Norske Skog and Abitibi Consolidated had more in common than the fact they were competitors in the international paper market. Both too were faced with the challenge of mature markets and relentless shareholder demands for higher corporate value.

The solution for both was look to Asia for investment opportunities which promised market growth and enhanced economies. The result almost three years later is the formation of a joint venture in which Norwegian Norske Skog, Canadian Abitibi-Consolidated and former Korean competitor Hansol Paper each have a one-third interest. Provisionally named Pan Asian Paper Company (PAPCO), the $1 billion joint venture has been created essentially by investment in state-of-the-art Korean owned and operated facilities in both Korea and elsewhere Asia. The result is the largest newsprint manufacturer in Asia outside of Japan, claiming 30 percent of the non-Japan Asian market, and an 18 percent market share in the Asia-Pacific region.

With an annual capacity of 1.425 million metric tonnes from four world-class plants in Korea, China and Thailand, PAPCO weighs in at three times the size of the nearest competitor, and equipped with assets which on average are the newest and hence most efficient in the industry worldwide.

Omund Revhaug, PAPCO chairman and CEO, and formerly Norske Skog's executive vice president for business development, explained his company's rationale in seeking an Asian investment. "If you have a goal to increase shareholder value over time, how do you do that? The companies consistently increasing their shareholder value are those consistently growing their business,"he said. "The question then is: 'Do you want to grow your business?' If so, you come to Asia."With scant growth of newsprint consumption in North America and mature demand in Europe, "for growth you have to do it through merger and acquisition, not through new capacity."

Norske Skog, a leading European manufacturer of newsprint and magazine paper with seven mills in Norway, France, Austria and the Czech Republic, has been selling in Asia for many years but without any local productive assets. "Three years ago the company decided to look for business opportunities in Asia, so we set up a small office in Singapore in 1997, said Mr. Revhaug. "It was really in Southeast Asia we saw possibilities and opportunities. Korea was regarded as a closed area and Korean companies weren't interested. They were competitors looking for the same thing."

Partner Search

The world's largest manufacturer and global marketer of newsprint and uncoated groundwood papers, operating 19 mills throughout North America and the United Kingdom, Abitibi-Consolidated had been looking for a local Asian partner for three years. The company had been shipping newsprint into Asia, mainly from its operations in Canada. "Korea was not open,"said William (Bill) H. Sheffield, Abitibi-Consolidated executive vice president, strategic marketing and planning, and PAPCO board member. "The government and companies were not interested. China, a little more so, so we initiated dealings there. After the crisis [of December 1997] though, the door was open."

Terje Engevik, Norske Skog representative director in Korea and shortly to join PAPCO as its Chief Technical Officer, said his company's efforts in Asia were directed to the "Entire region, not a specific country. However, by December 1997, we'd seen many things and it seemed the most efficient newsprint mills, their operating management, came out of Korea."

Said Mr. Revhaug, "When the crisis hit, we were very much geared to take advantage of it. We came to Korea and Thailand and bought very quickly in 1998."

What Norske Skog bought into were two mills built by the Korean Shinho Group. Specifically, Norske Skog purchased outright the ailing chaebol's 180,000 tonne-capacity mill in Chungwon, Korea, which commenced operations in March 1996; and Shinho's 75 percent equity share in a 120,000-tonne capacity Thai mill which came on stream in 1994. The deals were completed in mid-August 1998.

At the same time, exploratory discussions about forming a joint venture were under way between Abitibi -Consolidated and Hansol Paper, then the second-largest manufacturer in non-Japan Asia of newsprint, wood-free paper, and white duplex board. Hansol's Chonju plant was and remains the largest newsprint facility in the world. "We had talked to Hansol as early as January 1998,"said Mr. Engevik. "We wanted to invest in Hansol but they had a different concept of how it would work, so we parted. Then Hansol came again."

In the meantime, Norske Skog had made a decision regarding investment outside the developed world. "We wouldn't be alone,"said Mr. Engevik. "We would have a strategic partner."

