By Don Southerton
Few events in recent history have impacted South Koreans as significantly as the 1997-98 Asian financial crisis, commonly called the IMF Crisis. Thousands of Koreans lost their jobs and lifesavings as the crisis rocked the foundations of most Korean industrial groups or chaebol. In fact, no fewer than five major chaebol failed early in the crisis amid others who had to petition for bankruptcy. In the end, as many as 18 of the largest 30 chaebol would risk bankruptcy, and no more than a handful of the top 30 groups were seen as financially sound.
For Kia Motors the IMF Crisis would be devastating. Although overseas sales and growth were steady, by early 1997 with ever-increasing development and labor costs, Kia found themselves heavily in debt.
Perhaps of equal concern, Kia's difficulties were also a signal of problems throughout the South Korean automobile industry. The big three Korean automakers -- Hyundai, Kia and the Daewoo Motor Company—had created more capacity than needed for the once rapidly growing Korean domestic market. Adding to the pressure were plans by the Samsung Group to enter the car market, building a state of the art plant with the assistance of Nissan.
When the IMF Crisis ripped through the region, Kia’s debt load made the automaker extremely vulnerable. Strapped for cash, Kia looked to the government for an emergency loan. Meanwhile, an increasing number of Korean companies began to suffer similar financial challenges and they, too, sought government assistance.
In reaction to the crisis, international credit agencies downgraded the ratings of Korean banks. This led to a tightening of credit, which made it nearly impossible for debt-laden companies, Kia included, to borrow additional funds. As the economic situation grew worse across South Korea, domestic cars sales plummeted, further impacting Kia’s dwindling revenue and cash flow.
By October 1997 it was clear that additional funding for the beleaguered Kia would not be forthcoming from private banks. With few options, the government took over the company and placed Kia in a receivership in order to stave off bankruptcy and job losses.
A number of other factors also contributed to the collapse of Kia Motors. Some were beyond the control of its management. Others included the practice of Kia Motors and most Korean chaebol to seek market share regardless of the impact on financial markers, such as high debt-equity ratios and cross loan guarantees to affiliates. To gain a better understanding we need to look deeper.
• First, the company’s profitability suffered prior to the IMF Crisis. In particular, excessive domestic market competition was triggered by Daewoo’s interest-free sales campaigns from the early 1990s. Kia also carried a growing burden of debt as a result of over-expansion of production capacity in its domestic and overseas plants. Moreover, Kia made huge investments to develop and then ramp up production of their own passenger car models, the Sephia and Sportage.
• Next, following the model of Korea’s most successful industrial groups, such as Hyundai, Daewoo and Samsung, the company sought to diversify their core business by acquiring a steel-manufacturing firm (renamed the Kia Special Steel), establish a constructing company (named the Kisan), and form a trading company (named Kia Inter-trade). Most of these new affiliates operated at huge losses and contributed significantly to the mother company’s financial crisis.
• In addition and rarely discussed was the adversarial and costly takeover attempt by the Samsung Group. Kia management barely defended themselves against Samsung’s M&A attempts. More damaging, Kia’s vulnerability was widely exposed to the finance community during the takeover attempt, causing a sharp drop in their stock market value between 1996 and 1997.
• Finally, as a smaller professionally managed and not family-run company, Kia was viewed more harshly by the Korean banks than larger, more diversified and politically connected Hyundai, Samsung and Daewoo. In fact, unlike Kia, the larger chaebol were seen as “too big to fail” and so critical to the Korean economy that the government would take extreme measures to support and bolster them financially.
Once in receivership Kia Motors was soon joined by a growing number of Korean companies. The government was not in a position to manage the growing list of failed firms and, therefore, sought a buyer for Kia Motors. A few foreign investors, including GM and Ford, considered bidding for the company. When terms set by the creditors were seen as unfavorable, both GM and Ford stepped aside, leaving Hyundai, Daewoo, and Samsung still highly engaged in a bidding war.
Posturing itself well, Hyundai eventually won the bid and purchased a controlling interest in its former rival Kia Motors. Fortunately, for Kia Motors the Hyundai Group acquisition was an opportunity for a new start.
Part 6 in the series will examine the strategy, tactics, and first-hand accounts instituted by the new management that would by late 1998 and into 1999 set a trend for today’s global success.
This article is from content included in the forthcoming The Hyundai Way book. For more details, see http://www.facebook.com/TheHyundaiWay