The Debt-Fueled Collapse of Korea’s Daewoo Group

at its peak daewoo group had been korea's fourth largest business conglomerate along with hyundai samsung and lg the sprawling company rocketed upwards on the back of a favorable political environment and heaps of debt then in a shocking two-year span the whole group broke apart under the weight of its liabilities a crushing recession and a widespread fraud daewoo's collapse tarnished the legacy of founder and chairman kim wu tong who had to flee the country until he received a pardon in this video we will look at the rapid rise and startling collapse of korea's daewoo group but first the asian armature patreon go check it out early access members get to see new videos and selected references for them before they're released to the public it helps support the videos and i appreciate every pledge thanks and on with the show born in 1936 kim wu zhong was the fourth of six children his father served as the principal of daegu normal school the primary school of future korean president park chung-hee and would eventually become the governor of jeju island but after leaving his governor post the elder kim was abducted during the korean war and never returned leaving the family to fend for itself after the korean war the younger kim moved from his hometown of daegu to seoul where he studied economics in yongsae university one of korea's elite universities he graduated in 1960 at the age of 25. after that he worked at a textile trade and export company founded by one of his relatives he worked there for six years in 1967 kim just 30 years old at the time founded a textiles trading company of his own called daewoo industrial it started out small with just eighteen thousand dollars and four employees but the chinese characters in daewoo literally mean great universe and it signified the founders great ambitions in 1970 through sheer persistence kim managed to convince american department stores like sears jcpenney and montgomery ward to sell his textiles but it would be fortunate scuttlebutt that helped cement his sales position there his american customers told him that the us government was planning on setting a quota on textile imports foreign suppliers would receive a percentage of that quota based on their current market share daewoo decided to sacrifice both profits and product quality to gain as much market share as possible before the quota was imposed this ballsy gambit paid off and in 1972 daewoo was awarded 30 percent of the quota instantly catapulting the fledgling company to their first bucket of gold by its fourth year daewoo had exported textile goods worth over four million dollars becoming korea's second largest exporter this de facto monopoly will provide the cash flow to fund the company's future expansions throughout the 1960s president park chung he's administration focused on building up exports and capacity in certain strategic industries the companies who decided to follow their lead and succeed would receive favorable loans and funding daewoo was one of those companies in 1973 a year after receiving its lucrative textile quota they jewel expands into a dizzying series of new industries like machinery shipbuilding construction and automobiles these expansions came through acquisitions and joint ventures they were excelled at turnarounds they had relentless perseverance and an appetite for risk that would make wall street bets blush for instance in 1976 the company acquired a struggling industrial machinery manufacturer called hankook machinery kim renamed it to daewoo heavy industries and it turned a profit in its second year in 1978 daewoo acquired a struggling shipbuilding company called okpo shipbuilding which was then merged into daewoo heavy industries the shipyard also turned around and made a profit five years later daewoo's playbook followed that of its textiles business a focus on market share over profits with high volume and low prices without a strong focus on brand they rarely thought about upgrading their technologies or moving upscale into more valuable segments or markets also in line with the government's preferences daewoo focused on exports kim traveled the world 260 days of the year and daewoo sold their goods mostly in emerging countries in eastern europe central asia south east asia and africa we cannot talk about daewoo's extremely rapid rise to prominence without also talking about the company's relations with the government daewoo benefited from founder kim's personal ties to park chung-hee if you recall kim's father was the principal of puck's primary school in addition the company regularly hired government elites and retired state bankers for its executives these close ties helped daewoo secure absurdly favorable loans in a time when annual inflation got as high as 40 percent and private banks charge interest rates way over that daewoo's loans were in the six to nine percent range it was a really good deal but of course these gifts and benefits had strings attached in return for these preferential loans monopoly protections favorable labor laws and silent backing the chaebol followed guidance and contributed hundreds of millions of dollars to their presidency's slush funds nobody on