Kia Motor

	ASIA	April 13, 1998 VOL. 151 NO. 14
Running on Empty South Korea's Kia Motors fights to survive, despite rival takeover bids and a too-crowded auto market By DONALD MACINTYRE Seoul t first glance, it looks like just another day at Kia Motors' Asan Bay complex, a sprawling assembly plant and test track on the edge of the sea 90 km south of Seoul. As cars shuttle down the line, giant robot arms swoop like velociraptors, welding frames together in a shower of red-hot sparks. Workers in light-gray overalls bustle around, pulling door panels from giant die presses, checking gauges, readying dummies for crash tests. The plant churns out 1,200 vehicles a day, some destined for the U.S. market, where Kia plans to add 130 showrooms by the end of the year. In short, it's a scene even Henry Ford would find impressive. Except for one thing: Kia went bust last July. This is not the first time South Korea's eighth-largest conglomerate, or chaebol, has been in trouble. During the Korean War, when the company was still a bicycle maker, supplies of steel dried up. So Kia started fashioning bicycle frames out of empty oil drums. The firm survived the crisis and went on to make motorcycles, three-wheelers, trucks and finally, in 1974, the little Brisa S-1000, Korea's first locally made passenger car. Now, however, innovation isn't going to be enough to save Kia. After building too many cars for a saturated domestic market, Kia ended up owing its banks $3.5 billion, five times shareholders' equity. The courts froze Kia's debts last September. Now the endgame has started, and it's turning into a fight between Korea's two biggest chaebol, Hyundai and Samsung. Both could benefit from snapping up their distressed rival. In addition, Ford Motor, which already controls 17% of Kia, is scrambling to protect its interests and might even enter the takeover fray. The stakes in the battle are high. Kia is just one of more than 10 big-but-broke chaebol still turning out products while locking up credit that healthier companies badly need. The problem: pulling the plug on them could cost thousands of jobs. So Korea's President Kim Dae Jung needs to find a solution fast. But turning to Hyundai or Samsung would violate his pledge to reduce the power of the chaebol, which Koreans blame for landing the economy in its current mess. "We don't want to see Hyundai or Samsung become superconglomerates that can control the whole economy," says Lee Doo Won, an economist at Yonsei University. Kia is a particularly delicate challenge for Kim. Its Asian Motors affiliate accounts for a third of the economy of Kwangju, capital of Kim's native Cholla province, where jobs have long been scarce. And unlike other chaebol, Kia is run by professional managers instead of a single owner and his family. It has focused on autos, shunning the finger-in-every-pie approach of other conglomerates. Until recently, it thrived without developing overly cozy ties with government. Some economists say it's just the kind of U.S.-style company Korea needs to modernize its economy. Bitterly opposed to a takeover by Hyundai or Samsung, Kia figures it can get off life support-and retain its independence-with a little help from Ford. That strategy calls for Ford to pump in fresh capital while Kia's main creditor, state-run Korea Development Bank, would swap its debt for stock, becoming the biggest shareholder. The bank would then sell Kia shares to individual Koreans. Ford isn't likely to boost its stake much unless Kia's creditors agree to some kind of debt moratorium. But the No. 2 U.S. automaker might still strike a deal, it says, possibly in partnership with Samsung. Ford stands to gain a critical foothold in the Korean market, which has been almost impervious to imports. Building cars locally, it could take on Hyundai, Korea's largest automaker with 43% of the market, and General Motors, which may be joining forces with Daewoo, another Korean chaebol. Letting Ford have a bigger stake would also send an important signal to foreign investors, bolstering the government's claim that Korea is ready to open its doors. "What Korea needs is outside capital," says K.K. Seo, an expert in Asian business at the University of Hawaii at Manoa. "It's very, very important that Ford is involved." Hyundai, for its part, seems determined to block both Ford and Samsung. It doesn't want a bigger Ford presence in Korea, nor does it want to see Samsung become a serious competitor in the car market. In the short term, buying Kia wouldn't seem to make much sense for Hyundai-it already has too much capacity and the companies' product lines overlap. But the move could help make Hyundai's auto division a stronger player in world markets, where it's up against such heavy hitters as Ford and Toyota. Meanwhile, as creditors and potential buyers huddle behind closed doors, Kia is doing all it can to show that it's the little company that could. Employees have donated $100 million to the company and lent it an additional $17.4 million, interest-free. Everybody has taken pay cuts of 50% or more, and nobody is getting bonuses. At Kia's Seoul headquarters, visitors sit with their coats on because the heat is turned so low (Kia plans to sell the building too). But Kia's president, Park Je Hyuk, is upbeat. "We are absolutely confident that given a chance, we can bounce back," he says. A devout Catholic, Park says he has lately been praying for "courage and wisdom." He'll need plenty of both. With reporting by Stella Kim/Seoul
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South Korea's Kia Motors fights to survive, despite rival takeover bids and a too-crowded auto market

