[LATimes on Taiwan and Korea]
Angela --
Two articles in today's LATimes are worth a glance. The one on Taiwan b/c it talks about Acer and the one on Korea b/c it discusses the chaebol and the possibility of foreign ownership now that the companies are so devalued.
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Sunday, January 25, 1998
An Island of Stability in Rough Asian Seas
By JAMES FLANIGAN
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Taiwan is faring best of all the Asian countries in the current crisis.
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There is no International Monetary Fund emergency loan program needed for Taiwan's banks. Indeed, Taiwan's government, with $83 billion in foreign currency reserves, could lend the IMF a buck or two.
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The Taiwan dollar has fallen roughly 19% against the U.S. dollar, the lowest devaluation among convertible Asian currencies. Taiwan's industry is confident. "We will get a short-term advantage against our competitors in Korea because we can invest and they are hurt by debt and will have trouble keeping up investment," says Stan Shih, chairman of Acer Inc., the worldwide maker of computers, peripheral gear and semiconductors.
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ÿShih's confidence is based on the fact that Taiwan's small to medium-sized companies, more than 1 million strong, are financed largely by equity investments of individual shareholders rather than bank loans. That gives them flexibility and staying power when business turns down.
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Yet Taiwan's companies do fail often. They are not kept alive by government aid. That's one of the island nation's strengths, says a study by economists at Penn State University and the World Bank.
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"New companies displace others by innovating and improving productivity," says Penn State economist Mark Roberts.
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ÿBut a vibrant entrepreneurial economy is not Taiwan's only strength. "The most important reason for Taiwan's escaping the troubles of other economies is that it has little or no foreign debt," says Stanford University (<Picture: [Company Capsule]>) professor Lawrence Lau, who has worked extensively with Taiwanese industry.
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The Taiwan government has discouraged borrowing from abroad because of a deep aversion to inflation. When inflation took off in Taiwan in the late 1980s, the government killed land speculation and threw the economy into recession. At the time, Taiwan took the kind of lumps that other countries are suffering today. The main index of Taiwanese stocks fell from 12,000 to 2,000; that index is back over 8,000 today.
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Taiwan took those lumps because of government policies that stem not from economic theory but from the country's history--and that's a key point. The government of Taiwan's 21 million people descends from the Nationalist forces of Chiang Kai-shek, which fled mainland China in 1949 after defeat by Mao Tse-tung's Communists.
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Chiang's Kuomintang party blamed hyperinflation in China in the late 1940s for turning the people against them. They vowed to keep inflation under control in their new territory. So the government has guided the Taiwanese economy over the decades, encouraging but controlling foreign investment. Taiwan flourished first with chemical industries and home-appliance manufacturing.
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But the government, now led by President Lee Deng-hui--a Cornell University graduate--has been wise enough to hold the economic reins loosely, to allow entrepreneurial companies to multiply and newer high-tech industries to emerge. "The government has been seeking technology transfer from foreign computer and telecommunications companies," explains professor Thomas Gold of UC Berkeley, an expert on Asia.
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Taiwan has farmed out labor-intensive industries by investing in Southeast Asia and China itself.
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ÿAcer, founded in 1976 by electrical engineer Shih and a few associates, is a good example of evolving Taiwanese views on industry.
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The company, which had $3.8 billion in sales last year, is one of the world's largest suppliers of computer parts to other companies, as well as a manufacturer of desktop and laptop computers under its own name--which is derived from the Latin for "sharp" or "acute."
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Acer distributes via more than 30 locations worldwide, working through roughly 21 companies in which it has sold stock to local investors. It relies on joint ventures with other companies, such as an alliance with Texas Instruments in semiconductors. That way Acer has expanded without borrowing enormous amounts of capital.
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ÿAlso, Acer pioneered stock ownership among its employees, an innovation for Chinese industry, which traditionally is closely owned by family members. "We rely on equity financing. The people put their savings into the company," says Shih, who last week accepted an award from USC's Marshall School of Business.
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The result: Acer has more than $1 billion of shareholder equity and only $140 million in debt. Thus it has been able to endure occasionally heavy losses to establish its presence and the Acer name around the world.
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To be sure, Taiwan's is not a perfect system. Rule by a single party over 40 years has resulted in corruption scandals. And the country's prosperity owes much to its $30 billion a year in exports to the U.S.--not to mention the protection of the U.S. military.
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But the same could be said--from trade surplus to the U.S. military umbrella--for almost all Asian nations. Taiwan and Acer are significant because they set an example for developing countries and companies everywhere--particularly for China--on how a balance of government guidance and entrepreneurial initiative can build a modern economy and spread prosperity.
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Taiwan has created a middle class of skilled workers with average per-capita income of more than $12,000 a year. That's roughly half the average income in Japan and the U.S. but many times the $600 average for China, which is trying to shift from a state-owned system to one that encourages initiative and the development of advanced industries.
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Right now China is facing a crisis. Its economy is slowing, even as the Beijing government tries to shift state employees to more productive industries. Unemployment is rising and there is pressure on Beijing to devalue its currency, the yuan, to make exports attractive and preserve jobs at state companies. If it devalues, bad times seem inevitable. China would take a step back, Hong Kong would be devastated, and Japan and the world economy would be pushed further toward recession.
