541, Namdaemunno, 5-GA
Daewoo Group, with 1995 sales of $57 billion, consists of 25 companies with various business activities in trading, motor vehicles, heavy industry and shipbuilding, electronics and telecommunications, finance and service, and construction and hotels. The group employs 196,000 including 100,000 local overseas personnel.
Daewoo is a global enterprise committed to developing new technologies with practical applications that address customers' needs; pioneering new business and new markets; developing local market intelligence; building a worldwide network; and cultivating long-term customer relationships.
Daewoo Group was founded by Kim Woo Choong in March 1967. Daewoo means "Great Universe," and although the initial share capital of the company was a modest US$18,000, Kim and his colleagues held great hopes for their business. Today, Daewoo is South Korea's fourth-largest conglomerate, or chaebol, with principal operations in trading, motor vehicles, shipbuilding, heavy industry, aerospace, consumer electronics, telecommunications, and financial services.
Daewoo's success is inseparable from South Korea's rapid transformation from an agrarian country, racked by a long history of hostile invasions and lacking essential resources, to a land where the centrally planned "economic miracle" has become a fact of life. South Korea entered the 1960s with a crippling trade-deficit balance and a domestic market too poor to support indigenous industries. When Korea was divided by the Allies after World War II, the territory north of the 38th parallel inherited all of the country's natural resources. With a far stronger military force than its rivals in the South, North Korea waited less than two years after the withdrawal of U.S. peacekeeping troops to invade. Peace was eventually restored in 1953, but the fear of foreign invasion has remained with the South Koreans and, indeed, has acted as a powerful incentive in the search for economic prosperity.
The Daewoo Group is comprised of 25 subsidiary companies which are linked together in a complicated system of cross holdings. The major company in the group is Daewoo Corporation, which was licensed as a general trading company (GTC) by the Korean government in 1975. GTCs were set up to promote exports, and licenseholders were required to establish offices abroad. Daewoo has a network of over 100 branches worldwide, with some 3,500 different products traded in over 130 countries. In exchange for promoting Korean goods abroad, the Daewoo Corporation was able to finance its expansion through preferential loan agreements, reduced foreign exchange requirements, and improved government advice on exporting and marketing abroad.
The second-largest member of the group is Daewoo Heavy Industries, which was traditionally involved in construction equipment, industrial vehicles, and aerospace-industry products as well as the defense industry, but then added shipbuilding and heavy machinery in 1994 when Daewoo Shipbuilding and Heavy Machinery was merged into it. Daewoo Heavy Industries and Daewoo Corporation are related through cross holdings of stock. Major contributions to the Daewoo Group are also made by Daewoo Motor, Daewoo Electronics, Daewoo Telecom, and Daewoo Securities, the largest brokerage firm in South Korea.
The Daewoo Group is a chaebol, a large conglomeration of companies with widespread interests reporting to a powerful head office, Daewoo Corporation. There are more than fifty chaebols in South Korea; the Big Four are the Hyundai Group, the LG Group (formerly Lucky-Goldstar), the Samsung Group, and Daewoo. In order to understand Daewoo's meteoric rise it is necessary to appreciate the place of the chaebols in the modern Korean economy. Successive governments used the chaebols as their main method of implementing economic strategies. Incentives were offered in the form of massive subsidies, apparently unlimited cheap credit, and protection against foreign competition. On the other hand, Daewoo was forced to take over ailing companies and to enter industry sectors that the company would have preferred to leave to more appropriate competitors.
Early History
Beginning in 1962 the South Korean government instigated a series of five-year plans and forced the chaebols to aim for a number of basic objectives. In common with their Far East competitors, Hong Kong and Taiwan, South Korea's government relied on a strategy that focused attention on the importance of exports as the method to decrease the country's balance-of-trade gap and to strengthen domestic production.
