Regulators put dent in Hyundai's expansion
By Choe Sang-Hun International Herald Tribune
WEDNESDAY, APRIL 12, 2006
SEOUL Things were looking good - or so it seemed - for Chung Mong Koo, the 68-year-old chairman of Hyundai-Kia Automotive Group, the seventh-largest carmaker in the world.
After years of struggle, and ridicule, Hyundai cars were establishing themselves as a respected brand in the U.S. market. In January, the government gave the South Korean company's steel- making affiliate, Hyundai INI Steel, the green light to fulfill one of Chung's long-cherished dreams: building a $5.1 billion integrated mill that would ensure a steady supply of steel for his expanding auto empire.
Meanwhile, Chung was scheduled to attend groundbreaking ceremonies in the coming months for new factories in China, the United States and the Czech Republic.
Then came some news that spoiled the party. In March, South Korean prosecutors raided various Hyundai affiliates, a move that company officials said threatened to derail Hyundai's dream of breaking into the ranks of big-league global automakers.
Since March 26, prosecutors have been questioning Hyundai executives about allegations that their companies created multimillion-dollar slush funds to bribe politicians and that they engineered shady deals to facilitate a father-to-son transfer of corporate control in South Korea's second-largest conglomerate.
Prosecutors have vowed to call in Chung and his 35-year-old son, Eui Sun, the president of Kia Motors, for questioning, probably next week.
"This comes as we are on the verge of leaping forward to become a global automaker," said Jake Jang, a Hyundai spokesman. "We fear this will hurt our corporate image and credibility overseas and it could put a brake on our global strategy.
"The sooner it ends, the better it will be for the national economy."
Effectively barred from leaving the country, Chung will suffer the humiliation of not being able to attend an April 18 groundbreaking ceremony for Hyundai's second plant in China, to which top Chinese leaders have been invited, company officials said.
Kia has already postponed an April 26 ceremony to mark the beginning of construction of a $1.2 billion plant in the U.S. state of Georgia. It "looks inevitable" that a May 17 groundbreaking ceremony for a $1 billion Czech plant will be delayed, Jang said.
Hyundai is adopting an argument that South Korean conglomerates usually offer when they are under siege by regulators: Don't hurt us too much, or the economy will suffer.
Analysts say that how the government settles its latest dispute with Hyundai - one of the nation's most influential companies - will be a test of the commitment of President Roh Moo Hyun's administration to reform the nation's family-controlled conglomerates.
The government has given the conglomerates some strong warnings. The head of the oil and telecommunications giant SK Corp. was imprisoned for several months in 2003 on fraud charges. A government investigation forced the family that controls Samsung to donate 800 billion won, or $833 million, to charity, after the company was embroiled in corruption scandals. And the family that controls Doosan, an engineering and beverage conglomerate, stepped aside from management control under pressure from the government while they faced corruption charges.
Analysts still wonder, however, whether the authorities are serious about ending controversial practices at the chaebol, such as the way that fathers help sons inherit control of empires, or whether they are just bashing the often- unpopular conglomerates ahead of major elections this year and in 2007.
"If chairman Chung and his son are punished and professional managers take over, it will improve transparency of corporate governance and help Hyundai enter a new phase of growth and attract foreign investment," said Moon Joo Woong, an auto industry analyst at Goodmorning Shinhan Securities.
Chung is credited with separating the Hyundai-Kia group from the debt-ridden Hyundai Group in 2000 and nursing it into an independent conglomerate that now has 40 affiliates. Once dismissed as cheap yet unreliable, Hyundai and Kia cars have built enough of a reputation that Alabama and Georgia rolled out the red carpet and dangled attractive tax breaks in order to draw factories to their states.
Hyundai also is recording enviable growth in China, India and Europe. It controls 70 percent of the South Korean market.
Unlike the heads of other conglomerates - such as Samsung Group's Lee Kun Hee - who increasingly delegate day-to-day decision-making to professional managers, Chung bills himself as an "on the spot manager," visiting factories and keeping a tight leash on management.
Chung is also an aggressive believer in family control of a business.
Under a plan that prosecutors are scrutinizing, Chung and his 35-year-old son, Eui Sun, set up subsidiaries that thrived on lucrative contracts from Hyundai, Kia and other subsidiaries. Chung Eui Sun unloaded some of his shares at an enormous profit, which critics say he used to accumulate a 2- percent stake in Kia. The scheme was detailed in a report issued by civic groups that has not been disputed by Hyundai.
A significant stake in Kia is vital to the family that controls Hyundai through circular funding among affiliates. Kia is the biggest shareholder of the parts supplier Hyundai Mobis, which owns 14.6 percent of Hyundai Motor. Hyundai Motor in turn holds 38.67 percent of Kia.
Glovis, which was established in 2001 with 5 billion won from Chung and his son, is an example of a company involved in circular funding. The company, which ships cars and parts for Hyundai and Kia, was listed on the stock market last year and was valued at almost 2 trillion won, with 90 billion won in annual profit. Last year, Chung was the leading earner of stock dividends in South Korea, raking in 33 billion won, twice as much as the second- highest earner, Samsung's Lee, including 1.6 billion won from Glovis.
Glovis was the first Hyundai affiliate raided by prosecutors. Its president, Lee Ju Eun, was later arrested on charges of channeling slush funds through a lobbyist to win construction approvals and permits.
On Tuesday, the People's Solidarity for Participatory Democracy, a civic group, filed a lawsuit against the Chungs.
It said that giving huge profits to themselves through Glovis was tantamount to embezzling money from Hyundai and Kia, which they manage.
Hyundai has said that all its dealings with Glovis were legal. It said Hyundai had outsourced the shipping of its products even before Glovis was established.
"But the practice for years gave Hyundai management a weak spot when dealing with its labor union," said Lee Kark Bum, a professor at Information and Communications University in South Korea.
Hyundai Motor workers are among the best-paid blue-collar workers in South Korea. This week, their union demanded a 9.1 percent wage rise. It argued that workers were not compensated properly, considering the company's 2.3 trillion won in net profit last year.
Hyundai, which sells 70 percent of its cars overseas, is struggling with the increasing value of the won, which makes its cars more expensive abroad. Hyundai is opening assembly lines overseas to mitigate the problem.
But it is also asking its 450 parts suppliers to cut prices by up to 10 percent. That demand irked the authorities, who vow to reduce the enormous wage gaps between workers of big conglomerates and their subcontractors.
Experts say that despite recent strides in corporate transparency, financial secrecy and nepotism and corruption remain entrenched in the country's conglomerates, rendering them an easy target for political pressure and whistle-blowers.
In 2003, several executives from Hyundai and other conglomerates were convicted of giving vans filled with cash to an opposition candidate during the 2002 presidential election.
Prosecutors deny that their investigation is motivated by political concerns.
Meanwhile, Chung is going through the typical gesture of South Korean business tycoons in trouble: showing repentance.
"I am sorry to the people," Chung said Saturday, when he rushed home from an overseas trip. A separate statement said: "Hyundai Automotive Group as a people's company will try its best to fulfill its social responsibility and duty."
Such a comment indicates that Hyundai may donate a huge sum to charities, as Samsung did in February, to burnish its public image and placate a government that wants big businesses to help narrow the gap between the rich and poor, analysts said.
Such donations, however, are often criticized as stopgap measures that evade the real problems.
|
