Seoul: Restructuring of Korean
industry and corporate strucutures is not going as fast as many would like.
But enough is changing in goals, management, attitudes and corporate gearing
to be generally optimistic.
by Philip Bowring
Seoul: Is Korean business really being restructured, or now
that the worst of the crisis is over is it merely going
through the motions of reform?
Opinions at home and abroad are divided and there are no easy
benchmarks for assessing change. There are too many aspects to
restructuring to make judgements based on whether a foreign
bank takeover, such as that of Seoul Bank and Korea First, or
a "big deal" merger of chaebol industries happen or not.
For sure, the recovery of the stock market which has risen
threefold in dollar terms from a year ago and 70% since
January 1 -- has been stunning. But it is more an indication
of local liquidity and the collapse of interest rates, caused
by weak investment demand and a huge external surplus, than a
gauge of reform.
Some see the stock boom as an obstacle to change.
By pushing mutual funds such as Hyundai's Buy Korea Fund, the
biggest chaebol have promoted the stock boom for their own
purposes as well as to help towards the government's goal of
reducing debt equity ratios to 200% by year end. With 300%
ratios now the norm, a little more borrowing can fund group
contributions to affiliates' rights issues. So chaebol can
simultaneously keep their grip on affiliates and move towards
the target ratio.
However, as de-leveraging is itself a major reform objective
it is hard to argue that the chaebol are wrong. The real test
will be whether the chaebol now pay more attention to return
on equity rather than emphasising market share or sheer size.
The omens on this are quite encouraging. Younger generation
managers, some brought back from overseas, have different
attitudes from their parents. Wider share ownership will
increase public scrutiny of companies, and government-decreed
bans on cross-guarantees and the adoption from this year of
consolidated accounts will force a change in attitudes.
Reform of bank managements will gradually make lenders take a
more professional approach to credit assessment. Even without
a foreign takeovers, changes in practices are already profound
and staff numbers have been slashed. The banks' intermediation
role is also declining as the capital market develops.
Greater reliance on non-guaranteed bond and corporate paper
issues will make companies more mindful of financial ratios.
Cross-subsidies of massive loss makers, of the sort which has
kept Samsung Motors on life support, are unlikely to be
tolerated much longer. Chaebol internal cohesion will wane as
founders make way for sons, hastening natural splintering into
components defined more by activity than family.
Even Daewoo chairman Kim Woo Choong has at last realised that
his -- the most highly leveraged of the top chaebol -- must
face reality and sell assets to cut debt.
Politics matters too. President Kim Dae Jung faces a National
Assembly election next April. He needs both a reviving economy
and a track record of being nasty to the chaebol.
This is not to underestimate chaebol powers of survival, to
bend the rules to their own advantage -- for example, using
life insurance associates as captive sources of funds. The
patriarchs continue to fight government attempts to break
their influence, force them into mergers or lose face by
abandoning pet projects. But chaebol foot dragging cannot
hide the huge change in their circumstances and attitudes, nor
the scope of the industrial amalgamations that are occurring.
The same applies to attitudes to foreign investment. Korea
remains very nationalistic. But it has made huge progress
compared with a few years ago. If nothing else, global
ambitions force it to be less insular. Liberalisations before
and during the crisis, however reluctant, has made the economy
more open and foreign participation as the price of
Nor does economic recovery mean that further reform can be put
on hold, asset sales to foreigners stalled and further
bankruptcies. Low interest rates and a pick up demand -- 6%
GDP growth is now forecast for 1999 -- will save many
companies. The recovery is protracting agreement on bank
sales. But the return of optimism and falling unemployment
make it easier for the banks (which are now almost all owned
the government which rescued them) to take a tough line on
defaulters. More middle level chaebol bankruptcies are on the
cards. Many asset sales to foreigners are under negotiation
and foreigners are buying distressed debt from the
government's Korea Asset Management Corp.
Bankruptcies and corporate restructurings have done little to
reduce the huge over-capacity in industries such as cars and
steel. Some companies still talk grandly of increasing output
by unrealistic amounts. However, most of Korea's excess
capacity -- unlike China's -- is modern. Labour market reform,
though imperfect, has increased flexibilty and offered the
prospects of large gains in productivity as demand picks up.
It is possible that Korea will again go through a cycle of
excess investment driven by grandiose dreams and too easy
chaebol access to capital. But it stands a good chance now to
show that it can follow Taiwan in doing more with less
capital, moving towards a service and skill based economy in
which small firms not giant chaebol are the cutting edge. It
has been a quick learner in the past --- as witness its
response to the 1970s oil crises. It is still far from the
model economy of securities analysts' imagination. But on
balance enough restructuring is in the works to make this not
only a very competitive economy but one where returns to
shareholders will eventually justify today's stock prices.
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