Korea After the Crash Fighting 'the enemy within' is tough challenge

KUNSAN, South Korea - Foreign visitors to Daewoo Motor Co. Ltd.'s auto plant in the western seaport city of Kunsan are startled to see a large Plexiglas box half filled with currency at the airport.

A note fixed to the box asks travelers for a donation to help Korea's economy. The plea is one of the few outward signs of South Korea's tremendous internal struggle to overcome its life-threatening financial crisis.

The economy of the world's eleventh largest industrialized nation collapsed last summer as the currency devaluation that erupted in Thailand spread swiftly throughout the Asia/Pacific region - causing a crash in every major industry from computer chips to ocean ships to automobiles.

Within weeks, the Korean won plunged from W950/$1 to nearly W2,000/$1. The country was forced to turn to the International Monetary Fund (IMF) for a $60 billion bailout, promising reforms, corporate restructurings and greater openness to foreign takeovers.

For a proud and entrepreneurial people, who in only three postwar decades have rebuilt their cities and reinvented themselves, the plunge into financial chaos was a terrible loss of face and a devastating blow. But the Korean people have risen above adversity throughout their 4,000-year history, enduring occupation by hordes of would-be conquerors. What's different this time is that they are fighting an enemy within: crony capitalism and political corruption.

Despite national unemployment rising toward 1.5 million workers, or more than 6%, and 100 companies a day going bankrupt due to soaring inflation, there is little outward sign of consternation in Kunsan or any other of the peninsula's major cities.

In Seoul, men and women in fashionable Western business dress still rush to work each morning, crowding freeways with 3 million cars and filling the city's subways. Fresh-scrubbed children dressed in neatly pressed uniforms and shouldering designer book bags laugh together as they scurry to school, past a scramble of small shops where optimistic shopkeepers spread their colorful wares onto the sidewalk.

Along roadsides, airstrips, and even the upper slopes of cone-shaped mountains, ubiquitous rice paddies are tended by peasants, everywhere. In industrialized Kunsan, south of Seoul, uniformed workers hurry to factory jobs at more than 400 companies, many located in the sprawling Kunsan National Industrial Complex, where Daewoo's sparkling new auto plant is capable of producing and exporting 320,000 Nubira passenger cars per year.

The highly computerized Kunsan Motor Vehicle Complex includes stamping, body, paint, plastic and assembly shops, in addition to a futuristic technology exhibition center, quality-audit shop, test tracks, delivery yard and shipping pier - all of it built over reclaimed tidelands, with production startup in February 1997. Alongside the car plant sits a commercial vehicle facility that started production in 1995 and is capable of producing everything from city buses to heavy trucks.

The complex is key to the company's long-term survival, demonstrating the tenacity and drive of the country's No.2 automaker to be counted among the world's top 10 car manufacturers. Officials predict that the number of engineers here will increase from the present 3,000 to 10,000 by 2000. By then, 5,000 buses will be shipped annually to China; 27,000 cars will be built for Vietnam; some 35-plus overseas subsidiaries will grow to 180; and Daewoo's overall capacity at its five car plants throughout Korea will reach 2.7 million units, with $40 billion sales annually.

While skeptics might accuse Daewoo's spin controllers of overdrive, such ambitious goals should not be dismissed. This is a company, after all, that once was married to General Motors Corp., the world's largest automaker, and now is engaged in talks with GM to reunite after a five-year separation.

Such a move, likely to be wrapped up by year's end, would give Daewoo tremendous respect in the eyes of the world's major investors and money lenders, plus instant access to GM's U.S. sales network and production base.

Since its divorce from GM, Daewoo has proven its acumen by taking over rival Ssangyong Motor Co. Ltd. It also has captured 1% of the British car market. By acquiring part of local manufacturers or setting up new operations, Daewoo is competing in Poland, Romania, the Czech Republic, Ukraine, Uzbekistan, Indonesia, Vietnam, India, China, and the Philippines. In addition, Daewoo is about to start operations in Egypt and Iran as it begins exporting to the U.S. this summer.

