Daewoo Group Business Information, Profile, and History

History of Daewoo Group

Daewoo Group was founded by Kim Woo Choong in March 1967. Daewoo's emergence was inseparable from South Korea's rapid transformation from an agrarian country, racked by a long history of hostile invasions and lacking essential resources, to a land where the centrally planned "economic miracle" has become a fact of life. South Korea entered the 1960s with a crippling trade deficit and a domestic market too poor to support indigenous industries. When Korea was divided by the Allies after World War II, the territory north of the 38th parallel inherited all of the country's natural resources. With a far stronger military force than its rivals in the South, North Korea waited less than two years after the withdrawal of U.S. peacekeeping troops to invade. Peace was eventually restored in 1953, but the fear of foreign invasion has remained with the South Koreans and, indeed, has acted as a powerful incentive in the search for economic prosperity.

Daewoo means "Great Universe," and although the initial share capital of the company was a modest $18,000, Kim and his colleagues held great hopes for their business. At its peak, Daewoo was South Korea's fourth largest conglomerate, or chaebol, with principal operations in trading, motor vehicles, shipbuilding, heavy industry, aerospace, consumer electronics, telecommunications, and financial services. The company was comprised of 25 subsidiaries, linked together in a complicated system of cross holdings. The major company in the group was Daewoo Corporation, which was licensed as a general trading company (GTC) by the Korean government in 1975. GTCs were set up to promote exports, and license holders were required to establish offices abroad. Daewoo had a network of over 100 branches worldwide, with some 3,500 different products traded in over 130 countries. In exchange for promoting Korean goods abroad, the Daewoo Corporation was able to finance its expansion through preferential loan agreements, reduced foreign exchange requirements, and improved government advice on exporting and marketing abroad. However, Kim Woo Choong's global ambitions eventually overextended the company's resources, and by the late 1990s Daewoo was deep in debt, while Kim himself was being indicted on charges of corporate malfeasance. In 1999 the South Korean government issued an order to dismantle the chaebol, and the majority of the Daewoo Group's holdings were sold to other corporations.

Early History

Beginning in 1962 the South Korean government instigated a series of five-year plans and forced the chaebols to aim for a number of basic objectives. In common with their Far East competitors, Hong Kong and Taiwan, South Korea's government relied on a strategy that focused attention on the importance of exports as the method to decrease the country's balance-of-trade gap and to strengthen domestic production.

Daewoo began trading in 1967 at the start of the second five-year plan, and benefited from government-sponsored cheap loans on borrowing for exports. The company chose to concentrate on the labor-intensive clothing and textile industries, which would provide relatively high profit margins while utilizing South Korea's major asset, its large workforce. A factory was set up at Pusan and in 1990 3.6 million shirts were made there each month. Daewoo further contributed to the increases in South Korea's level of exports, which averaged 38.6 percent growth per annum during this period, by producing uncomplicated light manufacturing machines the construction of which, again, was labor intensive.

The third and fourth phases of Korea's economic recovery ran from 1973 to 1981. The country's most significant resource, labor, was then in high demand, and as wages increased, competitors from Malaysia and Thailand began to erode Korea's comparative advantage in labor-intensive production. The government responded by concentrating on mechanical and electrical engineering, shipbuilding, petrochemicals, and construction. This change in emphasis was designed to continue Korea's export-led expansion and to provide domestic industries with parts that previously had to be imported. A home-based defense industry was also a priority as plans were announced for the total withdrawal of U.S. peacekeeping forces.

Daewoo moved into construction, serving the new village program and, in a farsighted move, the rapidly growing African and Middle Eastern markets. During this period Daewoo achieved its GTC status and received significant investment help from the South Korean government. Subsidized loans and strict import controls aroused the anger of competing nations, but the chaebols were in need of protectionist policies if they were to survive this period of world recession, triggered by the oil crisis of 1973.