the outside of course saw this what they saw was a world famous businessman who spun gold wherever he went chairman kim as he was called became personally famous he was profiled in international business magazines and elected chairman of the federation of korean industries first amongst equals he wrote an autobiography in 1989 named every street is paved with gold it naturally became a bestseller selling over 2 million copies and was translated into 21 languages the daewoo group's ownership structure started off like a normal conglomerate think of a holding company like berkshire hathaway with subsidiaries underneath them like geico berkshire hathaway energy and dairy queen at the start daewoo's core holding company was private owned by the founder and his family this was the case for many korean chebur but in the 1970s the korean government demanded that the chair will take their holding companies public the reasons for doing so were twofold first it would help bring much-needed liquidity to the korean stock markets and second it would help the rest of the country participate in the fruits of their economic efforts the cebu daewoo included didn't want to do this they got all the money they needed from the banks but they finally caved after the government curbed certain shareholder rights to protect the family's control to guarantee that control the family set up the super-complicated cross-ownership structure that asian conglomerates are now famous for the chable were now free to offer stock to the public slowly diluting their economic shares in the company while still maintaining total control by 1997 chairman kim and his family owned on average just 6.1 percent of the shares in daewoo group companies but with each day we subsidiary owning some 30 percent of each other kim controlled an average of 38.3 percent of the votes no shareholder or even group of shareholders could challenge him even has his decision making became increasingly erratic worse yet the table's ultra complicated structure and interlocking dependencies daewoo companies only used each other's services made it difficult to figure out who was making money and who was losing it but no one worried too much about that so long as the government was going to bail them out which they will right entering 1979 daewoo group owned 41 companies and was south korea's largest exporter remember it had just been founded 12 years earlier the late 1970s would mark two momentous events for daewoo first it entered the car business in 1978 daewoo hooked up with gm korea to acquire 50 of sehan motor a company that dates back to the 1930s in 1992 they'd acquire full control daewoo motors applied the same playbook as it did with their other products low prices and low quality with little focus on r d and technical upgrading competing in this business with its cut-throat pricing which strained the company's finances down the line the second big event would be the assassination of pakhtung he the president his death marked major shifts in the country's regulatory and economic climate which suddenly put the daewoo group on less than steady ground even after park's death they will continue to hold close political ties but things changed korea's succeeding governments would open up the country's markets to foreign competition and the cheap loans started to dry up the 1980s would present new challenges for daewoo's low price and low quality strategy first the south korean wands started appreciating making their exports more expensive compared to goods made in other countries compounding this south korean labor wages started to rise has koreans experience improved living conditions suddenly making and selling cheap goods for the third world wasn't so easy second countries started adopting protective trade barriers looking to favor their own domestic players and maybe most significantly china started opening up their exporters would adopt some of the same low-cost strategies and compete with companies like daewoo the company knew that it needed to adapt to the times in order to survive the japanese had already started going upscale but hey nothing to worry about right the government's still around right in 1988 daewoo shipbuilding and heavy machinery suffered a near bankruptcy event the subsidiary owned the country's second largest shipyard out in okpo bay goji island years of high debt usage as well as an attitude of revenues over sales led to a turn for the worse by then daewoo carried about 1.8 billion dollars worth of debt in 1988 usd and was facing difficult market conditions daewoo turned to the korean government for a bailout and everyone expected it kim and daewoo argued that they had taken on the shipyard only at pakchanghi's request he added that the korea development bank had promised to inject 400 billion won of equity about 1.4 billion dollars in today's dollars but only provided 200 billion so the government had an obligation even the shipyard employees expected a bailout even as the shipyard struggled during the late 1980s the employees struck for and negotiated wage increases of 25 to 55 percent a year they knew that the government would either bail them out or find someone else to run the thing in the end the government