Various articles in todays Wall Street Journal.Only mention of LG is
that they have been looking for a semi-conductor site in Southeast
part of US.If this is still a viable concept , I would think it would be
a positive for both ZE & LG. ZE should be better off with more
LG money committed to US soil and if financing is needed it could
be arranged thru US banks.
There is an article on Korean conglomerates & their planned cutbacks.
[The Wall Street Journal Interactive Edition]>>
November 28, 1997
Korean Chaebols Prepare
To Pare Down Businesses
By MICHAEL SCHUMAN
Staff Reporter of THE WALL STREET JOURNAL
SEOUL, South Korea -- Anticipating a tough new world in which money will be hard to come by and growth will be slower, South Korea's mighty chaebols, or conglomerates, say they're starting to slim down.
The question is: Do they mean it?
A spate of announcements this week suggests they do. Samsung Group, one of the strongest chaebols, says it will invest 30% less in 1998 than it's budgeted to spend this year, and has delayed expanding some production lines overseas. Another chaebol, Hanwha Group, says it plans to sell real estate and other assets to reduce its debt to five times its equity from eight times. Halla Group is retrenching half of the 6,000 employees at its shipbuilding unit by year end, and plans to reduce its debt to six times from 20 times its equity.
Sign of the Times
The announcements could be a sign of the times. On Thursday, Korea started negotiations with the International Monetary Fund for an aid package, which the Ministry of Finance and Economy said will likely far exceed the original $20 billion requested last week, though no specific number was mentioned. But economists have estimated that the package could reach $60 billion.
The Asian Development Bank and World Bank may also be willing to join a rescue program, the ministry said. Seoul called in the IMF after the won had depreciated rapidly, but now the won's slide has slowed. On Thursday, the won fell less than 1% against the dollar to 1,119.50 won.
In the past, the chaebols had promised to reform, but failed to deliver. President Kim Young Sam, upon taking office in 1993, vowed to force the chaebols to pare their businesses to a few core industries each. Instead, they've grown during his tenure: the top 30 chaebols had 819 subsidiaries in October, up from 669 in 1996. Some still insist on forging ahead with grand investment plans.
The Dongbu Group, which has affiliates in insurance, chemicals and construction, announced just this month that its electronics company would invest $2 billion to start a memory-chip production business, notwithstanding the fact that other Korean chip firms are struggling with huge capacity and low prices.
"We still have a dream to get into telecommunications in the future," says Min Wi Sik, executive vice president at Dongbu Electronics Co.
Cutbacks Expected
But now, the chaebols may have little choice but to scale back. Their unbridled expansion and huge debts have been cited as a prime reason that led Seoul to seek help from the IMF. And the mutilateral agency is likely to insist on tight monetary and fiscal policies as a condition of its aid package. The expected belt-tightening will slow growth to below 3% next year, economists predict, and put pressure on the chaebols to cut back. Although cutbacks are likely to cause pain in the short term, they could be just the prescription for the ailing economy.
Unlike Thailand or Indonesia, the problems of Korea's financial sector are directly linked to the poor health of the country's biggest industrial companies. Many family-run chaebols invested too much, too fast in industries suffering from world-wide overcapacity, and took on too much debt in the process.
As Korea's growth slowed, many of these debts became unmanageable and five of the top 30 chaebols were forced to seek court protection from creditors this year. Meanwhile, as bad loans at Korean banks doubled, the financial sector found its liquidity shortage worsening to a point where the government had to turn to the IMF for a bailout.
By slashing spending, the chaebols could reduce their high debt levels, ease the demand for funds, and take some pressure off feeble banks. This week's announcements by the chaebols may be just the tip of the iceberg. "This is a taste of things to come," says Richard Samuelson, research director at SBC Warburg Dillon Read in Seoul.
Impact on Investments
Because the chaebols already are finding it much more difficult to raise financing at home and abroad, they may be forced to postpone or cancel investments. In the past, Korean banks routinely forked over funds without asking too many questions, but their bad-loan burden has now made them more cautious. Overseas investors, who once automatically bought into the Korean miracle story, have become far more wary.
As a result, even Korea's best companies are feeling the pain. Samsung Electronics Co., the world's largest maker of memory chips, found no buyers this week for a 100 billion won ($90.1 million) domestic bond issue. Amid such bearish sentiment, yields on three-year corporate domestic bonds, the benchmark interest rate, have soared by more than four percentage points in the past two weeks to 17.25%.
SK Telecom, the top cellular-phone service provider, postponed last month a $100 million offering of American depositary receipts due to lack of interest. And Hyundai Electronics Industries Co. has been unable to proceed with an overseas bond issue to raise $200 million to complete its memory-chip plant in Oregon. Hyundai group officials say they have had to use their own resources instead.
"Because of the current environment, we are reviewing our whole investment plan for next year," says an executive with Hyundai's financial management team.
--Staff reporter Namju Cho and Cecilia Kang of the AP-Dow Jones News Service contributed to this article.
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