Daewoo Motor's worldwide sales last year increased to 1,058,900 units, while production reached 1,046,300. "The key to our restructuring is increasing our strategic alliances," Daewoo Group Chairman Kim Woo-Choong says.

With the Nubira plant opening last spring, Daewoo's domestic market share increased by 10%, says Kim Tae-Gou, Daewoo Motor chairman. It should increase even more with the recent launch of the new world-class Matiz mini-utility car. Indeed, the Matiz - which will be exported to 87 countries, excluding North America - debuts just in time. Despite the nation's dizzying plunge in automobile sales of 50% in March, analysts here say mini-cars, such as the Hyundai Atoz and Daewoo Tico, are generating strong demand, providing 40% total sales for the two companies.

At Daewoo's southern Changwon plant, two shifts operate on overtime to build the Tico and Matiz. Kia Motors Corp.'s Carnival minivan sold 3,100 units in March, allowing the company to operate on three shifts for the first time since it went into receivership last year.

Korea's No.1 automaker, Hyundai Motor Co. Ltd., exported 50,000 minis in the month; Daewoo shipped close to 45,000. The bad news in the domestic market, however, is that both companies are providing interest-free credit for the cars, so actual revenue reportedly has fallen 70%.

"Although the economy is in a crisis, I am confident it will recover and make another leap forward," Daewoo Motor's Mr. Kim says optimistically. But optimism is not enough. The financial chill blowing in from Japan and Southeast Asia continues to erode Korea's corporate earnings, even as newly elected President Kim Dae-Jung struggles to implement necessary economic reforms.

One of his biggest challenges is to reform Korea's industrial structure, based on large multi-industry conglomerates called chaebol. Although progress has been fitful, Mr. Kim insists such restructuring is better left to market forces rather than state intervention. He places the responsibility on the banks to enforce tighter credit controls. So far, the chaebol have agreed to corporate transparency, reducing heavy debts and focusing on core businesses.

But IMF-mandated corporate restructuring also means allowing direct foreign investment and foreign takeovers of Korean companies, which previously had been protected from overseas ownership.

Korean corporate-think long has embraced the belief that overseas investment by Korean companies is good; foreign investment in Korea is bad. Perhaps it hearkens back to the dreadful decades under Japan's colonization. President Kim, however, believes foreign capital means that companies can create jobs and add to the tax base.

At first the largest conglomerates stiffened at Mr. Kim's suggestions of combining core businesses and spinning off unprofitable ones, but they now appear receptive, understanding that survival, not growth, is at stake.

Daewoo Group Chairman Kim Woo-Choong is leading the charge by renewing negotiations with GM to form an alliance that could give GM up to 50% stake in Daewoo Motor, plus unprecedented access to the Korean market. In turn, the deal could give Daewoo a much-needed injection of cash and a sales network for its Leganza, Nubira and Lanos cars to be introduced in the U.S. this year.

"We are discussing product, production facilities, parts and components, mutual sourcing and equity participation," Mr. Kim says. Hyundai, meanwhile, has expressed interest in taking over Kia. Samsung Group's upstart automotive arm, Samsung Motor, is in discussions with Ford Motor Co. and Kia.

Mr. Kim blames the former government, in part, for the country's current problems. "Korea's financial structure - merchant banks, securities and leasing companies - lacked experience in the international finance business," he says. "Government policies went ahead before any financial infrastructure had been established."

That said, he views the nation's financial crisis as a "blessing in disguise" that ultimately will leave Korea with a healthy corporate structure. "If the chaebol follow the president's efficient and appropriate measures," the hardship will set a good example for Korean society, he says, bringing about "harmonious consensus."

Which better explains the banner that hangs in the Daewoo Kunsan auto plant, asking workers to embrace the "spirit of creative challenge and sacrifice." Like the airport box seeking donations, it's all for the common good of Korea.