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ÿHowever, reports are that China's leaders don't want to devalue, but to press on with a restructuring of industry. In that context, Taiwan offers support. In the late '80s, Taiwan could have kept its bubble economy inflated by devaluing to help outdated industries. But it didn't do that. Instead it forced some companies to fail, encouraged new industry and came back strong. In Asia today, its example speaks volumes.
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ÿÿÿÿÿTaiwan at a Glance
ÿÿÿÿÿPopulation: 21.5 million
ÿÿÿÿÿAverage per-capita income: $12,285 per year
ÿÿÿÿÿHousehold savings rate: 20%
ÿÿÿÿÿUnemployment rate: 3%
ÿÿÿÿÿInflation rate: 3%
ÿÿÿÿÿMotor vehicles in use: 4 million cars, 8.5 million motorcycles
ÿÿÿÿÿSource: Taiwan Trade and Economic Office >>>>
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Sunday, January 25, 1998
Some U.S. Companies See Fire Sale in South Korean Crisis
Regulatory barriers are likely to come down along with prices, drawing foreign interest in newly distressed banks, auto makers and other groups.
By EVELYN IRITANI, Times Staff Writer
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SEOUL--The troubles facing South Korea's giant conglomerates are proving to be good news for U.S. and other foreign firms. Suddenly they see opportunities to buy modern, Korean-built production facilities around the world, or to find a backdoor into a market that seems destined to eventually regain its robust growth.
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ÿ"For Sale" signs have gone up at steel plants, beverage-manufacturing facilities and giant office towers around the world.
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Samsung Group) the country's largest chaebol--the term for South Korea's most influential conglomerates--announced last week that it would sell $300 million worth of real estate in London, New York and Singapore, not to mention $80 million worth of property owned personally by Chairman Lee Hun Kee, to reduce its debts.
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ÿMeanwhile, everything from banks to makers of consumer products, automobiles and petrochemicals in South Korea are attracting attention from foreign shoppers.
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Companies such as Procter & Gamble have already expanded their market in Korea by gobbling up competitors being shed by conglomerates under pressure to clean up their balance sheets and reduce their debts.
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General Motors is openly coveting opportunities in South Korea's troubled auto industry. And U.S. banking giants are said to be eyeing two of the country's biggest banks.
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This is expected to accelerate after President-elect Kim Dae Jung warned Korea's most powerful tycoons last week that their restructuring plans must include the sale of businesses that are profitable as well as those that are money losers.
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The chaebols, which embarked on an aggressive, debt-financed expansion program in the 1980s and '90s, are widely blamed for pushing South Korea to the edge of bankruptcy. Eight of the nation's 30 largest conglomerates have declared bankruptcy in the last year, although some are still operating under court protection.
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"The Korean firms need mergers and acquisitions and joint ventures," said Park Jin Hei, vice president and treasurer of Citibank's operations here. "Their problems can only be solved by equity, not more debt."
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But many foreign investors are holding back until they are sure the Korean government follows through on its pledge to clean up the banking system, reduce the legal barriers to foreign ownership and reform labor laws to make it easier to lay off employees during difficult times.
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The government has promised that by the end of this year, it will lift restrictions on foreign investment in the stock market--allowing foreigners to assume majority ownership in key industries, notably banking, and paving the way for hostile takeovers.
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"Foreign investors coming in and looking at this market are considering it on the basis that these changes will go forward," said Jay Bonacci, an accountant working on six deals involving European and U.S. firms. "If that doesn't occur, I'm not optimistic at all that these things will happen."
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South Korea's fiscal crisis, triggered by mountains of private debt, has forced people to confront their fears of foreign influence in the economy. During a televised town hall meeting last Sunday, President-elect Kim told viewers that fears of becoming an "economic colony" were nonsense.
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He said Korea's recovery depends on its integration into the global economy and that foreign investors will inject badly needed capital into the credit-squeezed system and create jobs for those laid off by bankrupt or restructured firms.
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ÿSo the welcome mat is officially out--but don't trip. Assessing a South Korean company's profitability and debt load can be difficult, since many corporate subsidiaries have substantial cross- holdings of shares, cross-guarantees of loans and intracompany sales that muddy their profit pictures and increase their debt exposure.
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Unraveling the paper trail will be particularly challenging in the financial sector, where two troubled banks--Seoul Bank and Korea First Bank--are expected to go on the auction block in late February. Chase Manhattan bank and Citicorp have been named as possible buyers, although bank officials deny being interested.
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Park said Citibank, a unit of Citicorp, has its hands full managing its own operations here, since tight credit and skyrocketing interest rates have already toppled thousands of local companies and are rapidly turning good debt into bad.
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Consumer products is one arena with many potential buyers and sellers, according to local business executives.
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For years, foreign firms have looked hungrily at Korea's large middle class, but it has been a difficult market to break into, in part because of consumer resistance to imported products as well as high tariffs and bureaucratic red tape.
Proctor & Gamble, the U.S. consumer products giant, recently paid approximately $240 million for a majority share of Ssangyong Paper Co., a subsidiary of debt-strapped Ssangyong Group.