did bail out daewoo shipbuilding in 1989 providing 200 billion korean one of preferential loans and ejected another 50 billion won directly into the company this generous rescue plan reaffirmed daewoo's closeness to the government even long after park's assassination it should have been a come to jesus moment for kim and his company and kim did seem to know that this bailout as well as the changing market conditions meant that something had to change more quality less quantity in 1990 he announced a company initiative to improve product quality across all of daewoo's companies which showed initial successes for instance shipbuilding defect rates declined 80 percent a few years later dew announced a plan to hire phds to do more advanced product r d unfortunately a leopard cannot change his spots in econ 101 they talk about the danger of moral hazard where someone does something crazy because they know they don't bear all the consequences if it goes wrong these initiatives never gained steam as kim never had his heart in it instead he dived back into what would be his most intoxicating and costly obsession cars in 1992 daewoo group acquired full control of its motor subsidiary at this time the subsidiary was unprofitable losing 200 million dollars in 1992. nevertheless daewoo motors embarked on a massive buying spree to become a global automotive leader likely paid with some of the 1989 bailout money given to daewoo shipbuilding in 1994 daewoo motors acquired a technical center in the united kingdom and started a joint venture in romania in 1996 daewoo spent 1.8 billion dollars to purchase a polish car company and a truck factory these made daewoo the country's second largest automaker after fiat they also opened an 800 million dollar car plant in uzbekistan capable of producing 200 000 cars a year the idea there would be to produce cars for sale in russia after that they bought a czech truck manufacturer entered ukraine in india through joint ventures all in all 14 car factory purchases in 13 countries many of these ventures failed but the company refused to pull out believing in their growth potential but they were losing 30 million dollars a year in india they sold just 423 cars in 1998 in vietnam and finally the cherry on the top a majority takeover of the troubled sasang young motor company in january 1998 the peak of the asian financial crisis who was paying for this how can they afford to do this my father always told me find someone who loves you as much as daewoo loves debt all of the cheby used debt their average debt to equity ratio throughout the 1980s and 1990s was 400 percent but they would not only carry the most debt over 11 billion dollars of it into the 1990s it was the most structurally vulnerable to debt crises it isn't the case today but long ago the cheby was structured around a core company this flagship tends to be the whole group's cash cow like a samsung electronics or something but daewoo's core company daewoo corporation was a trading and financial company that prefers revenues over profits it still handed out cash to its children but funded those handouts through borrowings in my previous video on hanjing shipping i talked about the company's precarious financial state after being severed from his profitable sibling korean air without a cash cow daewoo also ran on thin ice the market had long suspected that something was up in april 1997 on the eve of the asian financial crisis daewoo had the lowest price to book ratios of korea's top chebul 1.12 compared to samsung's 6 and hyundai's 3.66 1997 triggered a two year long series of events that would eventually send daewoo into insolvency late that year the korean wan plunged in value against the us dollar from 901 to a high of 1961. korea had to receive a big very controversial bailout from various international entities and the next year the economy shrank nearly seven percent while the other chamber pulled back daewoo plunged ahead recklessly with their classic hustle they discounted products and acquired new companies just like before this included the aforementioned purchase of sasangyeong in january 1998 which added even more debt to the company's books all throughout 1998 despite their already considerable debts daewoo managed to raise another 14.1 billion dollars becoming the nation's single most indebted company in the third quarter alone they added another 40 in debt it is likely that the investors believed that the korean government would eventually do a bailout and indeed daewoo had been in discussions with the government since june 1998 but they went back and forth about what a bailout might look like the government wanted austerity measures that they did not want to do chairman kim was an empire builder and could not accept a shrinkage late in 1998 the korean government suddenly realized the financial contagion risk of a daewoo debt default they told their financial institutions that they could only hold five percent of their portfolio in daewoo group debt essentially cutting off daewoo's lines of credit so long as daewoo could borrow more money the company stayed afloat kim was confident that the korean government would ease off on chebula reform and bail out daewoo once more once that