Thread,
In the war on excess that is the Asia economic and business landscape the following is a pretty remarkable event IMO. I have always thought that Korea could re-emerge quicker if some level of cooperation could be reached among the Chaebol. But I have also been somewhat skeptical having personally witnessed the extent to which these huge conglomerates compete. Now I feel slightly buoyed by the event outlines in the following article:
reprinted for personal use only:
December 8, 1998
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Samsung Agrees to Swap Units
With Daewoo in a Realignment
By MICHAEL SCHUMAN
Staff Reporter of THE WALL STREET JOURNAL
SEOUL, South Korea -- Samsung Group has agreed to hand its motor-vehicle business to Daewoo Group in return for Daewoo's electronics operations as part of a major realignment of South Korean industry that could potentially strengthen Korean firms as international competitors.
The asset swap, which spokesmen for both groups said had been agreed on in principle, will probably involve an exchange of Samsung Motors Inc. for Daewoo Electronics Co., but it could also include component and other related businesses. A final plan is expected by Dec. 15, according to a statement from Korean President Kim Dae Jung's office.
Meanwhile, the top five conglomerates, or chaebols, agreed to reduce the number of their affiliates by about half by selling, closing or absorbing businesses not in their core specialties. The announcement came in conjunction with a meeting between the leaders of the chaebols -- Hyundai Group, LG and SK Corp. as well as Samsung and Daewoo -- and President Kim, who has been pushing them to reform their bloated operations more quickly.
Auto Exit for Samsung
The Daewoo-Samsung swap is seen by analysts as a positive step for Samsung, since it offers the group a way out of its beleaguered new automobile business. Samsung Motors has become an emblem of the excesses of the chaebols that economists say were a key cause of Korea's debt crisis, and Samsung's decision to give up the prized project represents a significant step toward corporate reform. For Daewoo, which has shown little interest in restructuring, the move shows that the group may be starting to make difficult choices about its far-flung and widely diversified operations.
In return for the auto business, Samsung will likely get Daewoo Electronics, which posted sales of 3.86 trillion won ($3.18 billion) and profit of 41.47 billion won in 1997, and has extensive consumer-electronics manufacturing operations around the world. Combined, the Daewoo and Samsung electronics companies will have about 60% of Korea's domestic market in consumer electronics. Paribas Asia Equity estimates they account for 10% of world production of color-television sets, 18% of video-cassette recorders, and 30% of microwave ovens.
The asset swap also will complete a radical reorganization of the Korean automobile industry. A year ago, Korea had five independent car makers; now only two will remain. Daewoo acquired troubled Ssangyong Motor Co. early this year, and Hyundai Motor Co., the country's largest auto maker, won an international auction in October to take over Kia Motors Corp., which filed for court protection from creditors last year.
Seoul Stocks Jump 4.9%
The news helped fuel a stock-market rally Monday, boosting Seoul's benchmark composite index 4.9% to its highest level since March.
Questions remain, however, about the economic benefits of the swap. Daewoo gets Samsung's new auto plant with only 240,000 units of annual capacity. The company had sold just 41,277 cars by the end of November since it started marketing them in March, and analysts said Daewoo gains little in economies of scale, technology or market share. Similarly, a senior Samsung executive complained that Daewoo's low-tech electronics business "doesn't help us." Some analysts said the deal will stick Samsung with redundant factories around the world in products it was trying to de-emphasize.
These doubts raise concerns about the government's role in corporate reform. Asset swaps were a tool used by the government in Korea's authoritarian days to reorganize domestic industry. Chaebol executives complain that they are now being pressured into merging and swapping affiliates. The government has repeatedly threatened that banks will cut off finance to chaebols that don't reform. The Samsung official said the group was hoping to attract a foreign partner into its auto business, but since the government has been pushing asset swaps, "we don't have any other choice, do we?"
Bureaucratic Power
The government role leaves some observers worried. "In this case, [government intervention] is good, because the chaebols are not moving on their own free will," said Fan Jiang, an executive director at Goldman Sachs in Hong Kong. But "the fact that [the bureaucrats] have become so important in this process has become a concern for me."
Kim Tae Dong, the senior secretary to the president for policy and planning, countered that "the choice of firms was strictly the choice of the chaebols." The government, he said, has limited its role to the overall direction of reform -- the goal of which is to create slimmer chaebols, each focused in core industries. The government has favored asset swaps and mergers as a way of achieving that, since, Mr. Kim argues, such measures will make it easier for the larger companies to make hard decisions about current capacity, future investment and manpower.
If so, these deals could lead to layoffs not only in Korea but at Korean factories around the world as the merged operations are rationalized. Analysts expect more asset swaps to take place.
At the same time, such asset swaps are making some chaebols even more powerful at home and in international markets in certain industries. For example, a recently announced merger between the Hyundai and LG groups' semiconductor businesses will create the world's second-largest memory-chip maker -- after Samsung. Hyundai's acquisition of Kia Motors gives that chaebol more than 60% of the domestic vehicle market.
Many observers, however, see these changes among the chaebols and the government's role in them as a positive for the economy. "Government involvement represents one step back," said an investment banker in Seoul. "But we need that in order to go two steps forward."
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