Government policy forced Daewoo into shipbuilding, an industry to which Hyundai and Samsung were more suited because of their greater expertise in heavy engineering. Kim's reluctance to take over the world's biggest dockyard, at Okpo, in 1980 was well documented, and his comment on the Korean government indicated a growing frustration as his entrepreneurial instinct was being stifled. "They tell you it's your duty and you have to do it even if there's no profit." Displaying characteristic vigor and enthusiasm, however, Kim soon saw Daewoo Shipbuilding and Heavy Machinery earn a reputation for competitively priced ships and oil rigs that were often delivered ahead of schedule.

Established Joint Ventures in 1980s to Expand Outside Korea

The 1980s were a decade of liberalization for South Korea's economy. Small private companies were encouraged, and Daewoo was made to divest two of the textile companies that had contributed to its success. Protectionist import controls were relaxed, and the government no longer practiced positive discrimination towards the shipbuilding industry. These moves were instigated to ensure an efficient allocation of resources in a free market and to force the chaebols to be more aggressive in their dealings abroad.

The great change in attitude shown by the Korean government to the chaebols is best illustrated by the fate of one of Daewoo's competitors, the Kukje Group, which went into liquidation in 1985. At that time the government saw the chaebols as barriers to economic efficiency and refused to supply Kukje with further credit. Small- and medium-sized companies were to be favored to ensure that the wealth in Korea's two industrial centers, Seoul and Pusan, eventually would be spread throughout the whole country. The only large industries to benefit from government support would be those that were internationally competitive and those that could further a more equitable distribution of income.

Daewoo responded to the challenge by establishing a number of joint ventures with U.S. and European companies. Kim's philosophy for the 1980s was that finished products would eventually lose their national identity as countries cooperated in design and manufacturing before exporting the goods to a further country. In 1986 Daewoo Heavy Industries launched a $40 million Eurobond issue in order to expand exports of machine tools, defense products, and aerospace interests. The president of Daewoo Heavy Industries, Kyung Hoon Lee, hoped that the money would enable his company to move away from simply licensing products from abroad and to enter a new phase of complementary and long-term relationships with foreign companies.

The 50/50 joint venture with Sikorsky Aerospace illustrated the benefits of operating in partnership with a U.S. company. Daewoo started by building S-76 helicopters from parts imported from the United States and gradually began to produce these parts in Korea. As the South Korean government had always regarded the defense industry as being of utmost importance, Daewoo received generous subsidies to establish new factories. By the end of 1988, Daewoo had enough confidence in the skills it had learned in the Sikorsky project to announce that it was to begin work on civilian helicopters and airplanes, which would be considerably cheaper than those produced by their U.S. counterparts.

Daewoo used other methods to capture foreign markets. It had excellent experience in turning around faltering companies in Korea and was now, increasingly, applying this knowledge abroad. In 1986 Daewoo acquired a controlling interest in the U.S. ZyMOS Corporation as a means of gaining the technical knowledge necessary to expand its interests in semiconductor manufacturing and semiconductor design. Subsidiaries that actually produced goods abroad, rather than acting solely as sales agents, were also established. Daewoo added a microwave oven assembly plant in Lorraine, France, and set up a VCR manufacturing company in Northern Ireland. Signaling that South Korea's economic recovery was reaching completion, Daewoo began considering investment in countries such as Bangladesh and Indonesia, where textiles could be produced as cheaply as in Korea during the early 1960s. Other linkups included a deal with Caterpillar to export 100,000 forklifts by 1993, a marketing contract to sell IBM-compatible personal computers, and the production of parts for the European Airbus on behalf of British Aerospace.

The mid-1980s saw an increased emphasis on the motor vehicle industry. Although the government, fearful of arousing protectionist sympathies in its foreign markets, was reticent in announcing its ambitions publicly, it was clear that South Korea was aiming to become one of the world's major car exporters before the end of the decade. In 1986 the Japanese yen appreciated 25 percent against the dollar, making Daewoo's already cheap exports even more attractive. Daewoo established a 50/50 joint venture with General Motors, called Daewoo Motor, to produce an internationally competitive small car as well as components for a number of General Motors's existing vehicles. Daewoo was not deterred by the difficulties inherent in setting up the required high-technology production lines and relied on the experience gained in other parts of the group to construct sophisticated computer systems in a relatively short period of time.

