Dark Side To Korea Recovery? 
ELECTRONIC ENGINEERING TIMES
07-05-99, p. PG44
Copyright (c) 1999 CMP Media Inc.
By George Leopold

ELECTRONIC ENGINEERING TIMES: South Korea's rapid economic recovery  has spawned concerns in financial and technology circles that a lost sense of urgency will blunt meaningful reform of Korea's largest chaebol industrial groups. With South Korea on the road to economic recovery, the debate is focusing on whether early reforms in banking and other key industries will be reversed if Seoul fails to keep the pressure on the powerful chaebols. While smaller industrial groupings have succeeded in significantly reducing their debt-to-equity ratios, the only significant change among the top five chaebols has been the government-led merger of LG Semiconductor's chip operations into Hyundai Electronics. A senior Hyundai executive speaking at a conference in New York in late May on the Korea economy said he expects the deal to officially close this month.

With the IC merger nearly completed, Chong Sup Park, president and chief executive officer of Hyundai Electronics America (San Jose, Calif.), said the problem now is refocusing Hyundai's work force on improving products and production so it can compete with overseas rivals like Micron Technology Inc. (Boise, Idaho). Hyundai will "create a significant force focusing on the semiconductor business," Park told a conference sponsored by the Korea Society.

Although Park questioned government reformers' efforts to prod chaebols into lowering their debt ratios to the 1998 target of 200 percent, he predicted that government reforms "won't be reversed [because] we've gone too far to go back."

Korean government officials echoed that sentiment. Regulatory reform, while not complete, "is an irreversible process," said Jong Chang Kim, a member of the Korean Securities & Futures Commission. "We believe that continuing openness and liberalization of the domestic market will stimulate the chaebols to implement thorough and wide-ranging restructuring programs [of] their own volition."

The Korean official also noted that the top five chaebols have the financial resources to absorb losses stemming from structural reforms.
Along with brokering several industry mergers, Korean regulators have reduced the number of debt-ridden Korean banks from 27 to 17. Still, bankers, Korean analysts and emerging shareholder rights groups are far less confident that reforms instituted by President Kim Dae-jung can fundamentally change the way the top chaebols operate. "I don't think the Korean corporate restructuring has crossed the river of no return yet," said Hasung Jang, a finance professor at Korea University and chairman of a shareholder rights group called People's Solidarity for Participatory Democracy. "My experience with the chaebols doesn't convince me that reforms can't be reversed."

Hard-nosed financial analysts here agreed there's a long way to go before meaningful reform of Korea's banking system and related high-tech industries is   achieved. They note that government debt is up sharply as Seoul continues to prop up failing banks and that the corporate sector remains overextended. For instance, debt-to-equity ratios for the top five chaebols dropped to only about 355 percent by the end of 1998, far short of the 200 percent target set by the government.

"I don't think you could say the patient has returned to good health yet, " said Thomas Byrne, vice president and senior analyst for Moody's Investors' Service. "Restructuring of Korea's banking system will be a long and difficult process."

An illustration of how difficult the road to reform will be came in early June when Korea's Financial Supervisory Commission, charged with spearheading financial reforms, delayed the sale of Seoul Bank to HSBC Holdings plc. The commission also again delayed the sale of Korea First Bank to U.S. investors. Both banks were nationalized as part of a $57 billion bailout by the International Monetary Fund (IMF) in December 1997.

The U.S. semiconductor industry has been particularly vigilant in ensuring that the IMF bailout isn't used by the Korean government as a subsidy to encourage participation in IMF reforms. In a speech at the Korea Society conference, Marjory Searing, deputy assistant secretary of commerce for Asia and the Pacific, echoed chip makers' concerns and threatened U.S. trade action on subsidies to Korean firms if they continue.

The problem now is scaling back reforms and letting up on the pressure on the chaebols, Searing said. "This is not the time to relax," she said.

The government-led effort to reform the chaebols includes corporate restructuring to reduce overcapacity and to press companies to focus on their core businesses. Other Korean reforms focus on reducing corporate debt while increasing accountability and transparency and giving the government and creditors a larger role in implementing reforms.

The Hyundai/LG merger means Hyundai and Samsung Electronics will remain as Korea's top IC makers. Meanwhile, Samsung and Daewoo Electronics will continue to slug it out in the appliance market while LG shores up its display business.

As reforms proceed, Korean chip makers appear to be putting their money where their core business is. Samsung Electronics, the world's largest DRAM maker, said in early June it would boost spending on 256-Mbit DRAM production by 50 percent this year. Samsung's investment in production facilities is expected to top $3 billion in 1999 as its prepares for mass-production of next-generation DRAMs in 2001.

Still, overcapacity remains a problem as exports to the rest of Asia, the United States and Europe slow. Byrne, the investment analyst, said Japanese and Chinese demand for Korean goods is lacking and that U.S. and European demand is "as good as it gets" for Korea.

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Added July 6,  1999