3/9/04

South Korea – Growing and Learning Compiled by: Erik Kruse, SCRC

With no lack of issues to deal with regarding the South Korean external business environment, planners at Daewoo and Hyundai have plenty to think about. For these companies, though, operating in a fluctuating environment apparently is not a new thing.

The South Korean Economy
South Korea’s chaebol heavily influences its economy. A “chaebol” is “a business group consisting of large companies which are owned and managed by family members or relatives in many diversified business areas (1).” Chaebol have led the country into a wild economy over the past several years.

For example, in 1997, the top 30 chaebol had total sales equal to 90% of GDP and employed 80% of the workforce. The top four chaebol (Hyundai, Samsung, Daewoo, and LG) dominated the economy, producing 9% of GDP. The average debt-to-equity ratio for the top 30 chaebol was well over 300% in mid-1997. Six of these top 30
were forced into declaring bankruptcy in 1997 (2).

The need for corporate reform was documented more recently in a Business Week article that covered the March 11, 2003, indictment of 10 South Korean group executives on charges of accounting fraud and breach of trust (3). These issues, as well as the looming concern of the North’s purported nuclear weapons program, have been credited with dampening foreign investment. The effect is that South Korean economic growth is expected to slow from 6.3% in 2002 to 4-5% in 2003. According to authors at The Economist, “that is roughly the point, in an economy geared for rapid growth, at which Koreans start talking about a ‘growth recession (4).’”

Tensions in the Korean Peninsula
The North and the South never signed a peace treaty after the end of the Korean War of 1950-1953. Hence, the two countries are still technically at war. North Korea now claims it possesses a nuclear arsenal. For more on this, see CNN’s Timeline: Tensions on the Korean Peninsula.

While tensions have certainly escalated since North Korea admitted to having a nuclear weapons program, the effects on the South Korean business environment are impending and unknown. However, in the event that there is military action against North Korea and bombing proves to be impractical, the focus may turn toward preventing it from shipping weapons. In this scenario, there could be a blockade to stop any shipments. Because North Korea said it would consider this an act of war, the blockade might be called a“quarantine,” as was the 1962 blockade of Cuba by the U.S (5).

Daewoo
Daewoo’s former chairman, Kim Woo Choong, set Daewoo up as a textile-trading company in 1967. At the time, he was one of the few South Koreans to capitalize on the changing political environment. In a Business Week commentary, Mark Clifford said, “…almost alone, (Kim) saw that the U.S. would impose quotas on South Korean textiles and apparel. So he pumped up exports to make sure that he got a big chunk of the quotas. When the quotas were slapped on in 1972, Daewoo ended up with almost one-third of South Korea's total. Owning the quotas became a license to print money (6).”

Despite having started out as a tiny trading company operating out of a miniscule office, Daewoo acquired 11 companies from textiles to finance to machinery to cosmetics in its first nine years of existence. But how was Kim able to fund this growth? His father was a teacher of Park Chung Hee, the president South Korea from 1963 to 1979. Daewoo collapsed in 1999 (6).

Hyundai
In 1998, Hyundai Motors sold only 90,000 cars in the United States' 15.5 million car market. But the company quadrupled that figure when it sold 375,000 in 2002. Hyundai Motors has its sights set on selling 500,000 cars in the United States by 2005 and 1 million by 2010. An analyst from forecasting firm Global Insight told Forbes that the goal is “quite a reach (7).” According to the article’s author, “Hyundai has a bit of an unhappy history with over ambitious plans.” It was once part of a giant chaebol that crumbled after it attempted to grow too fast in the late 1980s and early 1990s.

Implications
All the wiser from its experience, South Korea should be poised to move forward. But the real question is whether or not other countries will learn from its experience. For example, as Chinese banks start to extend loans to the private sector, they should know that they’ll need to employ solid risk management techniques. Clifford, writing in a Business Week article sums it all up nicely: “After all, it’s a universal business truth: The first burst of entrepreneurial zeal inspires people with great ideas but often little management ability. Korea and China both need to heed the warning lesson of Daewoo’s Kim Woo Choong (6).”

References:

(1) Yoo, S. and Lee, S. (Summer, 1987). Management style and practice of Korean chaebols. California Management Review.

(2) Whitepaper. (March, 2001). South Korea: economic rise, collapse and recovery. American International Insurance.

(3) Ihlwen, M. (March, 2003). Korea can’t afford to cop out on corporate reform. Business Week.

(4) Anonymous. (March, 2003). Survey: a democratic riddle. The Economist.

(5) Brady, R. (March, 2003). North Korea: how high will Washington crank up the heat? Business Week.

(6) Clifford, M. (February, 2003). The rise, fall, and spin of citizen Kim. Business Week.

(7) Fahey, J. (March, 2001). Speed kills. Forbes.

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