"Change everything with the exception of your wife and children." With this stark statement, Samsung Group chairman Lee Kun-hee, called for a reform in consciousness and a drastic change in work attitudes among Samsung employees. Mr. Lee's remarkable statement was intended to bring home the need for change by Koreans at every level of society in order to overcome the economic crisis. To paraphrase Mr. Lee, one might say, "Sell everything except for your wife and children," has become an appropriate expression to describe the national Korean effort to attract foreign investment since the country entered the International Monetary Fund's (IMF) financial restructuring program. During what Koreans call the "IMF era," the country has waged a virtual war to attract foreign currency. As agreed with the IMF, attracting foreign investment was identified early in the crisis as the surest way for Korea to expedite the restructuring of its corporate sector and increase foreign reserves to prevent a possible second bout of financial turmoil. Daesang Corporation established a precedent in this regard when it sold its lysine division to BASF of Germany for $600 million in March, 1998. Korean companies garnered $5.53 billion through sales of assets or managerial rights in 1998 through to the end of October. Of that total, $3.567 billion was raised in 37 cases, each case involving more than $30 million. Major companies which sold their assets totally or partially include Halla Pulp and Paper, Shinho Paper, E-Mart, Oriental Brewery and Hanwha Machinery. Merger and acquisition professionals estimate the value of assets put up for sale will amount to more than $10 billion including those of massive firms such as Mando Machinery, Halla Heavy Industries, Pohang Iron & Steel Co., Korea Heavy Industries and Construction Co. (Hanjung) and Korea Electric Power Corp. (KEPCO). Some critics express concern that the sale of lucrative enterprises to foreign interests might weaken the domestic industrial structure, ignoring the fact the sales drive is part of a fight for survival by Korea business in the face of the ever-serious financial crisis. Offering the Most Lucrative Divisions Doosan Group chairman Park Yong-o noted, "We must promote foreign investment with the attitude that what is garbage for us is garbage for others, too." Doosan sold its 50.7 percent stake in Oriental Brewery to Inter Brew of Belgium. Meanwhile, Korea's deluxe hotels are bustling with foreign corporate hunters, in-country to explore what opportunities exist to buy domestic enterprises at bargain prices. Despite widespread, often desperate, efforts to attract foreign capital, the nation's top five conglomerates or chaebol failed to make much headway in this respect until the latter part of 1998. By October 1998 the five biggest chaebol could boast of only two projects in which the value of the foreign investment so attracted exceeded $30 million. They include Samsung Heavy Industries' sale of its heavy equipment division to Volvo of Sweden and LG Telecom's sale of 23.5 percent of its equity to British Telecom for $397 million. Corporate negotiations to secure foreign investment have been taking place at a brisk pace since the end of 1998, with progressively more companies putting their assets up for sale to reduce their debt ratios. Those foreign investors who previously maintained a cautious attitude while waiting for a further fall in prices are now looking to start merger and acquisition (M&A) negotiations with domestic enterprises in relatively healthy financial condition, prompted by the increase in attractive assets now on the block and the rush by Korean corporations to unload their real estate holdings. LG Chemicals announced in November 1998 that it had agreed to sell its carbon black business to the German-based Degussa for $170 million. One month later in New York City, Kumho Petrochemicals signed a contract with Columbia International Chemical Co. of the United States on Dec. 19th 1998 for the sale of its carbon black division for $91 million. The takeovers of the nation's two leading carbon black makers has resulted in 70 percent of the domestic market being controlled by foreign companies. The two instances amply demonstrate that only by offering lucrative divisions for sale will Korean business successfully attract foreign capital. "Carbon black is a material used for tire rubber, ink and paint. We anticipated negotiations with Degussa would go smoothly since the division was profitable one," said one LG official. M&A Growth Following British Telecom's equity buy-in of LG Telecom, British information and telecommunication companies are reportedly talking with their Korean counterparts on deals totalling $1 billion. Among the companies now up for sale are Kumho Tires, Mando Machinery, Halla Heavy Industries, the home appliance divisions of Samsung Electronics and LG Electronics, KEPCO's stake in POSCO, and Korea Heavy Industries and Construction. M&A analysts say that negotiations worth as much as $10 billion are now underway. The Kumho group said it is now talking with Michelin, Pirelli and Bridgestone, which have all shown interest in acquiring its tire making subsidiary. General Motors' Delphi and Ford, set to take over Halla Air, the car air-conditioner manufacturer, are in competition to take over Mando Machinery, Korea's largest auto parts maker. GM, in particular, has been actively seeking to take over Mando, recently signing a contract with the company