The joint venture with General Motors was initially one of Daewoo's most profitable links with a foreign company. In 1987 247,000 Pontiac LeManses were built, and the car, based on a design by the German car giant Opel, was well received in the U.S. market. Demand for the LeMans and the slightly larger Oldsmobile Royale soon faltered, however, and there were rumors of friction between the management of the two companies. The venture was not as successful as Hyundai's foray into the international car market, and it appeared that Daewoo underestimated the sophistication and technical standards required by the U.S. car buyer.

Late 1980s Crisis in Daewoo Shipbuilding

In 1989 heavy losses suffered by Daewoo Shipbuilding and Heavy Machinery made servicing the company's loans increasingly difficult. In an unprecedented demonstration against the traditional work ethic that had helped South Korea to economic prosperity, workers began an increasingly violent protest against years of long hours and low pay. The only solution available to Daewoo's management was to placate the workers with pay raises of more than 20 percent.

The reliance on shipbuilding as a way of cementing South Korea's export-led recovery looked even more dangerous as the rapidly appreciating South Korean won made exports more expensive. Demand for Daewoo's ships remained constant but the company was forced to sell ships at a loss as a way of guaranteeing a steady supply of orders. The situation was exacerbated by the bankruptcy of US Lines in 1986. A bad debt of $570 million marked the start of the crisis at the Okpo shipyard.

The Ministry of Trade and Industry, however, was no longer willing to bail out one of its most reliable chaebols, which was suffering as a direct result of the Daewoo Shipbuilding and Heavy Machinery acquisition forced on it by the government. Instead, the government promised a seven-year moratorium on Daewoo's debt to the Korean Development Bank and offered to provide a further W 150 billion in exchange for a number of contributions from the company. Daewoo would have to refinance the shipyards by selling off four subsidiaries, including the profitable Korea Steel Company and Daewoo Investment and Finance, as well as selling Daewoo Shipbuilding and Heavy Machinery's headquarters in Seoul. Subsidiaries were forced to raise W 85 billion on the Korean stock exchange, and Kim was ordered by the government to sell his W 150 billion investment in Daewoo Securities, the country's largest stockbroker. The government also ordered workers to curb their demands for wage increases and asked to see proof of improved management before the deal to help Daewoo was agreed to.

Kim's response was typical of his personal style. He had already moved his office to the shipyard so that he could keep direct control of the worsening situation, and had begun to take tours around the premises by bicycle to ensure that he could implement changes and cut costs where necessary. By 1990 improvements at the shipyard were already visible, and by the mid-1990s Daewoo was one of the most efficient shipbuilders in the world and, with 10 percent of the global market, was also the world's leading shipbuilder.

Aggressive Overseas Expansion in the 1990s

Daewoo entered the 1990s facing more problems than the downturn in the fortunes of its shipbuilding subsidiary. The company was highly leveraged, partly due to the ready availability of government loans, and was paying interest of W 300 million a day--about $500,000--on its debts. Daewoo had not marketed itself as well as competitors like Hyundai and, as a consequence, suffered from the lack of a strong brand image. Its heavy industries were now operating in stagnant markets and expenditure on research and development had to be increased if internationally competitive new products were to be successfully introduced. Continuing workers' demonstrations and changes in government policy further added to Daewoo's worries.

The company also had to deal with the unraveling of its relationship with General Motors. Sales of LeMans had fallen to 39,081 in 1990, a 39 percent drop from the peak of 1988. When GM and Daewoo could not agree on a plan to revive the venture, GM sold its half of Daewoo Motor to Daewoo in 1992 for $170 million. As he had done in shipbuilding, Kim decided to take direct control of Daewoo Motor and quickly turned its fortunes around. He focused the company on improving the quality of its cars; added to the production lines were detailed checks at every step along the way and, for a one-year period, every Espero and Prince car made was taken on a grueling road test to identify problems. By 1993 Daewoo had regained the number two spot in the domestic car market, still trailing Hyundai but once again ahead of Kia, and by 1995 Daewoo Motor was making a slight profit.