faucet was turned off things started to get serious that december the company finally agreed to downsize consolidating 51 operating companies into just 10. they will also had to reduce their debt ratio from its 500 percent over the span of 1999. late in 1998 the investment bank nomura securities published a report titled alarm bells ringing for daewoo group sharing their concerns about daewoo's debts however the market the banks and the government were slow to respond to the threat of a day would collapse the problem with the december 1998 quote-unquote restructuring was that it lacked teeth daewoo would be left alone for the entirety of 1999 to do nothing the creditor banks were supposed to withdraw funding if the company did not hit their quarterly debt reductions but failed to do this all the while rumors floated of big deals that would step in at the last second and save the company for instance rumors of daewoo swapping daewoo electronics to acquire samsung motors or of this saudi prince stepping in or of a special relationship with the incoming korean president kim de jong these rumors helped everyone delude themselves into believing that they would stay afloat but by mid-1999 it became clear to everyone that daewoo was not meeting its debt reduction marks and was indeed moving towards a default the credit rating agencies being timely as always downgraded daewoo's debt the reality was that at the end of 1998 daewoo was already a bankrupt entity for the 1998 year the company reported 25 higher sales and a half trillion korean won profit loss management argued that this loss was due to unique one-off situations relating to daewoo telecom daewoo corporation and daewoo heavy industries the core companies were generating hundreds of millions of dollars of profit unfortunately these profits were generated through a scheme of fictitious overseas asset sales between sister subsidiaries at fake prices for instance subsidiary a would sell some asset like a tractor to subsidiary b at a crazy price that no one else would pay b would pay for this with stock or another asset out of its books after this swap a gets to record a false profit in a variety of ways first directly from the false sale and second because a's assets are priced according to the quote-unquote market they get to also revalue all their other tractors to the new price remove these asset swaps and other fraudulent practices and daewoo didn't lose half a trillion one but actually eight times that amount or four trillion won other accounts estimated the amount of fraud going on in both 1997 and 1998 to be as high as 23 trillion won about 19 billion dollars korea's biggest accounting fraud ever up to that point the scale of the fraud remains up for debate but regardless the company was insolvent a dead man walking with far more liabilities than assets in july 1999 kim tried one final gambit he publicly announced that he would put up all of his personal wealth as collateral and resign all of his positions except for that of daewoo motors he would bring that company to profitability and then retire for good in return he wanted creditors to inject another 4 trillion 1 or roughly 3.4 billion dollars into the group daewoo would somehow find another nine billion dollars of collateral to help save the whole company not going to lie it's pretty ballsy for kim to try staying on after having been responsible for the whole debacle on august 1999 kim was removed from his companies and the subsidiaries were placed into bankruptcy to be sold off in chunks years later at its end they will owed over 50 billion dollars in debt to 140 banks in 100 plus countries kim fled the country in november 1999 and lived abroad in exile for five years when he returned he was placed on trial and received a large fine and a ten year prison sentence less than a year later he received a presidential pardon he died in 2019 at the age of 82. banks and insurance companies lost trillions of wand from daewoo dead the korean government had to inject public money to keep those banks from collapsing it led to extensive reforms and investor transparency and banking oversight considering the size of the fraud the accountants should have sounded the alarms but they let it slide probably because their clients were so powerful several accountants received fines and had their licenses suspended the daewoo saga would lead to reforms in the korean accounting industry the fraud was extensively documented but there remains about 750 million to possibly 4 billion dollars missing from the company's coffers some of this money might have been used for personal expenses for instance a 2.5 million donation to harvard for kim's son or was paid to the government as bribes it's not clear today the daewoo companies work independently of one another though they might still bear the name few companies have ever grown up as fast as daewoo and hopefully a few others will implode as spectacularly in the future alright everyone that's it for tonight thanks for watching subscribe to the channel uh sign up for the newsletter and i'll see you guys next time

Channel: Asianometry

Views: 914,016

Keywords:

Id: tEgayQwXo1g

Length: 23min 34sec (1414 seconds)

Published: Thu Sep 22 2022