Bailout Terms Will Undo Protection Of South Korea's Key Industries
Dow Jones Online News, Thursday, December 04, 1997 at 11:27
SEOUL -(Dow Jones)- South Korea will be forced to open its markets,
particularly for cars and computer chips, and slow its economic growth
to meet the terms of its multibillion-dollar international bailout,
analysts said Thursday.
South Korean car and computer chip makers - all owned by the
country's debt-ridden conglomerates - for years borrowed and expanded at
astounding speed as U.S., Japanese and other foreign companies were
successfully kept out, experts said. South Korea flooded the world with
cheap cars and chips, leading its export-driven economy.
"Now all that will have to change," said Yun Kun-young, an economist
at Seoul's Yonsei University. "South Korea's leading industries will go
through a radical change; they will slow down radically for the first
time."
As part of the record $55 billion rescue plan, the International
Monetary Fund required South Korea to slow economic growth, raise
interest rates, tighten credit control and accept more foreign imports.
The measures will make loans harder to get and increase competition in
already saturated domestic markets.
The car industry had estimated domestic demand would drop 11% to 1.3
million cars next year. But in the wake of the IMF bailout, the drop
could be much bigger, up to 30%, analysts said.
The forecast was as gloomy in the semiconductor industry, the pride
of the nation's export machine. South Korea supplies 40% of the world's
computer memory chips, called dynamic random access memory chips, or
DRAMs.
"South Korea very likely will lose the lead in the DRAM market in a
couple of years," said Yoo Seung-moon, an analyst at Coryo Investment
and Securities Co. "In semiconductors, you have to keep investing
because the chips keep getting powerful. But Samsung, Hyundai and other
Korean chip makers will not be able to get the money."
According to some estimates, Korean chip makers will lose a combined
$2.7 billion in the semiconductor business this year.
For decades, South Korea's economic strategy was simple: The bigger,
the better. In an expansion binge that foreigners often called
"logic-defying," large companies jumped in to compete when one
conglomerate made money in one sector. They poured billions of dollars
into new plants, creating ballooning industries that left the government
in a quandary when things turned bad.
Despite the national cash crunch, Samsung, the nation's largest
conglomerate, is building a $5 billion plant that will spill out 80,000
cars annually starting next year into an already saturated market at
home and abroad.
Last month, Dongbu, another South Korean conglomerate, said it was
entering the semiconductor industry.
In the past, the government jealously guarded those industries from
collapse and foreign competition. It provided a slew of incentives -
cheap loans, tax benefits, high tariffs and other trade barriers that
kept foreigners' share of the domestic auto market at less than 1%.
Only this year, the government spent hundreds of millions of dollars
to take over the near-bankrupt Kia, South Korea's second-largest car
maker, and keep it afloat. Under the new IMF rules, such protection will
no longer be possible.
South Korea's over-dependence on a few key industries was dramatized
last year when a supply glut sent global computer chip prices plunging
by 80%, contributing heavily to South Korea's record $23.7 billion
current-account deficit in 1996. Semiconductors account for nearly 20%
of all South Korean goods shipped abroad.
Micron Technology Inc., one of the last U.S. manufacturers of memory
chips, has started lobbying U.S. government officials and members of
Congress against the IMF bailout of Korea. The Boise, Idaho,
semiconductor maker has said the taxpayer dollars could help Korean chip
makers continue their unfair competition.
Treasury Department officials have said the amount of the bailout
hasn't been set and specifics of the U.S. contribution haven't been
worked out. It also is unclear how much money Korean chip manufacturers
might receive, if any, from the bailout plan.
Similar concerns have been voiced by U.S. auto makers about aid to
Korean auto makers, who are also accused of dumping.
Experts think the Korean chip makers will cut capital spending by 20%
to 40% in 1998, may shift some of the manufacturing capacity to non-DRAM
products and possibly cut prices even further due to the devaluation of
the Korean won against the dollar. The price cuts will likely continue
because the devaluation lowers that country's relative operating costs.
LG and Hyundai have recently said they are scaling back investments in
future plants, but Samsung, the world's largest maker of memory chips,
is about to open a new factory in Fort Worth, Texas.
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