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The acquisition of Ssangyong, which produces sanitary napkins, diapers and kitchen towels, significantly expanded P&G's domestic manufacturing base. The U.S. company has one other plant in Seoul producing its Whisper, Pampers and Vidal Sassoon products.
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Meanwhile, rumors of other deals are rife.
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Price Costco, the U.S. discount club operator, is said to be considering an investment in Shinsegae Group, a South Korean retailer currently operating two Price Club stores under a royalty agreement. A Shinsegae official denied that speculation.
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Korean newspapers also report that a number of department stores and retail outlets of bankrupt distribution companies are up for sale. Those include stores owned by the bankrupt Nasan Group, including a large home-appliance store called Home Place, and several department stores owned by New Core Group.
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Three unnamed domestic and several Japanese and U.S. companies are lining up to bid on the steelmaking arm of the bankrupt Kia Group, according to the South Korean government.
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The realignment of Korea's financially troubled auto sector could also produce opportunities for foreign firms anxious to expand their presence in that lucrative, but nearly impenetrable, market.
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U.S. auto makers all admit to being interested in South Korean investments. Detroit's Big Three remain frustrated by their lack of progress here, in spite of a 1995 agreement signed by the government to liberalize the market. In 1996, foreign auto makers sold just 10,000 cars in Korea--less than 1% of the market.
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Given the worldwide overcapacity in auto manufacturing, some industry observers say it is more likely that Detroit wants some of the country's Asian distribution networks than its car-making plants.
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Whatever happens, though, is going to happen relatively quickly.
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"Everything there is moving pretty fast and the [South Korean] auto companies are restructuring now, not next year," said analyst Dave Nathanson, head of the Detroit-based automotive group of Coopers & Lybrand Consulting.
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South Korea's crumbled economy presents "a golden opportunity for [U.S.] auto makers to expand" their presence and market share in the Asia-Pacific region through joint ventures or equity investment deals, said David L. Littmann, senior economist for Comerica Bank in Detroit.
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ÿAnd anxious Korean car makers are looking for "some of Detroit's hard-won experience in 'right-sizing' a car company," Littmann said.
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One wild card is Samsung Group, which has not indicated whether it will keep its controversial new auto venture. The giant conglomerate said it has hired a foreign research firm to analyze its vast operations and decide which businesses to keep and which to sell, merge or liquidate.
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ÿSamsung Motors Co., the country's newest auto maker, has invested $1.6 billion in an auto plant in South Korea but needs to expand production to make that operation profitable.
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Earlier, Samsung unsuccessfully tried to take over the bankrupt Kia Motors, the nation's third-largest auto maker, and there are reports that it is seeking a partnership with a foreign auto maker.
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Ford Motor Co. is keeping mum about its South Korean plans. The company already has a sizable stake in bankrupt Kia Motors and isn't likely to be looking to add yet another of the country's auto companies to its stable, analysts said.
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Tom Hoyt, a Ford spokesman, said the company will not pursue any opportunities unless South Korean auto companies' debt loads are stabilized and the economy starts improving.
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ÿBut GM makes no bones about its desire to boost its presence in the Asia-Pacific market with a significant investment in a South Korean car maker or one of the country's myriad auto components manufacturers. It already has a joint venture with one of Daewoo Group's car parts subsidiaries.
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"We have a 5% share of the Asia-Pacific market and we have a goal of securing a 10% share," said Mike Meyerand, spokesman for GM's international operations. "South Korea is the second-biggest market in the region, and we have far less than a 1% share there, so we clearly have a long way to go."
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He downplayed recent reports in the South Korean press that GM is pushing for a $5-billion investment in Daewoo Motor Co.--the country's third-largest car maker--but didn't deny it outright. Korean newspaper reports have also linked GM with Samsung Motors.
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"We have a lot of people in South Korea right now, and we are seriously looking," Meyerand said.
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Chrysler, the smallest of the Detroit car companies, says that for the moment it isn't interested in a Korean venture.
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Petrochemicals is another industry with something to offer foreign investors. The industry has grown rapidly in South Korea, as it has throughout Southeast Asia, where rapidly developing consumer economies have an insatiable appetite for plastics, synthetic fibers and other petroleum-derived products used to make an array of goods.
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Aided by low-cost credit from the government, the chaebols have invested billions in modern petrochemical plants to lessen their reliance on imported "feed stocks," as petrochemical components are called. But like so many other strategies here, that policy has backfired, producing overcapacity and declining profits.
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Indeed, the appeal of Korean petrochemical plants to potential buyers could be dimmed by the fact that plants are also on the block in other parts of Asia. Major refineries and petrochemical plants are for sale in Thailand, for example, said John Vautrain, vice president of Purvin & Gertz, a Long Beach-based energy consulting firm.
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"There are also only so many buyers since the plants typically cost $1 billion and up," Vautrain said. "It's not like buying a house."
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ÿÿÿÿÿTimes staff writers Chris Kraul in San Diego, John O'Dell in Orange County and Chi Jung Nam of The Times' Seoul bureau contributed to this report. >>>> |
