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Daewoo Case Study

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In the late 1990s, the leading South Korean car manufacturer, Daewoo Motors (Daewoo), was in deep financial trouble. For the financial year ending 1999-2000, Daewoo generated revenues of $197.8 million and a net loss after tax of $10.43 billion (13.7 trillion won).

The company's revenues had dropped by 94% since 1999. The loss reported was also three times higher than that reported in 1999, and was ranked as South Korea's largest ever corporate loss. In addition, the company's domestic marketshare fell from 33% in 1998 to just 23% in 2000. According to analysts, Daewoo's borrowings for its expansion programs were responsible for its losses. The company's domestic and foreign debt amounted to more than $16.06 billion in December 1999.

Moreover, its expansion into risky and uncertain markets like Vietnam and its decision to sell products at very low prices to gain marketshare had negatively affected its financial condition. Labor unrest was also one of the reasons cited by market observers for Daewoo's poor financial performance. The workers at many of its plants went on strike protesting against low wages, layoffs, and lack of job security. The Southeast Asian Financial Crisis of 1997-98 further deepened Daewoo's problems. The company's creditors started demanding repayments.

However, some analysts felt that the primary reason for Daewoo's problems was mismanagement and the corrupt corporate governance practices adopted by Kim Woo Choong (Kim), the founder of the Daewoo Group. An analyst commented, "The ill management and inability of Daewoo companies resulted in bankruptcy. The run-away irresponsible previous owner, Kim is now hiding somewhere in the world." Analysts commented that because of his financial mismanagement, not only Daewoo but also the entire Daewoo Group was deep in debt.

In November 2000, the Korean government officially announced Daewoo's bankruptcy and its assets were put on sale. Amid controversies and almost a year of negotiations with the Korean government, GM signed a preliminary agreement in September 2001 to buy Daewoo's assets for $1.2 billion. However, this agreement ran into problems when GM reported a discrepancy in Daewoo's overseas accounts. With so many skeletons in Daewoo's closet, market observers wondered when the company would find a buyer and when its problems would be solved.



Founded in 1967, Daewoo, or "Great Universe," started out as a small textile company. In less than three decades, based upon foreign assets, Daewoo became the largest transnational company among developing countries. Daewoo specialized in buying distressed companies from the government, extracting concessions in the process and then successfully restructuring and turning around these entities. Daewoo rapidly expanded into a conglomerate through this mode of acquisition as most of its major companies were procured in this manner under Korea's industrial policy during the 1960s and 1970s. In these early years, Daewoo apparently benefited from the personal relationship between its Chairman, Woo Choong Kim, and President Chung Hee Park. Largely through these connections, Kim obtained critical incentives from the government when taking over troubled companies. In 1976, for example, when Daewoo acquired Hankook Machinery, a manufacturer of industrial machinery, rolling stock and diesel engines that had not shown a profit for most of its history, the government provided generous financing and debt forgiveness to make the deal attractive. Under the new name, Daewoo Heavy Industries, Daewoo returned the company to profitability in its first year. Again, in 1978, when Daewoo acquired Okpo Shipping Company, another troubled company, government concessions allowed Daewoo to restructure the shipyard so that it started to generate positive earnings soon thereafter. Other distressed companies that the conglomerate acquired included Daewoo Motor, and parts of Daewoo Electronics and Daewoo Securities. During these transitions, requirements or conditions concerning corporate governance did not enter the dialogue.

Daewoo, therefore, largely succeeded in turning around these troubled companies through their rent-seeking ability. Chairman Kim would continue to rely upon his political acumen to extract these generous incentives from the government and to steer Daewoo out of difficulties. In 1988, for example, Daewoo faced its first serious crisis when Daewoo Shipbuilding and Heavy Machinery underwent a severe liquidity emergency due to suddenly deteriorating market conditions. The company employed over 14,000 workers and thousands more when suppliers and other downstream and upstream industries were included. The political economy consequences of allowing the company to collapse were enormous. The government thus reluctantly decided to bail out the company through an 840 billion won rescue plan despite heavy criticism that it should have been dissolved. The government's inability to deal decisively at the time convinced many that major conglomerates such as Daewoo had indeed become too big to fail. Everyone involved with large conglomerates such as Daewoo became more and more dependent upon this government-guaranteed social safety net, contributing to a dangerous moral hazard. Banks, investors, creditors, accounting firms and other stakeholders blindly followed this myth that the "Daewoos" in Korea would not be allowed to collapse. When the financial crisis hit, everyone naturally presumed that the government bureaucracy and Kim's political clout would rescue the conglomerate.

Operationally, Asian conglomerates tended to follow the dictates of strong central management that revolved around the controlling shareholder. Controlling shareholders in turn managed their conglomerates like personal kingdoms. While providing a certain degree of efficiency, this highly centralized decision-making structure in the end became the source of most of corporate governance ills in Asian conglomerates. Accountability and transparency received secondary priorities. The legal framework failed to provide effective board of directors, corporate officers and statutory auditors that acted independently according to their fiduciary duties. These internal stakeholders did not act as active monitors overseeing the conduct of the dominant controlling shareholder.

At best, government technocrats used the state's control and industrial policy to control the excesses of businesses. Large conglomerates such as Daewoo designed their business plans according



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