By DONALD MACINTYRE Seoul

t first glance, it looks like just another day at Kia Motors' Asan Bay complex, a sprawling assembly plant and test track on the edge of the sea 90 km south of Seoul. As cars shuttle down the line, giant robot arms swoop like velociraptors, welding frames together in a shower of red-hot sparks. Workers in light-gray overalls bustle around, pulling door panels from giant die presses, checking gauges, readying dummies for crash tests. The plant churns out 1,200 vehicles a day, some destined for the U.S. market, where Kia plans to add 130 showrooms by the end of the year. In short, it's a scene even Henry Ford would find impressive. Except for one thing: Kia went bust last July.

This is not the first time South Korea's eighth-largest conglomerate, or chaebol, has been in trouble. During the Korean War, when the company was still a bicycle maker, supplies of steel dried up. So Kia started fashioning bicycle frames out of empty oil drums. The firm survived the crisis and went on to make motorcycles, three-wheelers, trucks and finally, in 1974, the little Brisa S-1000, Korea's first locally made passenger car. Now, however, innovation isn't going to be enough to save Kia. After building too many cars for a saturated domestic market, Kia ended up owing its banks $3.5 billion, five times shareholders' equity. The courts froze Kia's debts last September. Now the endgame has started, and it's turning into a fight between Korea's two biggest chaebol, Hyundai and Samsung. Both could benefit from snapping up their distressed rival. In addition, Ford Motor, which already controls 17% of Kia, is scrambling to protect its interests and might even enter the takeover fray.

The stakes in the battle are high. Kia is just one of more than 10 big-but-broke chaebol still turning out products while locking up credit that healthier companies badly need. The problem: pulling the plug on them could cost thousands of jobs. So Korea's President Kim Dae Jung needs to find a solution fast. But turning to Hyundai or Samsung would violate his pledge to reduce the power of the chaebol, which Koreans blame for landing the economy in its current mess. "We don't want to see Hyundai or Samsung become superconglomerates that can control the whole economy," says Lee Doo Won, an economist at Yonsei University.

Kia is a particularly delicate challenge for Kim. Its Asian Motors affiliate accounts for a third of the economy of Kwangju, capital of Kim's native Cholla province, where jobs have long been scarce. And unlike other chaebol, Kia is run by professional managers instead of a single owner and his family. It has focused on autos, shunning the finger-in-every-pie approach of other conglomerates. Until recently, it thrived without developing overly cozy ties with government. Some economists say it's just the kind of U.S.-style company Korea needs to modernize its economy.

Bitterly opposed to a takeover by Hyundai or Samsung, Kia figures it can get off life support-and retain its independence-with a little help from Ford. That strategy calls for Ford to pump in fresh capital while Kia's main creditor, state-run Korea Development Bank, would swap its debt for stock, becoming the biggest shareholder. The bank would then sell Kia shares to individual Koreans. Ford isn't likely to boost its stake much unless Kia's creditors agree to some kind of debt moratorium. But the No. 2 U.S. automaker might still strike a deal, it says, possibly in partnership with Samsung. Ford stands to gain a critical foothold in the Korean market, which has been almost impervious to imports. Building cars locally, it could take on Hyundai, Korea's largest automaker with 43% of the market, and General Motors, which may be joining forces with Daewoo, another Korean chaebol. Letting Ford have a bigger stake would also send an important signal to foreign investors, bolstering the government's claim that Korea is ready to open its doors. "What Korea needs is outside capital," says K.K. Seo, an expert in Asian business at the University of Hawaii at Manoa. "It's very, very important that Ford is involved."

Hyundai, for its part, seems determined to block both Ford and Samsung. It doesn't want a bigger Ford presence in Korea, nor does it want to see Samsung become a serious competitor in the car market. In the short term, buying Kia wouldn't seem to make much sense for Hyundai-it already has too much capacity and the companies' product lines overlap. But the move could help make Hyundai's auto division a stronger player in world markets, where it's up against such heavy hitters as Ford and Toyota.

Meanwhile, as creditors and potential buyers huddle behind closed doors, Kia is doing all it can to show that it's the little company that could. Employees have donated $100 million to the company and lent it an additional $17.4 million, interest-free. Everybody has taken pay cuts of 50% or more, and nobody is getting bonuses. At Kia's Seoul headquarters, visitors sit with their coats on because the heat is turned so low (Kia plans to sell the building too). But Kia's president, Park Je Hyuk, is upbeat. "We are absolutely confident that given a chance, we can bounce back," he says. A devout Catholic, Park says he has lately been praying for "courage and wisdom." He'll need plenty of both.

With reporting by Stella Kim/Seoul