| La Lettre du GERPISA | no 120 (february 1998) |
The Korean automobile industry this year has been embroiled in an unprecedented controversy over industrial restructuring coupled with an oversupply problem and a trade dispute with the US on further auto market opening. Especially in the wake of the International Monetary Fund ( IMF) bailout package, the car industry has been faced with a severe decline in domestic demand and an over capacity, just five months after the country celebrated exceeding 10 million units of registered vehicles for the first time. Korean automakers enjoyed an 8.2 percent boost in their export volume last year over the previous year, but suffered a 2.5 percent decline in their domestic sales. According to the Korea Automobile Manufacturers Association (KAMA), the nation's automakers sold a total of 2,832,758 units in 1997, down 0.7 percent from 2,854,289 units in 1996. Exports went up 8.2 percent from 1,210,157 units in 1996 to 1,319,685 units last year, whereas domestic sales slipped 2.5 percent from 1,555,602 units to 1,513,073 units during the corresponding period. Hyundai Motor Co. topped the 1997 list of car exports with 565,295 units, followed by Daewoo Motor Co. with 334,802 units and Kia Motors Corp. with 281,523 units. In terms of domestic sales, Hyundai also ranked first with 645,615 units last year, followed by Kia with 354,210 units and Daewoo with 293,592 units. In the meantime, automakers' combined car production was 2,819,900 units in 1997, up 0.2 percent from the 2,812,714 units registered a year ago. Korean automobile industry capacity reached 4,480,000 units in 1997 and is expected to exceed 6 million units by 2000. This represents a sizable share of the world capacity. Capacity utilization in 1997 was 67%, however, capacity utilization in Korea is projected to fall significantly to 54% by 2000.
| Hyundai
Daewoo Kia Ssangyong Asia Hyundai Precious Co. Samsung Total | 780,000
460,000 460,000 30,000 30,000 40,000 0 1,800,000 | 1,650,000
1,070,000 1,030,000 200,000 200,000 90,000 240,000 4,480,000 |
Source : Ministry
of Trade, Industry and Energy
Hyundai carried out a large scale organizational restructuring and extensive layoffs affecting about 30 percent of its officials. According to Hyundai, it streamlined its organizations from 14 divisions with 404 teams to seven divisions with 340 teams. The seven divisions, including production, sales and R&D, are expected to act as an axle for smoother organizational operations. About 36 officials were relieved of their positions or placed on retirement list. After the executive level layoffs, the company further plans to dismiss about 5,000 employees by 2000. They have also decided to suspend construction on a 100,000 capacity car plant in Indonesia, returning all workers with the exception of a skeleton crew of five to Korea. Hyundai will halt further investment in the country until next year.
The Daewoo Group took over the ailing Ssangyong Motor
Co. this month. It was the first industrial takeover among the
nation's 10 biggest Conglomerates. At the same time, it is the
first major case of industrial restructuring since the nation
received bailout loans from the IMF. The nation's fourth largest
conglomerate, the Daewoo Group, agreed to take over 53.5 percent
of the total equity of Ssangyong Motors, the auto arm of the nation's
sixth largest conglomerate. Daewoo will also take over 2 trillion
won ($1.6 billion) of Ssangyong Motor's debts to financial institutions,
which total some 3.4 trillion won. Ssangyong will remain responsible
for repayment of the remaining 1.4 trillion won in debts. Daewoo's
takeover was endorsed by Daimler-Benz, which has 2.4 percent equity
in Ssangyong Motor. Daewoo will later stage negotiations with
the German automaker to seek ways of expanding bilateral business
cooperation. Creditors of Ssangyong Motors, including its main
creditor Cho Hung Bank, promised to grant Daewoo a 10-year grace
period for repayment of the principal debt, while providing Ssangyong
with favorable terms for repaying the principal in installments
over five years, after a five-year grace period. They will extend
150 billion won in fresh loans to Daewoo to help the group reduce
its financial burden. For Daewoo's debts, creditor banks also
promised to apply a prime lending rate, and creditor merchant
banks and insurance companies decided to apply an interest rate
one-percentage point higher than the prime lending rate. With
its takeover of Ssangyong Motors, which produces four-wheel drive
(4WD) vehicles, vans and mini buses, Daewoo will emerge as a major
carmaker equipped with a full production line for passenger cars,
jeeps and commercial vehicles.
Kia, which is one of the ten largest firms, came
to be selected as the object of a bankruptcy deferral pact. Under
the stagnation of domestic demands, a highly leveraged growth
strategy is no longer feasible. The Korea Development Bank is
scheduled to make additional investments in Kia early in 1998
to turn the ill-fated firm into a public enterprise, and then
the government wants to sell its equity share of Kia to Ford for
the takeover of Kia Motor's managerial rights. Under the bail-out
package of IMF, it is impossible for the Korea Development Bank
to increase its equity share in Kia from the present level of
30 percent of the equity share to help offset most of Kia Motor's
bad debts. If the Korean government will take measures to reduce
Kia's enormous debts, Ford intends to take over of Kia. Ford is
one of the largest shareholders with Mazda. Kia operations in
Indonesia have also been suspended as its partner, KTM is having
difficulty raising capital in the current financial crisis. However,
it will continue with its project targeting September this year
for production commencement.
Under a technical tie-up with Nissan, Samsung plans
to produce two models with an engine capacity of 3,000 cc and
2,500 cc, ready for domestic sales in March of this year. However,
Samsung Motors has faced serious problems such as over-investment
and limited domestic demands. These have caused the crisis in
this company. In order to solve this problem they would like to
acquire Kia. Samsung is holding 6.08 percent of Kia's stock through
Samsung Life Insurance and Samsung Fire & Marine Insurance,
thereby becoming the third largest shareholder. Yet, because of
Kia's exorbitant debts, the possibility of the takeover is very
unclear right now. More recently, the intention of GM was also
delivered to Samsung Motor for the strategic alliance. GM wants
to set up a production base of small cars in Asia.
The Korean automobile industry will likely undergo more intensive structural transformation in this year with the debut of Samsung as well as the IMF-led retrenchment and restructuring drive. The natural solution to the dilemmas in the Korean automobile industry would be a merger and acquisition based restructuring. This would play worldwide in creating competitive companies. The lack of an effective route to merger and acquisitions presents a serve impediment to future competitiveness in the industry. The automobile industry finds itself under multiple pressures to restructuring, nevertheless they face great difficulty in finding solutions.