Focus on Newsprint

Se Kang Oh, PAPCO chief financial officer, but previously responsible for Hansol Paper's overseas investment drive said prior to the crisis his company was extremely aggressive in expanding its capacity. "Over the five years before the crisis, we installed two machines consecutively at our Chonju plant. That's when Korea switched from being a net importer to a net exporter,"he said. "Also, overseas, we were trying to expand capacity to capitalize on opportunities in Southeast Asia."The onset of the crisis forced Hansol to seek outside investment in order to restructure. "When the crisis hit, we couldn't find the resources to put into our overseas investments, so we had to rationalize,"said Mr. Oh. "We had to find a solution, and eventually we devised a package which included four mills."

Hansol Paper's initial package which it brought to the market to find a partner comprised its main business of newsprint as well as its fine paper and duplex board lines. However, the plan foundered as Hansol discovered investor interest tended to be specific to one product. "Some companies had an interest in newsprint, some duplex board, some fine paper, but the biggest interest was in the newsprint business because it was known that Hansol was strong in that area and that the Chonju assets produced very high quality,"he said. Accordingly, Hansol came to the conclusion that the company would benefit most by introducing a partner into its newsprint business "because it was the most attractive area and for us to get the best return," Mr. Oh added.

While Hansol had adopted a three-business investment strategy, Norske Skog's initial January 1998 approach focussed solely on newsprint, followed later by a second contact in tandem with a partner. After Abitibi-Consolidated's August 1998 advance, the Canadian company and Norske Skog approached Hansol together. "Finally, three parties were involved in the discussions, but the synergy was effected in the newsprint business", said Mr. Oh.

Both Mr. Revhaug and Mr. Sheffield stressed their respective companies wished to concentrate on newsprint. "That's our core activity,"said Mr. Revhaug. "Fine paper and board were out of the question."

Under the terms of the joint venture agreement, all three companies are equal partners, each owning one-third each of the new company. Abitibi-Consolidated's input to PAPCO was $200 million in cash. Norske Skog invested its 100 percent equity holding in the Chungwon mill it bought from Shinho in 1998, plus the 75 percent share in the Thai mill previously owned by the chaebol, plus some cash equivalent to $200 million. Thus invested, PAPCO then purchased two Hansol properties. Firstly, it bought Hansol's established newsprint business represented by its Chonju plant, its order book, and its current business. Secondly, PAPCO purchased Hansol's 53 percent stake in the Shanghai Potential mill, a joint venture Hansol formed with an American company which commenced operations in February 1998. Hansol's equity contribution to PAPCO is gauged also at $200 million.

Opportunities to Rationalize

A marketing agreement between the partners provides for all paper manufactured by Abitibi-Consolidated and Norske Skog destined for Asian markets, currently some 400,000 tonnes annually, will be sold by PAPCO.

Conversely, any PAPCO produced paper exported to the Americas will be marketed by Abitibi, while all exports to Europe, the Middle East and Africa, will be sold by Norske Skog. Total PAPCO exports to these areas amount to 600,000 tonnes annually.

The area of freight flows is just one where opportunities for economies are evident in the new arrangement. "If you look at this company as an Asian strategy for three companies,"said Mr. Sheffield, "regarding the transportation issue, there has been 600,000 tons coming out of the region, and 400,000 tons coming in. We'd like to put that money in the pockets of our shareholders rather than those of the container companies."

Said Mr. Revhaug, "We're also talking about rationalization of the sales organization. In this kind of industry you're always rationalizing. It goes on and on. A never-ending fight in old, average-aged and new mills."An outstanding achievement of the joint venture is the acquisition of such recent assets whose productivity exceeds that of existing plant in some cases by a factors of four to five. "Approximately 80 percent of production in Thailand, China and Korea will come from machinery less than five years old, so PAPCO will have the newest assets of any paper company in the world, said Mr. Engevik. "In Europe, the average age of machines in the industry is15 years. Our most profitable mill in Europe has three machines, two of which were built in the mid-1960s."The result he said was a boost in efficiency and a 25 to 30 percent reduction in costs.

