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Business: The Daewoo Blues
Here's why the big auto companies should give up on Daewoo
By ASSIF SHAMEEN

October 17, 2000
Web posted at 7.00 p.m. Hong Kong time, 7.00 a.m. EDT

Everyone has heard of Daewoo, the half-dead Korean chaebol that refuses to fade peacefully into the history books. In Korean, Daewoo means "Great Universe." The name was once synonymous with non-stop expansion. Starting as a small garment company in the 70s, Daewoo soon ballooned into Korea's second-largest conglomerate, with nearly $70 billion in group sales. Its advertising blurbs claimed that the chaebol was literally into everything from A to Z automobile manufacturing to zinc trading. Daewoo's short, wiry-framed, silver-haired founder Kim Woo Choong was once an entrepreneurial legend. He worked 18-hour days, often slept in one of his many factories, and his PR machine claimed he had never had a holiday since founding the group.

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In the chaebol's "great universe," nothing was impossible. Daewoo collapsed last year with over $80 billion in debts — making it the biggest corporate collapse in history. Its main creditor banks are taking a huge haircut — or taking home less than 20 cents of every dollar they lent. Today, a fast disintegrating Daewoo is a symbol of Korean crisis. But breaking up Daewoo is proving even harder to do. As creditors dismantle the once-powerful giant, they are waking up to the reality that the sum of Daewoo's parts might add up to almost nothing. Witness the latest scramble for Daewoo Motors Co. its automobile affiliate. Two weeks ago, Ford Motor Co. pulled out of final negotiations to buy Daewoo Motors for $7 billion. Daewoo Motors was once a joint venture between Daewoo Group and US auto giant GM. In 1993, GM walked away because the chaebol was expanding the car company in myriad directions. When Daewoo went belly up, GM was first to walk in the door with an offer. However it was Ford that came up with the initial best offer. Now with Ford out of the picture, GM is back at the negotiating table.

I'd argue that the auto giants should just let Daewoo Motors die. There is already too much overcapacity in global automobile sector. More in Asia than anywhere on earth. Shutting down Daewoo would help cut capacity, boost return-on-equity for car makers and hopefully some of that would find its way into better, more fuel efficient, more environmentally friendly cars. What about the tens of thousands who will lose their jobs? If the government keeps Daewoo alive, it will need to spend several hundred million dollars. Better to provide a social safety net for workers and retrain them rather than keep throwing good money after bad.

There are several important implications of Ford pulling out of the deal. For one thing, if Daewoo Motors can't be sold for $7 billion, or something close to that, Daewoo creditors who were hoping to get 20 cents to the dollar might now get even less. A complete liquidation of Daewoo Motors, say two years from now, would mean that Daewoo Group creditors would get no more than 12 or 13 cents return on every dollar they lent. Moreover, the collapse of Daewoo Motor might also lead to delays in selling off other Daewoo Group assets. The bigger the haircut the banks take on Daewoo, the bigger the government bailout package will be needed to recapitalize the Korean banks. That could take us back to the slippery slope of a new Korean crisis.

What is Daewoo Motors really worth? It has less than 30% share of the 1.5 million cars-a-year Korean domestic market. True, it still manages to export over 450,000 vehicles a year. But Daewoo's brand name is nowhere compared to Hyundai, let alone Toyota or Ford. Indeed, analysts say Daewoo loses money on every car it sells overseas. In the past, Daewoo shareholders paid for those losses. Now the tax payers and banks fork up. Daewoo has 36 plants overseas, including a huge plant in Poland. It also has large plants in Romania and India. The Poland plant was once worth $1 billion; today, it would probably fetch about half that. The Indian and Romanian plants could be worth a couple of hundred million dollars. The company also owns domestic sports utility vehicle maker Ssangyong Motors, which could easily fetch a few hundred million dollars. Some analysts believe selling some of the overseas plants and Ssangyong piece-by-piece could fetch up to 2 billion. That's stretching things a bit. But it would be possible to raise some money by breaking the company up.

The big question on everyone's mind is: Is Daewoo Motors worth saving? Yes and no. The car company has 60,000 employees. Add suppliers and other spillovers, and you've got a lot more. Daewoo Motors has three large plants in Korea — in Pupyong (near Inchon port) as well as in cities of Changwon and Kunsan. The Inchon plant is antiquated and probably would be shut down by whoever buys the company. The other two plants are relatively new (less than 10 years old) and can be retooled.

There has been incredible consolidation in the global auto sector in recent years. Daimler-Chrysler recently bought a 34% majority stake in Mitsubishi, as well as 5% stake in Hyundai (which it raised to 10%). Hyundai also owns No.2 Korean car maker, Kia. GM, which has stakes in Italian giant Fiat (20%), as well as Japanese auto makers Suzuki (10%), Isuzu (49%) and Fuji Heavy (20%), is still by far the biggest car maker in the world. Ford, which owns a third of Mazda, isn't far behind, and actually would have overtaken GM had it acquired Daewoo Motors. France's Renault owns Japan's No.2 car maker Nissan and 70% of Korea's smallest and newest car maker Samsung Motors. Only Toyota, Honda and Volkswagen are now left among independent car makers. Daewoo, with less than 1 million units a year sales (or one-tenth of GM), just can't survive as an independent entity.

The reason Ford, GM and others want to buy Daewoo Motors is that they know it has assets that a competitor can leverage on. With Daewoo Motors losing money and losing market share, the Korean government cannot keep Daewoo Motors alive for too long. Ford walked away from a $7 billion deal to acquire the company because it realized the company really wasn't worth much. Now GM and Daewoo creditors are talking about a $3 billion price tag. If GM walks away, the price would fall even further. There could come a point within the next few months when the Korean government and creditors might just give away Daewoo Motors to the first person to walk through the door for a song. Keeping Daewoo alive is not cheap. It is costing the government and the banks millions of dollars every week just to keep Daewoo making those cars.

GM wants Daewoo because it will give 30% share of the currently closed auto market in Korea, plus the plants in Poland, Romania and India, which could be used to churn GM cars. GM doesn't want a competitor like Ford or Toyota to walk away. It would rather lose some money taking over Daewoo than see Toyota walk away with 30% market share in Korea and new plants in Eastern Europe. The auto business is so competitive that it has come to this: Everyone is outdoing each other in bidding process not because they think Daewoo Motors is worth that much but because they are afraid someone might extract value from the Daewoo plants.

But letting Daewoo Motors die will not close this painful chapter in Korean corporate history. Seoul must swiftly deal with those responsible for the Daewoo saga. Not just the creditor banks and Financial Supervisory Commission officials who couldn't cut a deal with Ford. It is important to hold accountable the creditor banks who lent billions of dollars to Daewoo Motors to expand in Korea and abroad without proper market research. Seoul must also make Daewoo founder Kim Woo Choong take responsibility for the billions of dollars of losses. Kim, who in his heyday wrote his autobiography "Every Street is paved with gold," is now a recluse in a small villa along a dirt road in southern France. Daewoo Motors' story of unbridled expansion and huge debts doesn't make sense to auto executives around the world. Why the bankers were willing to play along in what was obviously a losing game is unclear. One man who can tell us all is Kim Woo Choong.

Write to Asiaweek at mail@web.asiaweek.com

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