The tale of Daewoo serves as one of the earliest warning signs of the corporate governance breakdowns that later plagued leading companies around the world – Enron, Worldcom, Arthhur Andersen, Parmalat, e.t.c.
Daewoo was a revered Korean conglomerate. It had become the country’s symbol of economice revival and growth, earning the admiration and respect of its citizens and many people worldwide.
At its peak, Daewoo was a sprawling enterprise with over 320,000 employees in 500 domestic and foreign companies that operated in over 110 countries.
This business empire once produced 10% of South Korea’s gross domestic product.
According to one anecdote, DAEWOO founder Kim Woo Choong sold newspapers when he was young. Competition was fierde in wat-torn Korea and he was one of the fastest delivery boys in the neighborhood. He then devised a strategy that solidified his position as the most profitable delivery boy in the region. He discovered that he lost significant time against his competitors in the payment collection process so he decided to first deliver as many newspapers as he could and then collect payment afterwards. He calculated that he would be far more profitable even if he did not receive payment for some newspapers. He soundly beat out his competitors.
Mr. Kim would later in life apply this creative debt management strategy, which he had practiced and perfected as a kid while delivering newspapers, to build up one of the largest business empires in Korea and in the world. But debt financing has a limit and carries a risk, as Mr. Kim would, regrettably, discover later.
In 1967, 31-year-old Kim Woo Choong founded Daewoo industrial, a textile exporter, with just five employees and $ 10.000. The two Chinese characters for Daewoo meant “Great Universe,” true to the ambitions of the young entrepreneur. From its humble beginnings, business expanded rapidly and, by 1972, it became the second largest exporter in Korea. Daewoo played a major role in Korea’s economic success with the country transforming itself from an underdeveloped backwater into a developed nation in the span of forty years. Under Kim’s guidance, by 1996, Daewoo became the world’s largest transnational entity among developing c o u n t r i e s, surpassing such companies as Xerox, Amoco, Volvo, Fujitsu and Glaxo Wellcome
There were five major business conglomerates or Chaebols in South Korea – LG, Samsung, sunkyong, Hyundai and the Daewoo Group. Kim had established the Daewoo Group as a textiles business in 1967.
Politically, Daewoo benefited from Kim’s instincts and apparently his personal relationship with President Chung Hee Park, the controversial autocrat who ruled Korea from 1961 until 1979. Mr. Kim’s father had taught Mr. Park in school.
Although a compared to other established conglomerates, Daewoo blossomed under Park’s industrial policy during the 1960s and 1970s. Kim managed to extract concessions from the government, especially when taking over distressed companies.
The then Korean President Park Chung Hee (Park) helped Kim by handling over the management of bankrupt companies, which were slated for restructuring by the Korean government. Park also helped Kim with essential resources and official assistance.
Funded by government-approved borrowings, the Daewoo Group witnessed significant growth and diversified into several businesses during the 1970s and 1980s. In the early 1990s, the Group expanded overseas and soon became the 18th largest corporation in the world. The Group had more than 400 projects in about 85 countries.
A key cornerstone of Daewoo’s business strategy was its orientation toward export. Unlike other chaebols, Daewoos championed an international focus from its beginning. The Group prided itself on its ability to spearhead the opening of new markets overseas. By 1979, it became the largest exporter in Korea, following the government’s economic development plans of export- led growth.
The Groups management believed that expansion equaled success. However, little attention was paid to the profitability of t h e n e w businesses.
Daewoo engaged in all manner of sharp practices to keep itself afloat and to create a semblance of economic success. Daewoo’s Motor attempt to cover up its failed $200 million investment in a car plant in Ukraine is a good example. Unable to get parts to keep the plant running, Daewoo discretely shipped cars built in Korea to the Ukrainian border, where they were taken apart, and sent to the plant for reassembly.
It also engaged in “earnings management “on a large scale. To cover up losses or window- dress its balance sheets ,subsidiaries often sold assets within the Group at highly inflated prices and book resulting capital gain as profit.