As he was turning Daewoo Motor around, Kim embarked on a risky strategy of overseas expansion, aggressively seeking out opportunities for both marketing and manufacturing Daewoo products in the United States, Europe, and less-developed countries. He committed more than $20 billion in numerous joint ventures and start-ups around the world.

More than half of this money--$11 billion--was slated for Daewoo Motor ventures. In 1992 Daewoo entered into a joint venture with an automaker in Uzbekistan, which led to the opening in late 1995 of an $800 million plant capable of producing 200,000 compact cars annually by 2000. Some $250 million was spent to buy a state-owned carmaker in Romania, capable--after retooling--of making another 200,000 cars each year. In 1994 Daewoo Motor committed $1 billion to a joint venture in India. The following year, the company outbid General Motors itself to buy 60 percent of Poland's state-owned FSO carmaker for $1.1 billion. Manufacturing cars in these lesser-developed countries resulted in a lower-cost product that Kim hoped would succeed even in the brand-conscious West. Early indications were positive as Daewoo, in 1995, captured more than 1 percent of the British car market in the first month that it started selling Nexia and Espero sedans, exceeding its goal. After gaining this toehold in Europe, Kim then planned to enter the U.S. market in either 1997 or 1998. But by placing manufacturing in such countries as Poland and India, Daewoo would also be well-positioned to sell the cars in these same countries, which were experiencing much higher growth in demand for new cars than Western Europe or the United States. Overall, Kim set goals of quadrupling auto output to a total of two million vehicles by 2000, and of becoming one of the world's top ten automakers.

Automobiles, however, were not the only Daewoo product Kim aggressively moved overseas; consumer electronics became another key Daewoo transplant. But first, Daewoo Electronics revamped its product line. Quality problems had hampered sales of its higher-end electronics items, so Daewoo decided to focus on such lower-tech products as televisions, VCRs, and microwave ovens. Its aggressive yet systematic approach to overseas expansion then followed; by 1996 Daewoo Electronics had 20 production subsidiaries outside South Korea, with plans for 16 more. Non-Korean production stood at 19 percent but was slated to be increased to 60 percent by 2000. Daewoo strategically chose one country within each major target region for most of its production facilities. Southeast Asia was based in Vietnam (where Daewoo was the single largest foreign investor); the Americas, Mexico; Central and Eastern Europe, Poland; and Western Europe, France. Daewoo nearly made a huge step forward in late 1996 when a deal was announced whereby Daewoo Electronics would buy Thomson Multimedia, based in France. The acquisition would have made Daewoo the world's leading maker of televisions, but the deal was quickly scuttled after protests by French workers who were angered by the prospect of Thomson Multimedia falling into foreign hands.

The importance of Daewoo's moves in Europe, as well as the importance of Daewoo Motor, were shown in late 1995 when Kim moved to Vienna to concentrate solely on the Daewoo Group's overseas auto business. Placed at least temporarily in charge of the Daewoo Group was Kim's longtime ally, Yoon Young-Suk, who had headed up Daewoo Heavy Industries. Kim's move, however, fueled speculation that he was trying to distance himself from the ongoing corruption trials involving several heads of chaebol, as well as two former presidents of South Korea, Chun Doo Hwan and Roh Tae Woo. The chaebol leaders were accused of bribing Roh in an outgrowth of the overly cozy relationship between the Korean government and the chaebol. In late August 1996, eight of the chaebol leaders--including Kim--were found guilty of bribery; Kim was sentenced to two years in prison but immediately filed an appeal.

