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A Flying Leap Toward The 21 St Century?


International Business: SOUTH KOREA

A FLYING LEAP TOWARD THE 21ST CENTURY?

The auditorium was packed with 200 employees and executives of LG Group, formerly known as Lucky-Goldstar. A six-piece ensemble played selections from Antonin Dvork's Humoresques as Chairman Koo Cha-Kyung made a short but moving retirement speech. Breaking with iron Confucian discipline, the bespectacled chairman's voice filled with emotion as he addressed 100,000 employees watching via satellite TV. After years of pushing them for better performance, he apologized because "I never thanked you before."

With that ceremony on Feb. 22, the 70-year-old Koo ended his 45-year career in the conglomerate founded by his father. He handed control to his eldest son, Bon-Moo, 50, who promises to drastically reform the group's management and corporate strategies.

The youngest Koo won't be alone in restructuring one of Korea's powerful family-owned chaebol. These conglomerates, which blossomed during the heyday of government-business cooperation in the 1970s and 1980s, are finally coming to grips with transforming themselves into modern corporations.

NO MORE SHIELD. They are doing it partly under pressure from the South Korean government, which is determined to curtail the power and influence of the chaebol owners. To spur them on, Seoul is expected to fully open Korea's market in such sectors as telecommunications, construction, and autos by 1998. That will present the chaebol with much stronger competition inside Korea.

But aside from Seoul's pressure, the chaebol recognize that to make the leap to the next level of competitiveness against U.S., Japanese, and European multinationals, they must undergo an unprecedented restructuring. With less than 5% of their assets outside Korea, they plan to spend more than $20 billion by 2000 to set up overseas production bases and to acquire interests mostly in U.S. and European companies. At the same time, they are changing the relationship between founding families and professional managers and greatly decentralizing decision-making.

And because a generation of business leaders is passing from the scene, the chaebol are spinning off many companies that will be managed by sons and other family members. The most extreme example is the Hyundai group, which could break itself into pieces. All this reflects gut-wrenching cultural changes in companies whose management principles were based on the Confucian philosophy of harmony and seniority.

Skepticism lingers about just how far the chaebol will go and whether deregulation will be as fast as promised. "The actions are always slower than the words," says G. Paul Matthews, who is creating a San Francisco-based fund to invest in Korea. Despite years of talk, a government report shows that the top 30 conglomerates still have an average of 21 companies and are involved in 20 major business lines. The Samsung group, for example, has everything from shirts to ships to semiconductors.

That overly broad product mix has held back Korea's competitiveness. Although some chaebol succeeded in one or two industries, such as Samsung in semiconductors and Hyundai in shipbuilding and auto, others generally remained simple subcontractors to Japanese, U.S., or European companies.

That's why Korean executives argue that the current reforms have to be for real. Gimmicks in the name of reform will not work because the Korean cheap-labor advantage is long-gone. The recent opening of Price Club and other foreign discount stores in Seoul, for example, is showing Korean companies that if they do not produce top quality products, their survival will be at stake. A computer discount store sells a standard imported IBM-compatible 486 multimedia PC at a price 20% lower than that of a comparable Samsung model.

In response, Samsung is gearing up an aggressive international push. On Feb. 23, Chairman Lee Kun-Hee summoned his 30 senior executives to Los Angeles, where he ordered them to accelerate globalization. "By year 2000, 30% of our sales should come from international operations," Lee said--up from 20% now. Lee feels that shock therapy is necessary because the company hasn't moved fast enough. "Our minds are internationalized, our actions aren't," acknowledges one executive.

Samsung, which has been cautious in acquiring foreign companies in the past, says it will now pursue them. On Feb. 28, the company acquired 40.25% of AST Research Inc., one of the largest U.S. personal computer makers, for $378 million. It's the largest equity position a Korean entity has ever taken in a foreign company and will create a major new export channel.

Other groups also are on the march. LG Group is expected to pursue acquisitions of companies specializing in multimedia products. Hyundai Electronics Industries Co., which is Korea's second-largest semiconductor maker, has already taken over two U.S. companies: computer diskmaker Maxtor and a semiconductor division of AT&T, for $165 million and $340 million, respectively.

HIGH GOAL. Unlike the other conglomerates, Daewoo is concentrating on developing countries. Under its "world management" strategy, the group says that it will establish 600 companies overseas and post combined sales of over $200 billion by 2000. The goal seems unachievable, considering Daewoo's current sales of $40 billion.

Chairman Kim Woo-Choong is pushing forward nonetheless. In February, the group broke ground for a $300 million cement plant in China's Shandong province, where plans are also under way for a $1.5 billion auto-parts plant scheduled to open in 1997. In Uzbekistan, Daewoo's $800 million automotive plant will begin production in late 1995. In Romania, it took over a state-owned auto company for $250 million.

To what extent Daewoo or other chaebol succeed overseas will depend on their ability to manage much more complex global operations. That's why changes in management back home are important. Daewoo's Kim, for example, recently distanced himself from the day-to-day activities of all companies except Daewoo Motors. He also disbanded the group's executive council, which used to make decisions on such crucial issues as cross-holdings, cross-guarantees, and cross-subsidization, the key techniques the chaebol use to hold themselves together. Aside from appeasing the government, top Daewoo executives hope greater management autonomy will help their companies make better, quicker decisions in hundreds of places around the world.

