Until last year, Daewoo Motor was the automotive arm of the Daewoo Group, one of South Korea's leading chaebol, or conglomerates. Much like its larger rival the Hyundai Group, Daewoo's fortunes began to unravel after the onset of the Asian crisis in late 1997. The collapse of the Korean economy ended decades of rapid growth. It also destabilized a corporate structure based on high debt leverage and intricate webs of subsidies and financial support linking chaebol affiliates.
For much of 1999, South Korea's economic fate hung in the balance, as a possible default by the Daewoo Group threatened to pull the props out from under the country's shaky banks. Since then, the group has largely disintegrated, with stronger units - such as consumer electronics maker Daewoo Electronics - breaking free from the financial burden of their money-losing affiliates.
Daewoo Motor, one of the group's weakest members, now faces collapse. Creditor banks gave it some breathing space in August 1999, allowing the company to reschedule debt while it searched for a foreign buyer. The banks' patience ran out earlier this month, however, after General Motors Corp. failed to reach agreement on a takeover and Daewoo's labor union rejected a cost-cutting plan that would have eliminated 3,500 jobs, or one-fifth of the workforce. The company was declared bankrupt on Nov. 8, after failing for three consecutive days to redeem maturing commercial paper.
Korean law allows insolvent companies to apply for court receivership, a protected status similar to Chapter 11 in U.S. bankruptcy law, and continue operations without seizure of their assets. Daewoo Motor has not been placed in receivership, but the prospect has been devastating for its subcontractors, which depend on just-in-time supply links with the company. Daewoo's parts suppliers have quickly run short of funds themselves, since banks refuse to discount the company's bills for fear of being unable to collect payments. The suppliers, in turn, have refused to ship parts without immediate cash payment. Since Daewoo has no cash, production at its main plant outside Seoul has ground to a halt.
The breakdown of Daewoo's supply chain is a serious blow to Korea's recovering economy, since growth in manufactured exports has helped pull the country out of the recession of 1997-1998. The shutdown also wiped out much of the intangible asset value of the company, as dealerships and car buyers turn to more reliable suppliers. Meanwhile, General Motors - which had been seen as Daewoo's potential savior - has now returned as a scavenger. Rather than buy the entire company and take over its unpaid debts, GM and its Fiat affiliate propose to pick off a few of Daewoo's most desirable assets - including an ultra-modern assembly plant in Poland - and leave the rest for creditors to fight over.
President Kim has refused to pressure Daewoo's main creditors, including state-run Korea Development Bank, to give the company a break. With dozens of other indebted firms also slated for closure, his uncompromising stance has caused a near-panic in the Korean labor movement. The unions plan to aim this year's traditional "winter struggle" squarely at Kim's administration and its free-market policies. In a sign of how thoroughly Kim has broken with his former allies on the left, the president is now threatening police action against unauthorized strikes and protests, invoking laws that hark back to the era of military rule.
All signs point to the unions losing this fight. In spite of jitters over Daewoo Motor - and the looming risk of an even bigger corporate failure at Hyundai Engineering and Construction, the nation's largest civil contractor - Korea's tough, orthodox economic reforms are starting to bear fruit, producing the fastest turnaround in GDP growth of any crisis-stricken Asian nation. Middle-class opinion in Korea has always been wary of the labor movement, and Kim may well persuade the public Daewoo's collapse was the direct result of union leaders' intransigence. With many workers intimidated by the growing risk of unemployment, labor's planned winter of discontent is likely to fizzle.