupt last year, hardly any of its major companies were financially sound or profitable. But those of Hyundai are making money, with ample working capital.

So what's the problem? "The future of Hyundai's cash flow will depend on whether its creditors will be willing to roll over maturing short-term notes," says a Seoul investment banker. The group's current crunch began after two Samsung firms, Samsung Card and Samsung Capital, called in some $250 million in short-term notes. Another 16 trillion won (about $14 billion) in notes are due this year.

The restructuring unit's Kim says the cash-flow problems are temporary and limited to Hyundai Engineering and Hyundai Merchant Marine, both run by MH. Kim says the construction giant will raise $3.3 billion internally: $2.4 billion by disposing of securities, $620 million from real estate sales, and $330 million through a rights offering and other means. The shipping company will cut back on new-ship purchases and other investments to save nearly $2 billion in capital.

But will creditors and investors cut Hyundai enough slack to get its act and cash together? That depends on the confidence they have in the chaebol, and that ingredient has been running a bit short of late. Plainly, foreign bankers and investors are baffled by the goings-on at head office, especially after a similar father-and-sons brouhaha in March. Back then the old man removed his eldest as group co-chairman, letting MH hold the top title by himself. That intervention was the worst example of corporate governance, fumes Jang Hasung, professor of finance at Korea University and the country's leading campaigner for transparency.

Then there are the financial accounts. Eugene Chung, head of research for Jardine Fleming Securities in Seoul, finds the group's numbers rather opaque. "I don't know where to begin with Hyundai's finance," agrees an American bank executive in Seoul. Adds a French banker: "We have a large exposure with Hyundai and rumors of cash flow problems make us very nervous." Finance and Economy Minister Lee Hun Jai put the problem more bluntly after Hyundai Engineering sought emergency credit from Korea Exchange Bank, its primary lender: "The market is losing confidence in Hyundai." After a few rounds of discussions, the government let the bank lend the chaebol about $400 million.

Besides financial questions there are management issues, like who's in charge? Four years ago Chung Mong Koo edged out his uncle Se Yung as group chairman. That didn't please the patriarch, who then appointed MH as group co-chairman in December 1997. Early last year the eldest son ousted Se Yung and Se Yung's son from Hyundai Motor. MK then plotted its takeover of Kia to expand group output capacity to nearly 3 million cars a year. When the Asian Crisis forced the chaebol to restructure, MK pushed for the separation of Hyundai Motor and related units into an automotive group independent of the rest of the group.

In March this year, MK made his boldest move: he tried to oust MH as group co-chairman while the latter was on a trip to Beijing and Shanghai. The patriarch, now 86, intervened. In another public drama played out on national TV, he pressed MK to let his younger brother be sole group chairman while he headed the car companies.

But the truce did not last. With Hyundai's money woes came mounting pressure from the media, the public and the government for a top-level revamp. Chung Ju Yung was willing to oblige, but only if all his sons got out of the group. Anyone left could lord it over the professional managers appointed to run Hyundai.

The old man may also be trying to smooth the way for sixth son Mong Jun, a four-term independent MP with a Ph.D. in government, invited by Kim Dae Jung to join the president's party. His image and political gameplan could suffer if his family continued to run Hyundai. Koreans want chaebol and politics separated. They demand that conglomerate founders not let their children inherit top positions if they lack executive abilities. Minister Lee recently said: "Being born with a silver spoon in the mouth does not mean having excellent managerial skills," referring to second- and third-generation chaebol owners who failed at former powerhouses like Ssangyong, Jinro and Dainong.

"Hyundai will solve its internal family problem by itself," says Lee Yong Kun, chairman of the powerful Financial Supervisory Commission, which has used its clout over banks to force conglomerates to restructure. With strained family ties, says one Hyundai insider, the elder Chung may ask all his sons to join him for a breakfast meeting, which they used to have every day when the old man was teaching them about the family business.

Speaking about MK the source says: "The patriarch will probably do his best to mollify his son's anger by ensuring him some control in Hyundai Motor without being CEO." The source adds that Chung Ju Yung "always has the final word; it is unimaginable to see his sons disobeying him. This would shatter his feelings."

The patriarch certainly values obedience. Chung Mong Hun is said to be his favorite among eight sons, and one can see why. In 1991, when the old man ran for president, MH wholeheartedly supported him. The son went as far as to spend several months in prison after taking the fall for charges of using company funds for his father's presidential campaign.

In early 1998, he again went the extra mile when his father invested a huge sum in North Korea tour programs. "Even though he [MH] knew the business would bleed Hyundai, he went for it -- just to make his father happy," says a Hyundai executive. One of the few people outside Pyongyang to have met with leader Kim Jong Il twice, Chung Mong Hun is said to have gone to China to help broker the North-South summit.

Resolving Hyundai's boardroom row will have to wait until he and Chung Mong Jun get back from the North-South summit after June 15. Then Hyundai companies can elect new directors. Recently Chung Ju Yung increased his Hyundai Motor stake to 9%, well above MK's 4%. But Choi Han Yung, a managing director at the carmaker, says: "We can muster enough votes to defeat any move against our chairman." Besides DaimlerChrysler's planned 10% stake, he can count on 12% held by employees and Mitsubishi Motors' 4%.

Ironically, while the patriarch espouses promoting professional management, he still dominates the conglomerate. Indeed, standing up to such family pressure -- as Chung Mong Koo is doing -- may well be what future bosses need for true change to happen at Hyundai. "CEOs and other managers must dispel all doubts that they represent the Chung family," says governance advocate Jang. "They must serve all shareholders." Well, they had better learn proper governance fast. Investors, creditors and competitors won't wait forever for Hyundai to get its heads on straight.

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