Hyundai may be going a step further. This $63 billion group has long been held together by the grip of founder Chung Ju-Yung. But partly because of his failed bid for Korea's presidency, he is gradually easing out of his day-to-day activities at Hyundai.

That is encouraging his sons and younger brother to carve out their own empires: Chung's eldest son, Mong-Koo, controls five Hyundai companies; his fifth son, Mong-Hun, runs three, including Hyundai Electronics Industries Co.; his brother, Chung Se-Yung, is in the driver's seat at Hyundai Motor Co.

SETTING THE STAGE. Under a restructuring announced in late January, the group will be divided into six major-business units, each headed by a professional manager. "All these changes are for real and will be implemented as soon as possible," says Chung Se-Yung. Analysts say that the changes are intended to prepare the group for a breakup once "Big Chung" passes from the scene.

All these corporate moves are taking place against the backdrop of a concerted drive by President Kim Young Sam to change the ownership structure of the chaebol. Responding to the bold presidential challenge from Big Chung in 1991, Kim clamped sanctions on Hyundai, denying its companies access to low-interest loans from government-backed banks and refusing permission either to float shares in Korea or raise funds overseas.

But the campaign has been carefully calibrated to avoid throwing Hyundai and the other big groups into chaos. They are too important to the economy. The top 10 chaebol, for example, account for about a quarter of Korea's gross national product. Acting through a maze of cross-holdings, the founding families own about 9.7% of the groups' total capital--while they control more than 40%. The government doesn't want to drive the families out. "But we can make sure that the chaebol founders or owners do not act to expand their business horizontally and indiscriminately use corporate resources for personal use," says Han Duk-Soo, assistant minister in the Trade Promotion & Industry Ministry.

So the government is attempting to lower the ownership ratio of each controlling family. Chaebol units in which the founding family's direct or indirect holding is less than 8% are free to raise funds or pursue new businesses with governmental approval. Others aren't. To hack away at the web of cross-relationships, Seoul has banned a chaebol company from investing more than 40% of its equity capital in other companies in the same group. Failure to respect that ratio results in sanctions, including a fine. The government plans to cut the ratio to 25% this year and even lower in following years. Reducing the level of financial dealings among chaebol units will force them to abandon failing lines of business and zero in on those with the best prospects--or so the government hopes.

Korean investors are divided over whether Kim Young Sam's effort to transform the chaebol will be as successful as he hopes. Skeptics point to Samsung's decision to enter the automotive business as a clear case of a big group charging into a new business where it lacks experience.

LOST EDGE. But the majority view seems to be that fundamental change is coming to the chaebol. "This time, it could be serious and more effective than before," says John J. Lee, lead portfolio manager of the $600 million, New York-based Korea Fund. "Korean industry as a whole has to change to adapt to the new environment. They aren't labor-intensive any more. They have to be more efficient."

There's no question that the top South Korean companies are gradually absorbing more efficient, Western-style analytical tools. Some experts think the groups' international drive and their need for outside capital ultimately will prove decisive. "The families are going to go through this whole process screaming and kicking, but what's going to drive the transition is the same as with the American or Japanese companies that were family-controlled," says Joseph J. Kim, New York-based president of Peregrine Capital (USA).

He predicts the Korean chaebol won't completely break apart but rather will develop more subtle cross-dealings, much as the Japanese keiretsu have. Others argue that the Korean corporate model will be a hybrid of U.S. and Japanese practices. But whatever path they choose, Korea has little choice but to keep the pressure on the chaebol to remake themselves.

How the Big Four Stack Up...

NAME SIZE* MAIN BUSINESSES

SAMSUNG $63 Electronics, autos, shipbuilding, aerospace, machinery

HYUNDAI 63 Autos, shipbuilding, electronics, construction, machinery

LG 48 Petrochemicals, electronics

DAEWOO 40 Autos, shipbuilding, electronics, construction

* BILLIONS

...And How They Are Changing

REDUCING -- Samsung plans to cut its units from 50 to 24.

NUMBER OF -- Hyundai will merge and divest, reducing its companies

from 50 to 23.

COMPANIES -- LG is planning to merge several companies.

-- Daewoo will merge and divest, leaving it with 14, down

from 22.

REFORMING -- Samsung is decentralizing authority, giving more power to

individual

MANAGEMENT CEOs, and reducing the group chairman's clout.

-- Hyundai will give more authority to professional managers.

-- Daewoo companies will be run independently of the group's

chairman, who will concentrate on managing its motor unit.

-- LG plans to end the Confucian-based personnel management

under which seniority was important. Job performance now

will be key.

GOING -- Samsung plans to set up integrated electronics facilities

in China

INTERNATIONAL and Mexico. Also will tie up with Western companies in

semiconductors, computers, and telecom.

-- Hyundai will invest $4 billion by 2000 in autos, telecom,

and semiconductors.

-- Daewoo will pursue autos and electronics. Plans to set up

large electronic plants in Poland, Brazil, and Vietnam;

auto parts plants in China; auto-assembly plants in

Romania and Uzbekistan.

-- LG Electronics will increase its share of overseas

production by setting up plants in emerging countries;

acquire foreign technology and companies.

OWNERSHIP -- Samsung, Hyundai, and LG are gradually reducing founding

family

AND ownership by making more companies public.

CONTROL -- Daewoo is already largely in hands of professional managers.

DATA: BUSINESS WEEKBy Laxmi Nakarmi in Seoul


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