Impact of the Crisis on Daewoo
While the financial crisis was going on, Daewoo’s President Kim ignored the warning signs and continued to expand. In 1998, a year when the Daewoo Group lost money, it added 14 new firms to its existing 275 subsidiaries. While Samsung and LG were cutting back, Daewoo added 40 percent more debt. Finally, Korean President Kim Dae Jung had had enough. He ordered the banks to stop lending to the chaebol until they came up with and began to execute a plan to sell off businesses and to focus on their core competencies. But that didn’t stop Daewoo. To get access to more money to feed its growth. Daewoo issued corporate bonds, which were purchased by Investment Trust Companies (lTCs), finance companies associated with the chaebol. The ITCs purchased nearly $20 billion in corporate bonds.
In early 1999, Daewoo announced a plan to sell off some of its businesses to comply with government restructuring requirements before the government took more drastic action, such as nationalization. However, the plans limped along until July 1999. At that point with Korea still in a deep recession, Daewoo announced that it would go bankrupt unless its Korean creditors backed off. It basically could not even service its interest payments of $500 million a month. let alone its principal. The government immediately stepped in and froze Daewoo’s loans until November 1999. This shock rippled through Korea, because nobody thought a chaebol would ever be allowed to collapse. That had never happened before, and the close ties between government and business were such that it was never expected to happen. The shock of Daewoo’s announcement negatively affected the corporate bond market and the ITCs came under pressure because of their huge exposure to Daewoo. Negotiations in Korea involved 60 banks, some owned by the government, others in the private sector.
On September 16, 1999, Daewoo asked its foreign creditors for a moratorium on interest payments until March 2000, so the instability spread to the international markets.
Daewoo’s Future
By the end of 1999, Daewoo’s President Kim was left with few options to solve Daewoo’s problems. One possibility was to dismantle Daewoo and let it have only auto-related businesses. All of the other businesses would be sold off to domestic or foreign investors, and the name would be changed to something other than Daewoo. Another option for President Kim was to sell some of Daewoo’s auto assets. Ford, Daimler Chrysler, and General Motors showed interest, but selling Daewoo Motor, the second largest automaker in Korea, would be a big blow to the country. As the Korean economy began to recover in 1999, some felt that the chaebol should weather the storm and not allow themselves to be broken up. However, President Kim Dae Jung had mandated that the chaebol get their debt-to-equity ratios from 5 to 1 to 2 to 1 by the end of 1999, and that goal seemed impossible unless there was a huge infusion of equity capital or either a write-off of debt through debt restructuring with the banks or a selling off of debt-laden businesses to others. Under immense pressures caused by the debt and by accusations of fraud and embezzlement, President Kim Woo-Choong abandoned his company and fled the country. The government separated the Daewoo subsidiaries and worked with creditors to convert the debt to equity, to set up subsidiaries on debt workout programs, and to look for buyers. After a year of negotiations, General Motors purchased a portion of the $1.2 billion Daewoo Motor in April 2002 for $400 million agreed to keep only three manufacturing plants in Korea and one in Vietnam-leaving creditors scrambling to sell its other plants in Eastern Europe, Asia, and the Middle East. By mid-2002, the Korean economy was showing promising signs of recovery and reform. In 2001, the economy grew by 3 percent and was expected to grow by 5 to 6 percent in 2002. The government has done away with debt-based management of the large chaebol and is working to dissolve the large conglomerates to better compete internationally. Of the top-30 chaebol that existed prior to the economic crisis, only 14 remain. The improving economy helped General Motors make its decision to purchase Daewoo Motor, but GM is faced with a new decision: how to market Daewoo cars and reduce the $830 million of Daewoo debt Should GM continue selling Daewoo cars in the United States and Europe and compete with its own brands? Without increasing its debt, will it be able to restore Daewoo’s 37 percent share of the market in Korea?
Questions
1. How would you describe Korea’s economic system? What are the key elements in that system? How would you describe the interaction between politics and economics in Korea?
2. Does Korea look like a good place to invest? Why or why not?
3. What are the key mistakes Kim Woo-Choong made in formulating and implementing Daewoo’s strategy, and how did the economic crisis in Korea and in the rest of Asia affect that strategy?
4. What risks does GM face in taking over Daewoo Motors?