Daewoo Case Study

BACKGROUND

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 market share 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 market share 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.

MISMANAGEMENT AT DAEWOO

1. BUSINESS AND GOVERNMENT RELATIONS

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