Daewoo began trading in 1967 at the start of the second five-year plan, and benefited from government-sponsored cheap loans on borrowing for exports. The company chose to concentrate on the labor-intensive clothing and textile industries, which would provide relatively high profit margins while utilizing South Korea's major asset, its large workforce. A factory was set up at Pusan and, in 1990, 3.6 million shirts were made there each month. Daewoo further contributed to the increases in South Korea's level of exports, which averaged 38.6 percent growth per annum during this period, by producing uncomplicated light manufacturing machines the construction of which, again, was labor intensive.
The third and fourth phases of Korea's economic recovery ran from 1973 to 1981. The country's most significant resource, labor, was then in high demand, and as wages increased, competitors from Malaysia and Thailand began to erode Korea's comparative advantage in labor-intensive production. The government responded by concentrating on mechanical and electrical engineering, shipbuilding, petrochemicals, and construction. This change in emphasis was designed to continue Korea's export-led expansion and to provide domestic industries with parts that previously had to be imported. A home-based defense industry was also a priority as plans were announced for the total withdrawal of the U.S. peacekeeping force.
Daewoo moved into construction, serving the new village program and, in a farsighted move, the rapidly growing African and Middle Eastern markets. During this period Daewoo achieved its GTC status and received significant investment help from the South Korean government. Subsidized loans and strict import controls aroused the anger of competing nations, but the chaebols were in need of protectionist policies if they were to survive this period of world recession, triggered by the oil crisis of 1973.
Government policy forced Daewoo into shipbuilding, an industry to which Hyundai and Samsung were more suited because of their greater expertise in heavy engineering. Kim's reluctance to take over the world's biggest dockyard, at Okpo, in 1980 is well documented, and his comment on the Korean government indicated a growing frustration as his entrepreneurial instinct was being stifled. "They tell you it's your duty and you have to do it even if there's no profit." Displaying characteristic vigor and enthusiasm, however, Kim soon saw Daewoo Shipbuilding and Heavy Machinery earn a reputation for competitively priced ships and oil rigs that were often delivered ahead of schedule.
Established Joint Ventures in 1980s to Expand Outside Korea
The 1980s were a decade of liberalization for South Korea's economy. Small private companies were encouraged, and Daewoo was made to divest two of the textile companies that had contributed to its success. Protectionist import controls were relaxed, and the government no longer practiced positive discrimination towards the shipbuilding industry. These moves were instigated to ensure an efficient allocation of resources in a free market and to force the chaebols to be more aggressive in their dealings abroad.
The great change in attitude shown by the Korean government to the chaebols is best illustrated by the fate of one of Daewoo's competitors, the Kukje Group, which went into liquidation in 1985. At that time the government saw the chaebols as barriers to economic efficiency and refused to supply Kukje with further credit. Small- and medium-sized companies were to be favored to ensure that the wealth in Korea's two industrial centers, Seoul and Pusan, eventually would be spread throughout the whole country. The only large industries to benefit from government support would be those that were internationally competitive and those that could further a more equitable distribution of income.
Daewoo responded to the challenge by establishing a number of joint ventures with U.S. and European companies. Kim's philosophy for the 1980s was that finished products would eventually lose their national identity as countries cooperated in design and manufacturing before exporting the goods to a further country. In 1986 Daewoo Heavy Industries launched a $40 million Eurobond issue in order to expand exports of machine tools, defense products, and aerospace interests. The president of Daewoo Heavy Industries, Kyung Hoon Lee, hoped that the money would enable his company to move away from simply licensing products from abroad and to enter a new phase of complimentary and long-term relationships with foreign companies.
The 50/50 joint venture with Sikorsky Aerospace illustrated the benefits of operating in partnership with a U.S. company. Daewoo started by building S-76 helicopters from parts imported from the United States and gradually began to produce these parts in Korea. As the South Korean government had always regarded the defense industry as being of utmost importance, Daewoo received generous subsidies to establish new factories. By the end of 1988, Daewoo had enough confidence in the skills it had learned in the Sikorsky project to announce that it was to begin work on civilian helicopters and airplanes, which would be considerably cheaper than those produced by their U.S. counterparts.
