"We are making a fresh start." That was the promise made by South Korea's Hynix Semiconductor Inc in June after its stock had plummeted 80 percent since 1999.
Battling to regain investors' confidence, the maker of computer chips ran advertisements in Seoul newspapers saying it would put profit first -- a radical notion in Korea, where for decades many companies have put size and market share before earnings. "Hynix Semiconductor is a company restructured, refocused and reborn," the ads said.
Changes like this have swept South Korea. Since December 1997, when the nation accepted a US$57 billion IMF bailout, President Kim Dae-jung has opened the capital markets to foreign investors, nationalized troubled lenders and ordered Korea's sprawling conglomerates, or chaebol, to reduce their debt and sell marginal businesses.
Along the way, Kim has debunked the notion that the chaebol and their companies are too big to fail. In 1999, he let the Daewoo Group collapse under the weight of its debt; in May of this year, his government ordered the closure of Dong-Ah Construction Industrial Co, once the nation's second-largest contractor, after creditors declared the company insolvent.
"The worst is over for the Korean economy," says Robert Subbaraman, an economist at Lehman Brothers Japan Inc in Tokyo.
That view is reflected in Korea's stock market. As of July 30, the benchmark Korea Composite Index had climbed 2.41 percent this year, while the Standard & Poor's 500 Index had fallen 8.67 percent.
Now comes a new test. Growth -- and reform -- have begun to falter. From December 1999 to April of this year, exports to the US, the nation's largest overseas market, fell 27.4 percent. The slowdown gripping US computer makers, such as Dell Computer Corp has hit Korea hard; semiconductors account for 15 percent of the country's foreign sales. Result: Economic growth is likely to slow to 3.5 percent this year from 8.8 percent in 2000, according to the IMF.
South Korea's economy is cooling at a crucial moment. South Korean companies have halved their total debt since 1998, but they still owe domestic banks and bondholders about 300 trillion won (US$231 billion) -- twice their combined equity, the IMF estimates. Total nonfinancial corporate debt stood at an even higher 619.2 trillion won at the end of 2000, according to the Bank of Korea.
Many Soutn Korean companies aren't generating enough cash flow to cover interest payments, let alone repay principal, analysts say.
Financial institutions have wiped US$55 billion in bad loans from their books; they are still grappling with US$45 billion more in bad debt.
After spending more than US$102 billion to clean up this financial mess, Kim has lost momentum. The president has run into opposition from vested interests like the chaebol and labor unions.
Hynix, the company that says it has been "reborn," is part of a major chaebol: the Hyundai Group. Bled by other Hyundai units and deep in debt, Hynix lost US$1.9 billion in 2000. It hemorrhaged US$418 million in the first three months of 2001 as the price of computer chips plunged. Hynix owes banks and bondholders US$8.7 billion -- more than its US$8.3 billion in 2000 sales. Half that debt falls due by year-end.
Hynix probably would be bankrupt were it not for government life support, says US Senator Michael Crapo, an Idaho Republican whose constituents include Hynix rival Micron Technology Inc. "It further proves that [South] Korea's promises for reform are hollow," Crapo says.
Part of Kim's dilemma is that South Koreans themselves have tired of his crusade. Elected in 1997 with a mandate for change, Kim has since watched his popularity ratings slide below 30 percent. In parliamentary elections in April 2000, South Koreans dealt Kim a blow by strengthening the opposition and leaving his Millennium Democratic Party in second place. His party was trounced again in local by-elections this year.
Now, Kim is a lame duck. Under South Korea's constitution, he is barred from seeking a second term in elections scheduled for December 2002. "President Kim can't push harder for reforms now," says Jang Ha-sung, a finance professor at Korea University and the head of People's Solidarity for Participatory Democracy, a shareholders' rights group.
Fixing South Korea's financial system remains the biggest economic challenge. Having worked hand-in-glove with the chaebol for decades, many South Korean banks and state-run lenders still extend credit to troubled chaebol companies. The state-run Korea Development Bank, for example, has bought US$534 million of Hynix bonds. This year, the government injected money into Seoul Guarantee Insurance Co, which has guaranteed Hynix's debt.
Senator Crapo says all of this amounts to a government subsidy and gives Hynix an unfair trade advantage. Oh Haeng Kyeom, minister of economic affairs at South Korea's US embassy in Washington, says that's not so.
"The government was in no way involved in the creditor financial institutions' decision to adopt this plan," Oh wrote in a June 1 letter to Crapo.
Whatever the case, companies like Hynix Semiconductor may struggle to make a clean break with their chaebol parents, some investors say. "The ghost of Hyundai will continue to haunt Hynix," says Mark Mobius, president of Templeton Emerging Markets Group.
Mobius says many of South Korea's family-controlled industrial groups disregard the rights of shareholders much as they always have. Other investors seem to wonder whether change is for real. To sell US$1.25 billion of equity in June, Hynix Semiconductor had to price its new stock at 3,100 won, 25 percent below the market price of its outstanding stock.
Kim's drive to reduce the chaebols' debts and close ailing factories has drawn fire from the nation's labor unions, which have a history of staging regular, sometimes violent, strikes. And bankruptcies have rippled through the economy. The failures of Daewoo Motor and Dong-Ah Construction drove some of those companies' subcontractors and suppliers into default on their own debt. Hyupsung Universal Joint Co, a Daewoo supplier, for example, followed the chaebol into bankruptcy.
In June, more than 50,000 unionists walked off the job in nationwide strikes. Consumers, too, have made their displeasure felt. Sales have dropped this year at such major department store companies as Hyundai Department Store Co and Shinsegae Co.
"People aren't spending like they used to in the good old days of last year," says Kim Min-duk, a manager at Hyundai Department, Korea's second-largest department store chain.
What President Kim could use right now -- a revival in US growth -- is beyond his control. Says Bank of Korea Governor Chon Chol-hwan, "It's hard to say the economy has fully recovered, but I don't think there's too much chance things will get worse than they are now."
South Korea's financial crisis has passed and so has its heady recovery. For now, growth and financial reform are slowing together.
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