"It's very difficult in North America to get high value and the industry has not done a good job,"said Mr. Sheffield. "We realized that in the corporate area the growth opportunities were outside North America. We looked at the competences and said we should be in Asia and we turned out to be correct."Mr. Sheffield acknowledged the reforms Korea has made to make the country a welcoming destination for foreign capital served to help the investment process, noting the Korean ambassador to Canada visited him in his office in Montreal before he even arrived in the country to begin serious discussions. He said the "Korean approach has been very aggressive and featured a very consistent theme, that is, 'We want you here. Tell us what you want. Here are the rules.'"

by Charles Duerden

FDI REPORT

First Qtr. FDI up 250 pct. on Last Year

Foreign Direct Investment (FDI) into Korea continued to approach record-breaking levels as figures for March indicated total inbound capital for the first three months of 1999 soared 250 percent in value terms on a yearly basis from $572 million to $2,004 million. The number of committed cases also rose, increasing by 26.3 percent from 308 to 389.

First quarter FDI came close to matching that of the same period in 1997 when FDI topped $2,124 milion over 256 cases. The quarter's end brought cumulative FDI into Korea since 1962 to $35,496 million over 12,078 cases.

Each month in 1999's first quarter recorded higher FDI totals than its counterpart in 1998. March FDI more than doubled on a month-to-month comparison to $727 million from $310 million in February, and almost tripled on a yearly basis from $243 million in the same period last year. The number of committed FDI cases also rose in March, rising 4.40 percent to 141 over the same month in 1998 when 135 such cases were recorded.

Acquisition of newly issued stock through factory establishment and participation in capital increases accounted for $1,512 million or 75.4 percent of first quarter FDI over 321 committed cases. By region of origin, FDI from the United States and the European Union increased significantly throughout the quarter on a yearly comparison. American investment increased by 340 percent to $748 million from $170 million the year before while that from the E.U. recorded an even greater proportional and absolute increase, soaring some 426.2 percent to $863 million from $164 million the year before.

By sector, the lion's share of first quarter FDI went into the non-manufacturing sector, amounting to 67.3 percent or $1,348 million of the total. The pattern in is marked contrast to first quarter 1998 when non-manufacturing investment amounted to 47.2 percent or $270 million of a total of $572 million, the remainder going into manufacturing.

Topping the list of major first quarter FDIs is the $404 million capital increase by Callaghan Investment Partners of Belgium in Korea Telecom Freetel; the $166.67 million outstanding stock aquisition by U.S. Chip Pac Inc. in its local subsidiary; and British supermarket chain Tesco's new stock aquisition in the Samsung Tesco Ltd. wholesale and retail joint venture.

The government accribes the continuing robust nature of inbound capital to the recovery of the international credibility of the Korean economy, the progress of its ongoing corporate restructuring program, and the new environment of opportunity in the investment regimen created by the Foreign Investment Promotion Act.

A Q&A on Investment in the Financial Sector

Q.

A foreign investor is looking to establishing a finance company in Korea. What procedure should he or she follow?

- In order for a finance company to operate it should be registered as a corporation in accordance with the regulations of commercial law. It should also obtain a Certificate of Business Registration from a competent tax office. Apart from that, there is no need to seek additional permission or registration such as prescribed in the "Credit Specialized Banking Law."

Other credit banking businesses (including those engaged in factoring) have been fully open to foreign investors since May 1998 when the Korean government opened the market to all foreign investors. (Previously, market entry was restricted to banking institutions). There are now no extra regulations governing foreign investors who wish to establish finance companies in Korea.

- Currently the Korean finance market is overcrowded. However, the Korean government is still prepared to allow more entrants without considering any extra regulations, as long as these companies are established lawfully, pay taxes, and fulfill the normal functions of a banking institution.

One of the main functions of any finance company is to provide short-term loans to its customers. Accordingly, if any finance company performs any business outside its lawful scope such as the "receipt of semi-savings deposits and the guaranteeing of interest rates" from various and unspecified persons in the form of capital entry by stockholders and the like, it will be subject to the provisions of the law.