The late 1990s and early 21st century were slated to be a critical period for Daewoo. In addition to Kim's bribery conviction and possible jail sentence, Daewoo (and other chaebol) faced the possibility that the Korean government would intervene to reduce the power of the chaebol, which were beginning to be seen as impediments to the country's economic progress. Korean reunification, which was sure to profoundly affect the entire nation's future, seemed ever more likely and Daewoo had in 1995 become the first South Korean company allowed to enter into joint ventures in the north. These prospects, combined with the company's massive commitment to overseas expansion and a continuing heavy debt load, added up to a very uncertain future for the Daewoo Group.

Pre-Millennium Collapse

By the mid-1990s Daewoo was firmly entrenched in what Kim Woo Choong dubbed the "Vision 2000" plan, his ambitious program intended to position the company to become one of the top ten car manufacturers in the world. The company's expansion into Eastern Europe seemed savvy as the region's emerging democracies could provide the car manufacturer with cheap labor, and as the market for affordable, utilitarian automobiles in the former Soviet Bloc was experiencing precipitous growth. Indeed, in Poland alone, sales of cars and commercial vehicles were projected to reach 534,000 in 1997, up from 426,000 in 1996 and 296,000 in 1995. As late as March 1999, Daewoo was poised to overtake Fiat as the leading car manufacturer in the Polish market.

By the end of the decade, however, it was becoming apparent that Mr. Kim had bitten off far more than his company could chew, as his plan to grab up market share at a loss and recuperate the investment later was not panning out. While the company was poised to meet its goal of manufacturing two million cars by 2000, the financial crisis of 1997-98 in developing countries had caused car sales to fall well short of projections, and none of Daewoo's foreign operations were actually turning a profit. Furthermore, Daewoo had accumulated colossal debt over the course of its overseas automotive expansion, which compromised the stability of its other operations, including shipbuilding. By July 1999, the company owed its creditors more than $50 billion. The company's perilous financial situation was further exacerbated by the recession that hit South Korea in 1998, the country's worst economic slump in nearly half a century. In spite of these warning signs, Mr. Kim did not desist from his aggressive acquisition strategy. While other chaebols had begun implementing measures to slow growth in the midst of the country's fiscal crisis, Kim Woo Choong persevered with his ill-advised program, acquiring 14 new companies and increasing the company's debt by 40 percent in 1998.

In April 1998, recently elected South Korean President Kim Dae-jung had pledged to be the first South Korean president to implement significant reform of the chaebol system. As the country's most financially unstable chaebol, the Daewoo Group soon became a prime target for these reforms. On August 16, 1999, Daewoo's creditors announced a government-mandated plan to break up the company. Faced with bankruptcy, Kim Woo Choong agreed to step down as head of the Daewoo Group in November 1999, and the South Korean banks took control of the bulk of the chaebol's assets with plans to sell them off as quickly as possible. In the aftermath of the company's collapse, charges of wide-ranging accounting fraud and embezzlement began to emerge, and Kim Woo Choong became a fugitive from justice, going into hiding in numerous countries, including Morocco, France, and the Sudan. In the early years of the 21st century, however, the South Korean government remained reluctant to pursue Mr. Kim, amid insinuations that it had been complicit in the reckless expansion policies through which Kim Woo Choong overextended the Daewoo Group so flagrantly. In a 2003 interview with Fortune magazine, Mr. Kim lamented his unrealistic ambitions to grow the Daewoo Group so quickly, but denied all charges of corruption in his business practices.

Chronology

• Key Dates:
• 1967: Daewoo Group is founded by Kim Woo Choong.
• 1975: Daewoo Corporation is licensed as a general trading company (GTC) by the Korean government.
• 1986: Daewoo establishes a 50/50 joint venture with General Motors, called Daewoo Motor.
• 1995: Daewoo buys 60 percent of Poland's state-owned car company FSO for $1.1 billion.
• 1996: Kim Woo Choong is convicted on bribery charges.
• 1999: Facing at least $50 billion in debt, Daewoo is formally dismantled.