Korea Looks to Cars for a Lift
SEOUL — Even in the hyped world of public relations extravaganzas, the claims made for Daewoo Motors’ new Matiz mini-car at its formal launching ceremony--that it has achieved perfection--rang of chutzpah.
The Matiz is a “perfect, strong, safe, comfortable and convenient car that will be the best of its kind in the global market,” Lee Kwan Kie, president of the Daewoo subsidiary that manufactures the car, told hundreds of reception guests and reporters. “We are very confident that Matiz has perfect performance and quality.”
Daewoo and the other South Korean auto firms--Hyundai Motor Co., Samsung Motors Inc. and bankrupt Kia Motors Corp.--could use some perfect cars.
The auto industry is at the eye of South Korea’s economic storm. A powerful example of the country’s global reach, it may also be the most important barometer of the nation’s progress in rehabilitating its economy.
In the midst of a shattered domestic market, the industry is being counted on to export the country out of international debt--while it tries not to be distracted by a sideshow featuring five Korean and U.S. auto makers circling bankrupt Kia Motors like so many vulture capitalists.
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Export success is critical to South Korea’s efforts to extricate itself from the financial crisis that forced it to accept a $60-billion International Monetary Fund bailout late last year. Indeed, exporting cars is now a national goal, as evidenced by the attendance of South Korea’s trade minister at the roll-out of the Matiz this spring.
“It is quite important for all leaders of the auto industry to contribute to recovery of the national economy,” minister Park Tae Young declared at the Daewoo ceremony. “To do this you have to concentrate on exports. Expansion of markets abroad will be essential, while at the same time avoiding any trade conflicts.”
Meanwhile, Hyundai, despite plans for a 20% cut in its 30,000-strong work force, has launched a hostile takeover effort against Kia. Samsung--possibly in league with Ford Motor Co.--also is widely believed to covet control of the struggling car maker, although the issue is so sensitive the company refuses to discuss it.
For good measure, Daewoo also recently joined the free-for-all over Kia.
“The atmosphere within the Daewoo Group . . . is that it would be advisable if Hyundai and Daewoo together took over Kia,” said Lee Jung Seung, a Daewoo spokesman. “Chairman Kim [Woo Choong] has reportedly said in private meetings that although it would be better if Kia is scrapped, if that’s not possible Hyundai and Daewoo should divide and take over Kia’s business.”
Kia is fiercely resisting all acquisition efforts, saying it should be allowed to survive as an independent company.
Kia workers staged a five-day strike earlier this month to demand that the government--which holds 30% of Kia’s debt through a state-owned bank--guarantee that the company will not be sold off to another auto maker, which would be likely to lead to heavy layoffs.
The conglomerates going after Kia are “like hyenas” on the attack, former Kia Chairman Chin Nyum complained earlier this year before he quit the company to join the administration of President Kim Dae Jung as its top budget official.
Indeed, for all its problems, Kia would be a prize for any car company trying to build up its presence here.
Hyundai produced 1.3 million cars last year, and “Hyundai management thought it would be wise to reach slightly over 2-million production by merger and acquisition of Kia,” said Shin Hyun Kyu, director of Hyundai’s public relations office. This would be good “for the future of the Korean auto industry” because it would give Hyundai the volume needed “to be very competitive in the worldwide market,” he said.
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A leaner set of South Korean auto makers--bolstered by a weak currency and a new focus on quality now being stressed by all four of the companies--could become a rapidly growing force in the world economy.
“The Korean auto industry will become much more competitive after this IMF crunch is over, in 1 1/2 or 2 years,” predicted Kim So Rim, spokesman for the Korea Automobile Manufacturers Assn.
Korean-built cars have become notorious overseas for their quality problems, and they have done poorly in the U.S. market. But the weakened local currency will make them especially cheap abroad, raising the prospect of increased trade tensions.
Hyundai and Kia have been expanding their dealer networks and model offerings in the U.S. in recent years. Daewoo plans to enter the U.S. market late this summer.
Detroit auto makers have complained that even as South Korea engages in an aggressive export assault abroad, it keeps foreign competition out of its domestic market. Last fall, the Clinton administration cited Korea for unfair trade practices.
Much is riding on the Matiz.
Daewoo already sells cars in more than 100 countries. But despite its global reach and declarations of brimming self-confidence, Daewoo is moving with healthy caution on its new offering. The Matiz will initially be sold only in South Korea, and the first country to which it will be exported--starting in June--is Romania. Daewoo hopes to gradually expand sales to the rest of Europe and the world.
One cause for caution is the South Korean auto industry’s history of trying to expand too rapidly when it wasn’t ready. Exports of Hyundai cars to the United States, for example, soared for two years in the late 1980s, then collapsed from the weight of customer dissatisfaction.