Q.

How does a foreign investor gain entry into the credit card business in Korea?

- The "Credit Card Business" is defined as involving the activity described in item B and at least one of the other two items.

A. Issue and management of credit cards

B. Settlement of accounts related to the use of credit cards

C. Recruitment and management of utilizing businesses

- Details on operating a credit card business are prescribed in the Credit Specialized Banking Law. However, considering the characteristic functions of a credit card business such as account settlement, approval of its establishment should be sought from the Minister of Finance and Economy.

- According to Article 3 of the Credit Specialized Banking Law, only existing credit specialist banking companies, or those which will be established in the near future, can obtain approval to commence operations. They include the following:

A banking facility as provided by a presidential decree among those established under other laws or permitted by the Minister of Finance and Economy; and

A company as provided by a presidential decree among those recognized as eligible to run a credit card company as a side business.

- There are no restrictions on the establishment of a foreign-owned credit card company, but regarding its administrative procedures the permission of the Minister of Finance and Economy is required. The competent authority in the Korean government is currently reviewing the regulations concerning the establishment of a credit card company, with particular focus on the need for financial soundness and administrative ability on the part of its principals.

Q.

What support on financial matters does the Korean government give foreign-invested companies?

- Firstly, the Korean government guarantees that a foreign investor can freely remit abroad a principle sum of investment and/or dividends. In addition, tax reductions or exemptions are available for high-tech industries which establish outside the capital area or within Foreign Investment Zones.

However, the Korean government is not considering granting extra financial support for the exclusive benefit of foreign-invested companies, except that such companies are eligible for various types of financial support on an equal footing with their domestic counterparts.

Q.

If a foreign-invested company wants to introduce overseas capital, what procedure must it follow?

- As a foreign-invested company is a corporation established under Korean law, it can raise funds overseas funds in the manner of any Korean company.

- If the overseas loan is short-term with a redemption of less than one year, notification should be made to the chief of a foreign exchange bank (Article 10-39 No. 2 of the Foreign Exchange Control Regulations). However, if the overseas loan exceeds US$30 million with a redemption of more than one year, notification must be made to the Minister of Finance and Economy. If the loan is less than US$30 million with the same terms of redemption, notification should be made to the president of a foreign exchange bank (Article 10-39 No. 3 of the Foreign Exchange Control Regulations).

- Regarding overseas loans with redemptions of more than one year, if the foreign-invested company borrows money from its parent company overseas, or receives a loan from a company capitally related to the parent company with a term of redemption more than five years, it will be classified as "foreign investment" and will accordingly require special processing.

Q.

To what extent is foreign investment in derivatives allowed?

- Derivatives are financial instruments whose value is based on the anticipated fluctuations in price of such basic forms of financial capital as bonds, foreign exchange and stocks, as well as interest rates. Typical derivatives include futures, options, forwardings and swaps.

- Derivatives were originally designed to hedge against future potential financial risks. However, the marked price fluctuations of derivatives, together with the opportunity to effect large-scale transactions for relatively small sums, have resulted in their massive speculative trading, the attraction of which is the opportunity to achieve extremely high profits in a relatively short period of time.

- A foreign investor can freely enter into derivatives transactions as per the following:

Firstly, KOSPI futures trading is fully open to anyone, the basis of this derivative being the Korea Stock Exchange price index. Secondly, over-the-counter trading will be fully opened with the amendment of the Regulation on Foreign Exchange Control on April 1st 1999. Its target transactions are swaps, forwardings, futures, options and most forex dealings. However, direct transactions performed outside foreign exchange banks will only be deregulated after January 2001.

Q.

Is it possible for a foreign investor to establish a mutual fund in Korea?

- There will be no restrictions regarding the establishment and management of a mutual fund and its assets operating company by a foreign investor, insofar as he or she is registered under the relevant law.