Daewoo used other methods to capture foreign markets. It had excellent experience in turning around faltering companies in Korea and was now, increasingly, applying this knowledge abroad. In 1986 Daewoo acquired a controlling interest in the U.S. ZyMOS Corporation as a means of gaining the technical knowledge necessary to expand its interests in semiconductor manufacturing and semiconductor design. Subsidiaries that actually produce goods abroad, rather than acting solely as sales agents, have also been established. Daewoo added a microwave-oven assembly plant in Lorraine, France, and set up a video-recorder company in Northern Ireland. Signaling that South Korea's economic recovery was reaching completion, Daewoo began considering investment in countries such as Bangladesh and Indonesia, where textiles can be produced as cheaply as Korea was able to do in the early 1960s. Other linkups included a deal with Caterpillar to export 100,000 forklifts by 1993, a marketing contract to sell IBM-compatible personal computers, and the production of parts for the European Airbus on behalf of British Aerospace.
The mid-1980s saw an increased emphasis on the motor vehicle industry. Although the government, fearful of arousing protectionist sympathies in its foreign markets, was reticent in announcing its ambitions publicly, it was clear that South Korea was aiming to become one of the world's major car exporters before the end of the decade. In 1986 the Japanese yen appreciated 25 percent against the dollar, making Daewoo's already cheap exports even more attractive. Daewoo established a 50/50 joint venture with General Motors, called Daewoo Motor, to produce an internationally competitive small car and components for a number of General Motors's existing vehicles. Daewoo was not deterred by the difficulties inherent in setting up the required high-technology production lines and relied on the experience gained in other parts of the group to construct sophisticated computer systems in a relatively short period of time.
The joint venture with General Motors was, initially, one of Daewoo's most profitable links with a foreign company. In 1987 247,000 Pontiac LeMans were built, and the car, based on a design by the German car giant Opel, was well received in the U.S. market. Demand for the LeMans and the slightly larger Oldsmobile Royale soon faltered, however, and there were rumors of friction between the management of the two companies. The venture was not as successful as Hyundai's foray into the international car market, and it appears that Daewoo underestimated the sophistication and technical standards required by the U.S. car buyer.
Late 1980s Crisis in Daewoo Shipbuilding
In 1989 heavy losses suffered by Daewoo Shipbuilding and Heavy Machinery made servicing the company's loans increasingly difficult. In an unprecedented demonstration against the traditional work ethic that had helped South Korea to economic prosperity, workers began an increasingly violent protest against years of long hours and low pay. The only solution available to Daewoo's management was to placate the workers with pay raises of more than 20 percent.
The reliance on shipbuilding as a way of cementing South Korea's export-led recovery looked even more dangerous as the rapidly appreciating South Korean won made exports more expensive. Demand for Daewoo's ships remained constant but the company was forced to sell ships at a loss as a way of guaranteeing a steady supply of orders. The situation was exacerbated by the bankruptcy of US Lines in 1986. A bad debt of $570 million marked the start of the crisis at the Okpo shipyard.
The Ministry of Trade and Industry, however, was no longer willing to bail out one of its most reliable chaebols, which was suffering as a direct result of the Daewoo Shipbuilding and Heavy Machinery acquisition forced on it by the government. Instead, the government promised a seven-year moratorium on Daewoo's debt to the Korean Development Bank and offered to provide a further W150 billion in exchange for a number of contributions from the company. Daewoo would have to refinance the shipyards by selling off four subsidiaries, including the profitable Korea Steel Company and Daewoo Investment and Finance, as well as selling Daewoo Shipbuilding and Heavy Machinery's headquarters in Seoul. Subsidiaries were forced to raise W85 billion on the Korean stock exchange, and Kim was ordered by the government to sell his W150 billion investment in Daewoo Securities, the country's largest stockbroker. The government also ordered workers to curb their demands for wage increases and asked to see proof of improved management before the deal to help Daewoo was agreed to.
