Little Has Changed

Kumho Asiana Case Highlights Problems of Overexpansion

Economists agree the heavily leveraged corporate takeover boom among family-controlled conglomerates turned Korea into a victim of the 1997-98 Asian financial crisis. The ongoing trouble at the Kumho Asiana Group, the nation's eighth-largest chaebol with assets of 38 trillion won ($30 billion), reaffirms that old habits do die hard.

The seed of misfortune was sowed three years ago when the group bought out Daewoo Construction & Engineering at 6.4 trillion won by raising 3.5 trillion won from investors with a promise to repurchase their stocks at 32,500 won per share unless prices reached a certain level by the end of this year. Daewoo C&E's share price hovers around 13,000 won now, imposing Kumho Asiana with a financial burden of 4.2 trillion won. In short, it was tantamount to taking out a three-year loan at compound interests of 9 percent per annum.

Of course, it would have been difficult for the group officials to predict the global financial crisis and consequent economic recession at the time of the takeover. Still, the acquisition of the building arm of the now-defunct Daewoo Group by Kumho Asiana, a chemical-transportation group holding one of the nation's two flag carriers, sent not a few analysts' heads shaking with doubts, then.

The problem is that Kumho Asiana is not the only chaebol to recently show undue appetite for corporate expansion and now be forced to resell what they bought in another bout of massive restructuring. The worldwide liquidity crunch has served as a timely reminder of the unchanged habits of chaebol in this regard.

Encouraging chaebol's resumption of old practices, however, was part of the Lee Myung-bak administration's various policies, which sharply eased their equity-investment limits, allowed them to run banks and introduced devices to tighten the families' grip on management control, including the so-called poison pill system.

Government officials say all these pro-business ― rather, pro-chaebol ― policies were intended to induce investment, but most of the conglomerates' promises have so far remained as such: words, not deeds. Cho Suk-rai, chairman of the Federation of Korean Industries, a chaebol lobby, even went as far as flatly rejecting calls for investment on Wednesday, saying politicians and militant unions are keeping them from making investments, even if they want to.

If and when Kumho Asiana experiences prolonged difficulties in restructuring by selling assets, the liquidity at creditor banks will be adversely affected, and, in the worst case, require the injection of public funds, or taxpayer money. This, in turn, would further strain financial resources for other sectors, including the small- and medium-sized enterprises that hire more than 90 percent of all workers.

From the standpoint of the average worker, therefore, nothing could be more irrelevant than the competition among chaebol to grow, which, at its worst, could damage the national economy and, even at its best, simply lead to the growth of specific chaebol posing as global giants unbound by nationality.

Which is why the government should supervise the conglomerates' business activities far more strictly, requiring responsibilities corresponding to their rights and privileges. And this is the only way to turn the Kumho Asiana case into a blessing in disguise for the national economy.