to purchase $200 million worth of auto components. British Telecom and other United Kingdom-based companies, Vodafone, Cable & Wireless and GE-Marconi, are in negotiations with three Korean telecommunications companies. As much as $1 billion worth of foreign capital will be invested in the information and telecommunications sector, should the negotiations proceed satisfactorily. Investment through the acquisition of existing stocks amounted to $1,110 million, or 16.1 percent of total FDI. Investment through acquisition of new stocks including those purchased in M&A agreements such as factory and business division takeovers reached $3,455 million, accounting for 50 percent of all FDI. Forty-nine of the 112 cases of investment worth $10 million or more, some 43.8 percent, took the form of merger or acquisition. Investment Appeal By region, investment from Japan and European Union underwent a remarkable increase. In particular, investment from Japan rose to $483 million as of the end of November 1998, a 94 percent increase over the same period in 1997. Investment from the European Union also increased, growing by 35.5 percent from a year earlier. By industry, 63.7 percent of the investment took place in manufacturing. One of the most successful examples of foreign investment is that involving Appeal Telecom. The company drew special attention by selling 51 percent of its equity to Motorola for $45 million in 1998. Appeal Telecom is one of the most lucrative venture businesses in Korea and the equity sale was made on fairly favorable terms for Appeal. The company's president, Lee Ki-hyung, launched the business in 1994 to manufacture an ultra small-sized personal communication service handset marketed under the brand name, M.I.Tel. By becoming a supplier of 79-gram handsets to LG Telecom, the company has emerged as one of the most promising venture businesses in Korea. Listed on the KOSDAQ in late 1997, the company is projecting it will have achieved180 billion won in sales by the end of 1998, up 200 percent from 1997. Of the 51 percent stake sold to Motorola, some 25 percent was personally owned by Mr. Lee on which he netted 27.5 billion won after taking into consideration his original investment of 2.5 billion won. In addition, the deal paved the way for Appeal to export handsets to Motorola under the original equipment manufacturing (OEM) system. FDI, which plummeted following the outbreak of the financial crisis in late 1997, is expected to continue to undergo a remarkable expansion. The overwhelmingly positive appraisal of Korea's new investment climate by foreigners and foreign financial organizations heralds a further influx of foreign capital. International Monetary Fund (IMF) director Michel Camdeduss said Nov. 25th 1998 "According to a variety of economic indicators, the economies of Korea and Thailand are approaching a turnaround and are expected to enter full-scale recovery in 1999." Selling Cos. & Businesses in 1998 (unit:U$ million)
Pressuring the Chaebol Morgan Stanley also predicted in a report released Nov. 25th 1998, that the Korean economy will bottom out within a matter of months. Furthermore, Moodys' on Dec. 4th 1998 gave Korea's won-denominated state bonds a Baa1 rating, which indicates their suitability for investment. As a result of constant pressure brought to bear by the Korean government, the chaebol are abandoning the so-called "fleet management" system of launching innumerable subsidiaries which led to excessive expansion. President Kim Dae-jung, his economic ministers, chairmen of the major conglomerates and heads of creditor banks reached an agreement to this effect Dec. 7th 1998. In order for the agreement to be carried out without delay, the chaebol agreed to provide progress reports on its implementation at quarterly meetings to be presided over by President Kim. Essentially, the chaebol have agreed to focus on three to five core businesses each by selling or swapping less competitive divisions and seeking foreign investment. Korea's five major conglomerates have realized 23 trillion won through self-rescue efforts such as asset sales, business divestitures, mergers and spin-offs. They now plan to garner 20 trillion won through stock increases and $26 billion by attracting foreign capital. In the process the number of subsidiaries of the five conglomerates will be reduced from 264 to 130. Hyundai has chosen to concentrate on automobiles, construction, electronics, heavy industries, financing and services as core businesses, while Samsung will focus on electronics, financing, trade and services. Daewoo's main businesses include automobiles, heavy industries, shipbuilding, trade, construction, financing and services, while LG has chosen chemicals and energy, telecommunications, services and financing. SK will focus on energy and chemicals, information and communications, construction, distribution and financing. By chaebol, the number of subsidiaries will shrink from 63 to 30 for Hyundai, 65 to 40 for Samsung, 41 to 10 for Daewoo, 53 to 30 for LG and 42 to 20 for SK, respectively. Achievable Target The Bank of Korea, the country's central bank, tallied the foreign reserves available as of Dec. 15th, 1998 at $48.77 billion, more than five times the less than $8 billion on hand at the end of 1997. Even research institutes which take a negative view of the prospects for the Korean economy in 1999, such as the Korea Development Institute (KDI), are forecasting a current account surplus of $30 billion by year's end. The Korean government has set a target of a surplus of $20 billion in consultation with the IMF. Some critics have questioned whether the government's 1999 FDI target of $15 billion is feasible. "The target is achievable," a government official said, citing the progress of the restructuring drive in the business and banking sectors as well as the continual abolition of regulations. The final figures for December indicated FDI topped a record $8.9 billion for 1998, an increase of 27.7 percent on 1997's total. November's inflow of $1,378 million was previously second-largest monthly volume after the $1,565 million recorded in April 1997, up an incredible 1,414 percent from a year earlier, and 54.1 percent on October. Both figures, though, were overshadowed by December's almost $2 billion. December's record means that in value terms FDI increased for the eight consecutive months from May 1998. Wang Yun-jong, senior researcher at the Korea Institute for International Economic Policy (KIEP), said, "It appears foreign corporations are increasing their investment in Korea in the firm belief that the economy will recover from a long term perspective." He foresaw FDI increasing dramatically from early 1999, beginning with strong influxes of capital from the U.S. The full-scale opening of the real estate market has also helped to encourage foreign investment. In the first half of 1998, the acquisition of land by foreigners on a monthly average amounted to 436,360 square meters in 50 cases. However, the situation changed radically after June 26, 1998 when the government introduced measures to liberalize the real estate market. In July 1998 land acquisition by foreign interests soared to 2,489,260 square meters in 244 cases. Aggregate land purchase by foreigners in the June 26th-Oct. 25th period rose to 7.8 million square meters, representing an inflow of $660 million to the domestic economy. "Foreign investment in the real estate market is forecast to take place at an even more rapid pace following the stabilization of the foreign exchange rate and the bottoming out of the national economy," said Kim Jae-jong director of land policy at the Ministry of Construction and Transportation. So far, real estate acquisitions by foreigners have been m ainly for business purposes, but for the future it is anticipated speculative purchases of housing and land will occur more frequently. The improvement of the nation's credit standing in international financial markets is also expected to have a positive effect on FDI. Inbound investment surged following the release of a report by Morgan Stanley in October 1998 recommending further investment into Asia. In October FDI increased to $894 million from $534 million the month before, while in November it leapt to $1,378 million. The influx decreased slightly with the onset of December, with FDI totalling just $40 million by the 6th of the month. However, levels began to increase again from Dec. 8th, prompted by marked gains in stock prices and leading to the month's outstanding totals. Establishing Beachheads The weakened financial condition of Korean business, the depreciation of the Korean won, the drop in stock prices and the cost of effecting takeovers, have all led foreign investors to seek further investment in the Korean market through a variety of means. Korean companies have also been attempting to lure foreign capital in the process of the restructuring corporately while foreign enterprises have been looking to utilize existing facilities as bridgeheads to penetrate other Asian markets. The negotiating position of Korean business in this regard has been seriously undermined because of their poor financial status. The result has been foreign companies have preferred outright takeovers rather than joint-ventures with their Korean counterparts. The appreciation of the U.S. dollar against the won and the decline in stock and real estate prices has meant the cost of taking over Korean companies has fallen considerably, as evidenced by the increase of foreign investment into the domestic market through M&A. Foreign investors have opted for the takeover of existing companies over "greenfield" investment since the former requires less cost. Statistics indicate foreign investment through M&As reached $1,029 million in 186 cases from January to October 1998, representing 18.6 percent of total registered foreign investment compared with 10 percent in the whole of 1997. The extraordinary drive by Korean businesses to attract foreign capital has paid off handsomely. For instance, LG Telecom's success in attracting an equity buy-in by British Telecom Oct. 1st 1998 began with LG Group chairman Koo Bon-moo personally contacting his British counterpart. Figures show that 34.3 percent of 102 investment projects involving more than $10 million were in the form of M&As, an indication that an increasing number of companies are restructuring corporately through securities sales. Investment into Korea has been moving at a swift pace since the IMF financial program began, as foreign investors have sought to capitalize on Korea's potential as a regional manufacturing platform by taking advantage of the widespread financial weakness throughout Korean business. German corporations have been most aggressive in this respect, making investments worth $1.5 billion over 54 projects from November 1997 to May 1998. According to a survey conducted by the Korean-German Chamber of Commerce and