Kim's response was typical of his personal style. He had already moved his office to the shipyard so that he could keep direct control of the worsening situation, and had begun to take tours around the premises by bicycle to ensure that he could implement changes and cut costs where necessary. By 1990 improvements at the shipyard were already visible, and by the mid-1990s Daewoo was one of the most efficient shipbuilders in the world and, with 10 percent of the world market, was also the world's leading shipbuilder.
1990s and Beyond
Daewoo entered the 1990s facing more problems than the downturn in the fortunes of its shipbuilding subsidiary. The company was highly leveraged, partly due to the ready availability of government loans, and was paying interest of W300 million a day&mdashout US$500,000--on its debts. Daewoo had not marketed itself as well as competitors like Hyundai and, as a consequence, suffered from the lack of a strong brand image. Its heavy industries were now operating in stagnant markets and expenditure on research and development had to be increased if internationally competitive new products were to be successfully introduced. Continuing workers' demonstrations and changes in government policy further added to Daewoo's worries.
The company also had to deal with the unraveling of its relationship with General Motors. Sales of LeMans had fallen to 39,081 in 1990, a 39 percent drop from the peak of 1988. When GM and Daewoo could not agree on a plan to revive the venture, GM sold its half of Daewoo Motor to Daewoo in 1992 for US$170 million. As he had done in shipbuilding, Kim decided to take direct control of Daewoo Motor and quickly turned its fortunes around. He focused the company on improving the quality of its cars; added to the production lines were detailed checks at every step along the way and for a one-year period every Espero and Prince car made was taken on a grueling road test to identify problems. By 1993 Daewoo had regained the number two spot in the domestic car market, still trailing Hyundai but once again ahead of Kia, and by 1995 Daewoo Motor was making a slight profit.
As he was turning Daewoo Motor around, Kim embarked on a risky strategy of overseas expansion, aggressively seeking out opportunities for both marketing and manufacturing Daewoo products in the United States, Europe, and less-developed countries. He committed more than US$20 billion in numerous joint ventures and start-ups around the world.
More than half of this money--US$11 billion--was slated for Daewoo Motor ventures. In 1992 Daewoo entered into a joint venture with an automaker in Uzbekistan, which led to the opening in late 1995 of a US$800-million plant capable of producing 200,000 compact cars annually by 2000. US$250 million was spent to buy a state-owned carmaker in Romania, capable--after retooling--of making another 200,000 cars each year. In 1994 Daewoo Motor committed US$1 billion to a joint venture in India. The following year, the company outbid General Motors itself to buy 60 percent of Poland's state-owned FSO carmaker for US$1.1 billion. Manufacturing cars in these lesser-developed countries resulted in a lower-cost product that Kim hoped would succeed even in the brand-conscious West. Early indications were positive as Daewoo, in 1995, captured more than 1 percent of the British car market in the first month that it started selling Nexia and Espero sedans, exceeding its goal. After gaining this toehold in Europe, Kim then planned to enter the U.S. market in either 1997 or 1998. But by placing manufacturing in such countries as Poland and India, Daewoo would also be well-positioned to sell the cars in these same countries, which were experiencing much higher growth in demand for new cars than Western Europe or the United States. Overall, Kim set goals of quadrupling auto output to a total of 2 million vehicles by 2000, and of becoming one of the world's top ten automakers.