That dealt a crippling blow to the image of Korean-made cars that lingers to this day. Exports of South Korean cars to the United States peaked at 480,017 in 1988, falling to 111,324 in 1993, with sales last year of 215,684.
Indeed, the quality rap against South Korean cars is cited by the Samsung conglomerate as one reason it decided to get into the auto business.
Samsung Group is new to making cars--it launched Samsung Motors in 1995, with technical help from Japan’s Nissan Motor Co., and sold its first cars in March. But its brand image is perhaps the highest of all South Korean conglomerates. Samsung Motors is counting on that to help it succeed in the auto business.
“Samsung decided to produce high-performance, high-quality cars, because the auto industry was adopting more electronic technology, and the Samsung Group has the best electronics in Korea,” said Han Jae Yoon, a Samsung Motors spokesman. “In the Korean market, many customers complain about the low quality of Korean cars, [but] Korean customers have confidence in Samsung’s brand.”
If Samsung Motors takes over Kia, with its 700,000-unit annual production capacity, it could catapult Samsung into the ranks of the global market’s significant players.
But without Kia’s factories, it will be years before Samsung can produce the million cars per year usually considered necessary to show a profit.
Kia, for its part, insists that it is now doing well enough that there is no justification for it to be taken over by one of the big conglomerates.
Kia got into trouble because of debts owed by its Asia Motors and Kia Steel affiliates, said Um Sung Yong, director of public relations for Kia Group. If those companies can be sold off to cover most of the debt, the auto maker will be left in a fairly good position, he said.
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Kia is trying to cut costs enough that production of 600,000 cars will mark the break-even point this year, contrasted with a slight loss last year on production of 700,000 cars, Um said.
Kia expects to sell more than 600,000 cars in 1998, despite having slashed its work force to 18,000 from 30,000 since June, so “our profit situation will improve,” he added.
State-owned Korea Development Bank, Kia’s biggest creditor, is planning to turn its debts into equity, Um noted. Kia officials hope that will set an example for other creditor banks to follow.
“Hopefully within one year’s time you’ll be witnessing Kia operating normally, once we reach a favorable agreement with our creditors,” said Jeun Sang Jin, another Kia spokesman.
Another player in the Kia sweepstakes is Ford, the No. 2 U.S. car maker, which already controls 17% of the company directly and through its Japanese affiliate, Mazda Motor Corp.
Tom Hoyt, a Ford spokesman, said the company has been in talks with the Korean government, the Korea Development Bank and Kia on restructuring of the troubled company. Ford has indicated it would not consider increasing its investment unless the government restructured the company to reduce Kia’s debt of more than $10 billion.
“If the right business opportunity presented itself, we would consider further investment,” Hoyt said.
Hoyt called Hyundai’s proposed buyout of Kia “disturbing” and said if it were approved, it would be an indication that the Korean government is not serious about restructuring the auto industry.
Analysts see Hyundai’s move as a defensive strategy to block any takeover of Kia by Ford through an alliance with Samsung.
Ford and Samsung are negotiating a number of possible business ventures, including a 50% equity investment by Ford; joint car-making ventures in Korea; as well as joint marketing, parts-making and finance operations.
There have been widespread reports in Korea that a deal was near, though Ford officials were more cautious about both the timing and scope of potential agreements.
The most potent rumor is that Ford would make a hefty investment in Samsung--giving it as much as 50% of the fledgling auto maker--and that Samsung would in turn acquire control of a restructured Kia.
“It’s a possibility,” Hoyt said. “But there are endless possibilities and ways this could go.”
Samsung Motors’ Han said his company is talking with Ford “about very wide fields--from parts-making to R&D; and co-developing cars.”
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Meanwhile, Daewoo is discussing joint ventures and other deals with General Motors Corp. that could lead to the No. 1 U.S. car company’s taking a stake of up to 50% in Daewoo Motors, Daewoo Group Chairman Kim said.
The potential for Detroit’s Big Three to invest in South Korea has gotten a big boost from conditions attached to the IMF bailout, which require Seoul to dismantle many of its barriers to foreign companies.
“In the past, foreigners were not allowed to own a majority of a company’s shares,” said the auto association’s Kim. “Now that restriction is gone. So it is possible to do hostile acquisitions.”
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Chi Jung Nam of The Times’ Seoul bureau and staff writer Don Nauss of The Times’ Detroit bureau contributed to this report.
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Mixed Markets
A reputation for poor quality has prevented South Korean car makers from regaining lost ground in the U.S. market. But their exports to the rest of the world have climbed steadily.
South Korean vehicle exports, in thousands:
Exports to the United States
1997: 215,684
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Total exports
1998 estimate: 1,480,000
Source: Korea Automobile Manufacturers Assn.