Many other fictitious transactions occurred. There was a 650 million slush funds set up to bribe politicians. In November 1995, Kim and a group of top Korean executives were charged with paying bribes to Roh Tae Woo, who was Korea’s President from 1988 to 1993, from the slush fund: Kim got a suspended jail sentence for that.
Daewoo forged documents to create an import-export transaction that never was but which resulted in $2.6 billion fictitious profit. The group diverted an additional $1.5 billion from car –export revenue. Industry executives and analysts think that at least part of the money was earmarked for the chairman’s personal use and for bribing government officials around the world
In the late 1990s, the leading South Korean car manufacturer, Daewoo Motors (Daewoo), was in deep financial trouble. For the financial year ending 1999-2000, Daewoo generated revenues of $197.8million and net loss after tax of $10.43billion.The company’s revenues had dropped by 94 percent and the loss was regarded as South Korea’s largest ever corporate loss. Market share also shrank from 33% in 1998 to 23% in 2000.
Daewoo’s problems started when Kim took huge debts to expand the automobile business. About $1.3 billion was spent on Daewoo’s expansion in developing countries. It acquired an additional $1.1billion debt to buy Ssang Yong Motor, in a joint venture with General Motors, Korea. Intent on quickly establishing a foothold and dominating the automobile market at home and abroad, Deawoo sought growth and market share instead of focusing on profitability and research and development
Meanwhile, Daewoo’s financial structure precariously relied upon debt. While debt-to-equity ratios for chaebols (Korea’s name for conglomerates) exceeded 400 percent, Daewoo surpassed everyone in its over-reliance on debt. As early as 1988,with over $11.2 billion in borrowings, Daewoo stood as Korea’s most indebted conglomerate. Its debt gearing allegedly reached a high as 2,000 percent. Critics claimed that Daewoo succeeded because of its ability to extract support from the government through rent-seeking while leveraging itself that it had become too important to be allowed to fail.
Daewoo Group ran into deep financial trouble in 1998 due to the Asian financial crisis, increasingly thin relationship with the Korean government under President Kim Dae Jung, and its own poor financial management.
According to a 1999 article by the “Economist”, When the economic crises forced most of the chaebols to cut back. Daewoo brazenly added 14 new firms to its existing 275 subsidiaries- and is in a year where the group lost a combined 550 billion won($458m) on sales of 62 trillion won ($51 billion).
At the end of 1997,South Korea’s four biggest chaebols averaged debt of nearly five times their equity .But while Samsung and LG two other considerable chaebols cut back during the subsequent year of economic crisis, Daewoo acted as if nothing had changed : it added 40% more debt.
In late 1997 , the Korean currency, then, won fell from 900 won to 1960 won to the dollar in less than four months. Companies with dollar-denominated debt came under immense financial stress as the local currency equivalent of the debt multiplied.
Daewoo might have weathered the storm had it restructured from the onset in early 1998. Rejecting a contractionary approach, Woo Choong Kim instinctively pursued aggressive growth, particularly in the automobile industry. He declared that “Daewoo will over come the crises through expansionist measures(like in the past)because given the opportunity. We cannot embrace the future if we flinch at a time of recession.”
While others retracted, the Daewoo Group’s sales therefore increased by 25 percent in 1998.The Group spent 10 trillion won ($7.14billion)in sales promotions during this critical period
Just how flawed it was became apparent in mid-1999, when Mr.Kim had to acknowledge that his companies, which had acquired a global reach in a debt –flued expansion binge, could not pay their creditors. By the time the banks that took over the Daewoo group had calculated $80 billion in liabilities.
After hiding as a fugitive overseas for over six years, Daewoo’s chairman, Woo Choong Kim, returned to Korea in June 2005 to face criminal charges. In 2006, he was sentenced to eight and a half years in prison .
In his own words, he claimed that “my big mistake was being ambitious, especially in autos. I tried to do too much too fast”