- The Korean National Assembly voted Sept. 2nd 1998 to pass the "Bill on Mutual Funds," legislation designed to allow corporation-type investment trusts.

- Since the concept of a mutual fund is relatively new to most Koreans, there will thus exist in the popular mind a distinction between such funds and the contract-type beneficiary certificate sold by existing investment trusts. The corporation-type investment trust is one that is established under corporate law, so the trust becomes a corporation, and the investors its stockholders.

- The required capital to establish a mutual fund is one billion Korean won. The minimum capitalization of its assets operating company is expected to be 10 billion Korean won (in the prior announcement of legislation of its enforcement ordinance).

- When a mutual fund is first introduced, only closed-end investments will be allowed so making midway short covering impossible. To protect investors, the fund will be obliged to make public announcements on a regular basis concerning the earning rate of the working fund as determined by its market price. Also, to prevent a mutual fund coming under the control of any particular company or individual, no one will be permitted to acquire more than 10 percent of the marketable securities issued by its major stockholders or anyone who is especially affiliated with the assets operating company.

-In Europe and the United States mutual funds are considered a substitute for bank accounts as a means of investment, and it is believed that same tendency will manifest itself in Korea in the not-to-distant future.

Hewlett-Packard, Dedicated to Cultivating its Roots in Korea with Sound Investments

By way of contributing to the Korean government's plan to restructure big business, and to reinforce its long-term commitment to Korea, Hewlett-Packard purchased Samsung's stake in HP Korea for $36 million in 1998 and is in the process of purchasing a new building in Seoul. "We constantly do business on a long-term basis," said Joon-keun Choi, president of Hewlett-Packard Korea. "There are no obstacles to investing and building in Korea. Some people say Korea is known as a difficult place to do business, but actually this is not the case."

Choi Joon-keun, president of Hewlett-Packard Korea cheerfully exits a conference room. Discussions for the latest project that will undeniably establish the computer company as a stalwart presence in Korea are progressing well. While companies, local and foreign, bemoan the current state of the economy, HP Korea expects to purchase a building for the company's headquarters in Seoul and to set up an HP finance company for an equipment lease and rental business. "We constantly do business on a long-term basis," said Mr. Choi. "Although the local market is frozen at present and most companies are taking a wait-and-see attitude, we think investing in Korea is a great idea."

HP Korea broke new ground as a full-fledged, foreign-owned multinational, by purchasing Samsung's stake in their joint venture for $36 million in 1998. HP and Samsung joined forces in 1977, with Samsung Electronics Co. Ltd. benefiting from Hewlett-Packard's technical expertise and sophisticated management skills, while HP Korea benefitted by expanding its market in Korea. HP then established HP Korea in 1984 through a joint venture with Samsung, buying 45 percent of HP Korea. Company capitalization was increased to 16.1 billion won by the addition of 8 billion won in 1996.

HP Korea has the largest market share in Korea for Unix computer systems, deskjet printers, and test and measurement equipment. Not surprisingly, the company is at the forefront of global computing, Internet and intranet solutions, services, communications products and measurement solutions. HP Korea is Asia's second-largest company in terms of revenues, and seventh among HP companies worldwide. The technology giant raked in 898.6 billion won in 1997, the most revenues by a multinational company in Korea. It was ranked 142nd among all domestic companies, and first among foreign-invested companies. Despite the sluggish economy, it has shrewdly devised and applied singular strategies, expanding its market share in PC servers.

HP Korea operates a power supply and GPS receiver manufacturing plant in Seoul. Through technology transfer from HP, USA, it is also developing CDMA software which inspects wireless telecommunication station equipment.

"Korea will overcome its financial difficulties within a short period," said Mr. Choi, "not only because Korea has excellent human resources in the form of a highly-educated, hardworking labor force, but also because the government is determined to complete its restructuring program."

Hewlett-Packard Korea

25-12, Yoido-dong, Yongdeungpo-ku, Seoul, 150-010, Korea

Tel: 82-2-769-0114, Fax: 82-2-784-7084

http://www.hp.co.kr