Automobiles, however, were not the only Daewoo product Kim aggressively moved overseas; consumer electronics became another key Daewoo transplant. But first, Daewoo Electronics revamped its product line. Quality problems had hampered sales of its higher-end electronics items, so Daewoo decided to focus on such lower-tech products as televisions, VCRs, and microwave ovens. Its aggressive yet systematic approach to overseas expansion then followed; by 1996 Daewoo Electronics had 20 production subsidiaries outside South Korea, with plans for 16 more. Non-Korean production stood at 19 percent but was slated to be increased to 60 percent by 2000. Daewoo strategically chose one country within each major target region for most of its production facilities. Southeast Asia was based in Vietnam (where Daewoo was the single largest foreign investor); the Americas, Mexico; Central and Eastern Europe, Poland; and Western Europe, France. Daewoo nearly made a huge step forward in late 1996 when a deal was announced whereby Daewoo Electronics would buy Thomson Multimedia, based in France. The acquisition would have made Daewoo the world's leading maker of televisions, but the deal was quickly scuttled after protests by French workers who were angered by the prospect of Thomson Multimedia falling into foreign hands.
The importance of Daewoo's moves in Europe, as well as the importance of Daewoo Motor, were shown in late 1995 when Kim moved to Vienna to concentrate solely on the Daewoo Group's overseas auto business. Placed at least temporarily in charge of the Daewoo Group was Kim's long-time ally, Yoon Young-Suk, who had headed up Daewoo Heavy Industries. Kim's move, however, fueled speculation that he was trying to distance himself from the ongoing corruption trials involving several heads of chaebol, as well as two former presidents of South Korea, Chun Doo Hwan and Roh Tae Woo. The chaebol leaders were accused of bribing Roh in an outgrowth of the overly cozy relationship between the Korean government and the chaebol. In late August 1996, eight of the chaebol leaders--including Kim--were found guilty of bribery; Kim was sentenced to two years in prison but immediately filed an appeal.
The late 1990s and early 21st century were slated to be a critical period for Daewoo. In addition to Kim's bribery conviction and possible jail sentence, Daewoo (and other chaebol) faced the possibility that the Korean government would intervene to reduce the power of the chaebol, which were beginning to be seen as impediments to the country's economic progress. Korean reunification, which was sure to profoundly affect the entire nation's future, seemed ever more likely and Daewoo had in 1995 become the first South Korean company allowed to enter into joint ventures in the north. These prospects, combined with the company's massive commitment to overseas expansion and a continuing heavy debt load, added up to a very uncertain future for the Daewoo Group.
Principal Subsidiaries: Daewoo Corporation; Daewoo Automotive Components, Ltd.; Daewoo Capital Management Co., Ltd.; Daewoo Development Co.; Daewoo Electric Motor Industries, Ltd.; Daewoo Electronics Co., Ltd.; Daewoo Engineering Company; Daewoo Heavy Industries, Ltd.; Daewoo Metal Co., Ltd.; Daewoo Motor Company, Ltd.; Daewoo Precision Industries, Ltd.; Daewoo Sang Sa; Daewoo Securities Co., Ltd.; Daewoo Telecom Co., Ltd.; Societe Algerienne d'Hotellerie, De Loisirs et d'Immobilier (Algeria); Daewoo Australia Pty. Limited; Universal Refining N.V. (Belgium); Daewoo do Brazil Imp. Exp. Ltd.; Daewoo Canada Ltd.; Daewoo Chile S.A.; Daewoo Motor Chile S.A.; Beijing Lufthansa Center Co., Ltd. (China); Qingdao Daewoo Stone Co., Ltd. (China); Daewoo (Latin America) Ltd. (Colombia); Daewoo France S.A.R.L.; Daewoo Handels GmbH (Germany); Daewoo Hong Kong Ltd.; Daewoo Italia S.R.L. (Italy); Daewoo Fukuoka Corp. (Japan); Myanmar Daewoo International Ltd.; Daewoo Corp. Amsterdam B.V. (Netherlands); Daewoo Nigeria Limited; Daewoo Singapore Pte. Ltd.; Nlle. Corp. Construction Corp. (Sudan); Union Daewoo Engineering & Construction Co., Ltd. (Thailand); Daewoo UK Ltd.; Daewoo America Development, Inc. (U.S.A.); Daewoo International America Corp. (U.S.A.).
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