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... tors and banks are meant to help out these ailing firms by lowering the interest rates on their loans or rolling them over completely. In return, the companies are supposed to reform themselves; although many have simply cooked the books in order to make their balance sheets look better. When the company failed to win agreement from its labor unions for a cost-cutting program, it found no fresh money was available.
The firm then defaulted on loan repayments to its major creditor, the Korea Development Bank. The pressure to keep propping up busted firms is partly political: the South Korean government deeply fears an increase in unemployment. The banks are also concerned about having to make even greater provision for bad loans by allowing firms to go bust. If, however, Daewoo is liquidated and sold, perhaps with some parts going to an overseas producer and the remainder to its main domestic rival, Hyundai, then a strong message of reform would be sent not only to bankers and managers in South Korea, but the rest of Asia as well. If South Korea can bite the bullet on such a large bankruptcy, which in turn would open the door for fresh investment in its motor industry and ultimately the preservation of jobs, then other countries might be encouraged to do the same. The process would have enormous effects in South Korea itself, where giant companies have long been considered too big to fail.
The countrys family ran conglomerates, are known as chabot. Successive governments with favors deliberately fattened them and state directed credit so that they would become the countrys main engines of growth. It helped South Korea to leap from poverty at the end of the Korean War in 1953, to relative prosperity in a single generation. However, there are flaws.
The cozy links between the chaebol's bosses and the countrys politicians and bureaucrats fostered corruption. The chabot recklessly loaded them up with debt, to expand into all sorts of unrelated business. The corporate monsters, that emerged, came to dominate, the economy. A firm like Microsoft could never have emerged in the country, some South Koreans claim. The veteran opposition leader, Kim Dae Jung, was elected president in 1997. It finally looked like chabot was going to come to a Holt.
The political transition, together with the shock delivered by the financial crisis, was thought to be potent enough to restructure the chabot. To an extent it has, but without genuine bankruptcies, the process will be far from complete. Hyundai's giant construction division is also in deep trouble and is teetering on the brink of bankruptcy. But, for Kim Woo Choong, he is thought to be riding out the storm in Europe, and plotting a business comeback. The fall of the House that Kim Built The collapse of South Koreas second largest conglomerate, Daewoo Motor, is a bankruptcy that could be good for Asia.
The founder of the firm, Kim Woo Choong, could look out over the South Korean capital and see the enormous headquarters building, of his firm, which he founded in 1967. He started out as a shirt salesman 30 years ago, and now he has created Daewoo. Daewoo is a multinational with sales of around sixty billion dollars and some two hundred thousand employees, which half of them are over seas. The company made just about anything, anywhere: ships in South Korea microwave ovens in France and fertilizer in Vietnam. The car business had been Kim's latest and biggest target. He had been determined to turn Daewoo into a global giant.
But a year ago the Daewoo group began to collapse under its enormous debts; some parts were broken up, some parts sold. Now, on November eighth, the dream was finally shattered, when the Daewoo Motor Company was faced with bankruptcy. The collapse of the company has shocked South Korea. The government called an emergency cabinet meeting. But the firms final day of reckoning was a long time coming. The company had been fighting for months with unions to try to agree job cuts that might allow it to be sold.
Ford had looked the firm over, but walked away. Americas General Motors and its partner, Italy's Fiat, will remain the only likely suitors. The bankruptcy of the company, however, has significance beyond South Korea. The company is one of the many casualties of the 1997 - 98 Asian financial crisis. Just like other failed companies in Thailand, Indonesia, and the Philippines and elsewhere, instead of expiring under a mountain of debt, it has staggered on.
By the end of June, Daewoo Motors assets had shrunk to 17. 8 trillion won; however, its debts had grown to 18. 2 trillion won. It is a similar massive overhang of corporate debt throughout Asia that threatens to undermine the regions economic recovery. While politicians, officials and banks shy away from making companies bankrupt and continue to prop them up, competitors suffer and assets cannot be redistributed. The bankruptcy of the company could initiate the corporate clear-out which Asia badly needs by encouraging governments to allow the failure of bust firms, despite the pain to both workers and managers that this would entail.
The fate of the company though, is still not, clear-cut. When the group buckled under debts of around eighty billion dollars last year, it was in effect broken into separate businesses. Some, shipbuilding, were sold, and others were placed into a state-backed corporate workout, to help them survive. More than 40 other South Korean firms are also in the program. Creditors and banks are meant to help out these ailing firms by lowering the interest rates on their loans or rolling them over completely. In return, the companies are supposed to reform themselves; although many have simply cooked the books in order to make their balance sheets look better.
When the company failed to win agreement from its labor unions for a cost-cutting program, it found no fresh money was available. The firm then defaulted on loan repayments to its major creditor, the Korea Development Bank. The pressure to keep propping up busted firms is partly political: the South Korean government deeply fears an increase in unemployment. The banks are also concerned about having to make even greater provision for bad loans by allowing firms to go bust.
If, however, Daewoo is liquidated and sold, perhaps with some parts going to an overseas producer and the remainder to its main domestic rival, Hyundai, then a strong message of reform would be sent not only to bankers and managers in South Korea, but the rest of Asia as well. If South Korea can bite the bullet on such a large bankruptcy, which in turn would open the door for fresh investment in its motor industry and ultimately the preservation of jobs, then other countries might be encouraged to do the same. The process would have enormous effects in South Korea itself, where giant companies have long been considered too big to fail. The countrys family ran conglomerates, are known as chabot. Successive governments with favors deliberately fattened them and state directed credit so that they would become the countrys main engines of growth. It helped South Korea to leap from poverty at the end of the Korean War in 1953, to relative prosperity in a single generation.
However, there are flaws. The cozy links between the chaebol's bosses and the countrys politicians and bureaucrats fostered corruption. The chabot recklessly loaded them up with debt, to expand into all sorts of unrelated business. The corporate monsters, that emerged, came to dominate, the economy.
A firm like Microsoft could never have emerged in the country, some South Koreans claim. The veteran opposition leader, Kim Dae Jung, was elected president in 1997. It finally looked like chabot was going to come to a Holt. The political transition, together with the shock delivered by the financial crisis, was thought to be potent enough to restructure the chabot.
To an extent it has, but without genuine bankruptcies, the process will be far from complete. Hyundai's giant construction division is also in deep trouble and is teetering on the brink of bankruptcy. But, for Kim Woo Choong, he is thought to be riding out the storm in Europe, and plotting a business comeback. Bibliography: The Economist. com
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