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November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

SEPTEMBER 24, 1999 VOL. 25 NO. 38

Putting on the Kid Gloves
Hyundai is no Daewoo, which is probably why Seoul is giving it a break
By LAXMI NAKARMI Seoul

    ALSO IN ASIAWEEK
Putting on the Kid Gloves
Hyundai is no Daewoo, which is probably why Seoul is giving it a break

A Few Kind Words
Some things the chaebol did right

Petroleum Power
Will rising crude-oil prices halt Asia's turnaround?

Property Poker
Malaysia is playing for high stakes as it looks for solutions to a massive real-estate glut

'We Have Too Many Banks'
The Philippines' new central banker looks ahead

After questioning nearly 50 people, including the heads of Hyundai Merchant Marine and Hyundai Heavy Industries, prosecutors were ready for Lee Ik Chi, chairman and CEO of Hyundai Securities. They locked him in a sparsely furnished interrogation room beginning Sept. 8 and, over two days, questioned him and laid out their case: that Lee, starting in May 1998, conspired to manipulate the share price of Hyundai Electronics and gain about $117 million in fraudulent profits. The questioning and subsequent arrest of Lee came as rumors spread that prosecutors had come under political pressure to let him stay free on his own personal recognizance. However, said Lim Yang Un of the Seoul Prosecutor's Office: "The crime that Lee committed is too serious to hold him without physical detention."

Meanwhile, the Hyundai Group was lobbying furiously to keep its chairman, Chung Mong Hun, from being questioned by prosecutors who wanted to know how Lee could have persuaded other Hyundai units to provide $176 million for investing in Hyundai Electronics without authorization from the top. The delay effort achieved partial success. Prosecutors insisted on sitting down with Chung, but he was allowed to put back the interrogation to Sept. 20. Chung is the son of Hyundai founder Chung Ju Yung.

The fact that prosecutors gave a small break to Hyundai, along with the rumors of political pressure -- including that some came directly from the Blue House -- lent credence to the theory that the government was pulling punches. "Hyundai is a debt-ridden, family-controlled chaebol that the Blue House should not protect," says Kim Won Suk, a member of the Citizens' Coalition for Economic Justice that protested in front of the Seoul Prosecutors' Office demanding the arrests of Lee, Chung and his father. Park Jun Young, senior press secretary to President Kim Dae Jung, denied that Hyundai was receiving special treatment. But Lee Shin Bom, an opposition member of parliament, says there is a clear political reason for the government to go easy on Hyundai: "It is very important for President Kim's sunshine policy and it is natural for him to treat Hyundai softly." Hyundai has been operating a cruise ship for South Korean tourists to the North since November 1998.

The government has appeared aggressive in recent weeks in the case of Daewoo, assuming authority over some high-profile business units and forcing Daewoo's founder and chairman, Kim Woo Choong, to fade into the background. On the surface, Hyundai is in similar straits as Daewoo. While other chaebol have spent the last 20 months selling assets and consolidating, both Hyundai and Daewoo expanded. Hyundai took over Hanhwa Energy last year and this year added Kia Motors and LG Semicon. Hyundai has accumulated debts (including payment guarantees) of nearly $63 billion, more than Daewoo. Like Daewoo, Hyundai remains firmly in the hands of its founding family. Last year the Hyundai Group of companies lost a combined $9 billion, according to the New Management Efficiency Research Institute.

But at Hyundai's Seoul headquarters the atmosphere among employees is much different than at Daewoo in the days and weeks leading up to its near-collapse. Life is, basically, normal. Hyundai founder and honorary chairman Chung Ju Yung recently took 300 fresh Hyundai recruits to a training camp set up at Diamond Mountain in North Korea, destination of the company's regular cruises. There he relaxed as the recruits engaged in traditional Korean wrestling. Back at company headquarters, employees are more stressed over the workload from new sales than a sense of impending doom.

But the important distinctions between Daewoo and Hyundai have more to do with substance than style. "Hyundai has cash coming in from its businesses: automobiles, semiconductors and shipbuilding," says Lee Kun Mo, managing director of Good Morning Securities. Adds Hans-Bernhard Merforth, managing director of Korea Exchange Bank, which is Hyundai's primary creditor bank and is owned 30% by Germany's Commerzbank: "We are not worried about Hyundai's debts because the [financial] long-term structure is excellent." Hyundai has also sold several good assets, including Symbois Logic in the U.S. to LSI Logic for $760 million and Chip Pack Korea to a group of American investors for $328 million. Negotiations, says Park Se Young of Hyundai, are currently underway for the sale of five additional units. "By the end of the year, Hyundai will be a lean group," promises Park.

Splitting the Hyundai Group is supposed to begin next year when a new automobile unit emerges as an independent business unit from the combination of Hyundai's five existing auto-related businesses and Kia. The initial public offering of Hyundai Heavy Industries later this year is supposed to lead to the integration of all machinery-related units in 2000. In all, the restructuring of the group is set to be finished by 2003.

The plan now is to transfer each of the five units to a son of the founder. Will the offspring be up to it? Several sons have already acquired strong experience in different Hyundai units, though the patriarch himself has admitted that his children don't always measure up to his "exacting standards." Says Merforth of Commerzbank: "What is important for me as a banker is that the founder remains healthy and active until the separation of the business units is completed." Founder Chung is said to still require his sons to have breakfast with him at his northern Seoul home where he hands down his opinions and orders on the group's business.

Improved sales and plans to restructure are nice, but they may not equal the political clout that Chung Ju Yung has acquired thanks to his contact with North Korea. President Kim is said to see reunification as his best chance to earn a lasting legacy as a great South Korean leader. Hyundai has become critically important in this regard. The company has provided $170 million to Pyongyang from its tourism project alone-- a potent symbol of goodwill. Given this, Hyundai might find itself treated better than Daewoo even if its assets weren't more sound and plans for restructuring weren't better developed. Certainly, Seoul is showing admirable patience as it seeks answers from Hyundai and Chung Mong Hun.

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