(12) Kim Woo-choong: embodiment of nation’s business might
By Andrei Lankov
In November 2006, the Seoul court heard a case which attracted the attention of almost all Koreans. The defendant was a rich businessman who was accused of embezzlement and infringement of an impressive number of laws and many infractions. He was given a prison term of eight years and six months, but in December 2007 he was pardoned by the President and released from prison.
People were not really surprised by the decision of Cheong Wa Dae (Blue House) to pardon him. After all the businessman was Kim Woo-choong, former chairman of Daewoo Group, a person who just a decade earlier had been considered the embodiment of Korea’s economic might and business acumen.
Daewoo Group in the late 1990s was the nation’s second largest business conglomerate. It produced around 5 percent of Korea’s GDP and was responsible for roughly 10 percent of Korea’s entire export volume, but this would not save the business behemoth from dramatic collapse. The disintegration of the group after the Asian financial crisis of 1998 can be seen as the largest shipwreck in Korean corporate history.
The spectacular rise of the Korean economy after 1961 was not known as the “Korean economic miracle” for nothing. A country which had hitherto been seen as an international basket-case would become a world leader in many high-end industries, an economic powerhouse.
The decisive role in this transformation was played by a combination of government and large non-specialized business conglomerates, known as chaebol. From the early 1970s to late 1990s, the top four Korean chaebol were Hyundai, LG, Samsung and Daewoo. Their exact order changed from year to year, but nobody else in the Korean corporate world could challenge the “big four.”
Nearly all chaebol are rooted in the colonial period. Contrary to the rather widespread perception, they were not created by big-time Japanese collaborators, since most chaebol began small and remained third-rate companies throughout the colonial era. They would make the most of the opportunities that were created by liberation and would grow fast in the 1950s.
The decisive turning point in the history of the chaebol was the early 1960s, when the South Korean government (or rather its efficient, ruthless and austere leader, General Park Chung-hee) selected a few dozen promising companies. These companies were given preferential treatment and government support just to make sure they would be able to become really large.
A latecomer in the world of Korean big business, Kim Woo-choong was younger than the others. He was born in 1936, the year when Samsung’s founder Lee Byung-chul established his first business venture (while Chung Ju-yung, the founder of Hyundai, was pushing pedals on his delivery bike). Daewoo was first established in 1967, but it grew really fast. In 1967, it had five workers. Ten years later Daewoo Group had 35,000 employees.
To a large extent, Kim Woo-choong’s rise was aided by his personal connections with the president himself. Kim’s father once had been a school teacher, among whose students there was a boy from a poor farming family named Park Chung-hee. In due time the boy would become a dictator, but he would not forget his teacher.
That said, it would be an oversimplification to think that Kim was able to achieve such heights just through personal connections. In his late 20s, Kim had already gotten a reputation for being an enterprising if somewhat adventurous businessman.
According to one story, his rise began from a bold business operation. Young Kim first went to Hong Kong, where he bought samples of locally produced fabric. He then travelled to Singapore and presented the samples as products of his small company, secured orders and rushed back to Seoul to start production. Because at the time it was impossible to secure a loan, he got money from his family and trusted friends. This was how Daewoo was born in the mid-1960s.
Thereby a combination of business acumen and political connections was the force behind the meteoritic rise of Daewoo. In the early 1970s, Daewoo became one of only a few South Korean companies to be selected to start ship-building operations. As usual, this selection was done by the government, which helped with credit and sales, and in return expected obedience, and above all drive for growth, not profits.
In the mid-1970s Daewoo was also ordered to start making cars. The government had an ambitious plan: it wanted to make South Korea, back then still a country of unpaved roads and oxcarts, into a major producer of cars. This bold plan eventually succeeded, and Kim would play a major role in this breakthrough.
People who knew Kim Woo-choong in the 1980s say that the Daewoo chairman always had a fondness for grandiose projects and risky operations. In most cases, such schemes brought spectacular success, but the risk of equally spectacular failure was never far away. Until the late 1980s, however, things moved along smoothly. Kim was surrounded by good advisers — many of whom were his relatives and school friends. They did not hesitate to tell the chairman when his plans and schemes were unacceptably risky.
In the early 1990s Kim Woo-choong (then still in his mid-50s) had good reason to see himself as the most successful and lucky of all chaebol owners. All major Korean conglomerates grew with amazing speed but Daewoo’s growth was the fastest among them. Obviously, this aura of success had some impact on Kim Woo-choong’s judgment and led him to make decisions which later turned out to be excessively hazardous.
Among other things, Daewoo heavily invested in emerging markets; after the collapse of communism, in the early 1990s, it built massive car plants in Poland and Uzbekistan. It also heavily invested in construction in Russia, Vietnam and Indonesia. Kim Woo-choong never stopped dreaming about further expansion, he was always ready to invest in new regions and fields.
To support these expansionist schemes, Kim Woo-choong’s business empire borrowed heavily. Korean bankers of the 1990s did not have much issue with lending money to a legendary successful business man and his company. Obviously, they assumed that Daewoo was too big to fail — a trap bankers across the world seem to keep falling into. As a result of this borrowing frenzy, by 1998 the debt-equity ratio of Daewoo was 5.3 : 1. This was a dangerous situation even by the rather notorious standards of Korean conglomerates.
Then in late 1997, Korea was hit by a major financial crisis, probably the largest economic disaster South Korea has ever experienced. All conglomerates suffered, but Daewoo was hit hardest. The major problem was the huge debt, which in 1999 had reached some $60 billion. At first, Daewoo — like all other chaebol — attempted to restructure, but it didn’t work out well. It was discovered that Kim Woo-choong and other top managers had doctored the books in an attempt to hide the real scale of the company’s problems.
Political factors also played a major role. In late 1997, South Korean voters elected a left-leaning administration — this was the first time the left (admittedly of a quite moderate variety) came to power in the country. Kim Dae-jung, the new president, was not a fan of the chaebol, which he saw as corrupt and outdated. In this new situation, Kim Woo-choong could not count on the government’s sympathy.
In October 1999, Kim Woo-choong officially resigned from his position as Daewoo’s chairman. The group was then divided into 12 independent companies. Unlike the initial conglomerate, each of these companies specializes in a particular field (Daewoo motors produces cars whilst Daewoo Shipbuilding builds ships). The new companies were controlled by professional managers, most of whom had no connection with Kim Woo-choong.
Before this, though, in his last-ditch attempts to save the company, Kim Woo-choong broke a number of laws. Had he succeeded, nobody would have probably paid attention, but he did not. So, Kim Woo-choong had no choice but to flee. The South Korean government officially asked Interpol to assist with his arrest.
Kim would spend a few years in hiding. It was probably a luxurious exile, since he was not short of money. Nonetheless, in July 2005 he chose to return to Korea and surrender. Nobody expected at the time that the former tycoon would spend too much time behind bars and as we have seen, this was indeed the case.
Kim Woo-choong is still alive, but as one would expect, he keeps a relatively low profile. The numerous Daewoos, the descendants of a once-mighty conglomerate, continue to operate with varying degrees of success. But the tycoon, now in his mid-70s, obviously does not have much to do with what he once created.
Professor Andrei Lankov was born in St. Petersburg, Russia, and now teaches at Kookmin University in Seoul. He can be reached at anlankov@yahoo.com.