Industry, 98 percent of German corporations presently doing business in Korea are considering new investment. On a visit to Korea following his company's $230 million takeover of Halla Pulp & Paper, Bowater president Arthur Fuller, stated the resultant company, Bowater-Halla Paper Co., will serve as a beachhead to make further inroads into Asia markets including China. Mainstay Businesses The chairman of FAG, which took over the bearing division of Hanwha Machinery for DM 380 million to form FAG Hanwha Bearing Korea, said the new company will be the mainstay of the German firm's Asian business. Similarly, Mexican multinational Seminis took over the nation's leading seed companies, Hungnong and JungAng, for $100 million and $18 million, respectively, and Novartis, a Swiss company, purchased Seoul Seed for $32 million, to further penetrate the Asian seed market. The lure of further Asian business was a prime consideration in Volvo's takeover of the heavy equipment division of Samsung Heavy Industries July 1st 1998 to form Volvo Constru-ction Machinery Korea. The company now plans to invest $200 million in building a plant in Chongwon, Kyongsang-namdo province to supply global markets. Clark of the United States which took over the fork lift division of Samsung Heavy Industries July 1st for $30 million, will build a state-of-the-art research and production center in Changwon for the purpose of exporting product to the United States and European Union. Local DuPont subsidiary DuPont Photomask Korea, established in 1996, plans to build
a $50 million research and development center in Ichon, Kyonggi province and replace
its existing facilities with state-of-the-art plant. Long-established Motorola Korea has recently undertaken a series of investments designed to launch a new phase of growth in the Korean market. Capping the opening of a 200 billion won non-memory semiconductor factory in Paju, Kyonggi province in October 1997, it later announced it would invest a further $300 million in May 1998. Of this total, $150 million will go to building a software center and expand semiconductor production lines, while the other $150 million will be utilized in the communications sector. The company also invested $13 million in the purchase of PanTech, a leading firm in the telecommunications area. Leading U.S. chemical firm Dow Chemical announced Oct. 14th it would launch a $320 million 50/50 joint venture with LG Chemical to be called LG-Dow Poly Carbonate. LG Chemical explained that the joint- venture firm would supply products for Asian markets which, with the exception of Japan, have grown by more than 10 percent annually. Putting Infrastructure in Place Analysts concur that Korea's request to the IMF for assistance in December 1997 was the result of Korean industry pursuing growth mainly through increases in capital rather than by the efficient usage of capital and improving productivity. Management decisions without consideration of efficiency and profitability have resulted in perilous financial conditions throughout Korean business and a fall in overseas credit ratings. They also note the financial crisis might have been curbed had there been a sufficient influx of foreign investment. To promote much-needed inbound foreign investment, the Korean government revised associated restrictions or abolished them outright. Additional categories of business were opened to foreign participation, increasing the proportion so liberalized to 98.9 percent of the total. Almost all areas of economic activity were liberalized including capital and foreign currency transactions, and the corporate and real estate markets. The tripartite committee composed of representatives of labor, management and government achieved a consensus of laws allowing layoffs and other flexible labor policies. The centerpiece of the government's liberalization drive, however, is the Foreign Investment Promotion Act, which emphasizes promotion and assistance of foreign investment rather than control and regulation. The act also features an expanded range of tax incentives, specific assistance for investment projects, provides for the setting up of regional investment promotion centers, the immediate addressing of complaints, the designation of foreign investment zones and the striking of the foreign investment committee. Under the new act, existing regulations were simplified and tax advantages for foreign businesses were enhanced. An additional avenue through which to foster inbound capital was established July 30th 1998 when the Korean government signed an agreement with the United States to promote mutual investment, a measure agreed on during President Kim Dae-jung's summit meeting with U.S. President Bill Clinton the month before. The agreement became effective almost immediately, the U.S. Overseas Private Investment Corporation (OPIC) resuming its assistance to American businesses wanting to invest into Korea after it had discontinued the same in 1991 citing anti-union activities by the government of the day. The move by OPIC is expected to considerably boost investment into Korea since it is the body responsible for issuing investment insurance, direct loans, and loan guarantees to U.S. corporations wishing to invest abroad. With so extensive a regulatory, financial and political infrastructure in place, the stage is well set in Korea to break further records in attracting inbound investment. by Soo-Deuk Shon
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