Daewoo Group

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Daewoo Group

541, 5-GA, Namdaemunno, Chung-gu
Seoul
Republic of Korea
(02) 759-2114
Fax: (02) 753-9489

Public Company
Incorporated: 1967
Employees: 91,056
Sales: W13.62 trillion (US$20.11 billion)
Stock Exchange: Seoul

The Daewoo Group was founded by Woo Choong Kim 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.

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 70 branches covering the United States., South America, Australasia, the Indian sub-continent, Europe, and the Arab states. In all, some 3,500 different products are 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 is involved in construction equipment, industrial vehicles, and aerospace-industry products as well as the defense industry. 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 and Daewoo Electronics. Daewoo Shipbuilding and Heavy Machinery, however, is proving to be a significant drain on the resources of the group. The diverse interests of the group are controlled by the management committee which Kim chairs.

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 Lucky-Goldstar Group, 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 have used the chaebols as their main method of implementing economic strategies. Incentives have been offered in the forms of massive subsidies, apparently unlimited cheap credit, and protection against foreign competition. On the other hand, Daewoo has been forced to take over ailing companies and to enter industry sectors that the company would have preferred to leave to more appropriate competitors.

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 governments have relied on a strategy that focuses 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% growth per annum during this period, by producing uncomplicated light manufacturing machines the construction of which, again, wak labor intensive.

The third and fourth phases of Korea’s economic recovery ran from 1973 to 1981. The country’s most significant resource, its supply of 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 far-sighted 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 indicates 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.

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 illustrates 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 has 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 has used other methods to capture foreign markets. It has excellent experience in turning around faltering companies in Korea and is 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 now has a microwave-oven assembly plant in Lorraine, France, and has set up a video-recorder company in Northern Ireland. Signaling that South Korea’s economic recovery is reaching completion, Daewoo is now 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 link ups include 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% against the dollar, making Daewoo’s already cheap exports even more attractive. Daewoo established a 50/50 joint venture with General Motors 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 set up 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 has not been 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.

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%.

The reliance on shipbuilding as a way of cementing South Korea’s export-led recovery looked even more dangerous as the rapidly appreciating 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.

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 began 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 Kim was confident that by 1992, when Daewoo Shipbuilding is to be merged with Daewoo Heavy Industries, the company would contribute to the profits of the group.

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 is currently paying interest of W300 million a day—about US$500,000—on its debts. Daewoo has not marketed itself as well as competitors like Hyundai and, as a consequence, suffers from the lack of a strong brand image. Its heavy industries are now operating in stagnant markets and expenditure on research and development has to be increased if internationally competitive new products are to be successfully introduced. Continuing workers’ demonstrations and changes in government policy further add to Daewoo’s worries.

Daewoo’s strengths include a flexible and open-minded approach to new opportunities and experience in establishing joint ventures with foreign companies. The company’s wide range of industries means that risks can be taken without fear of causing the collapse of the whole group, and that synergies between different subsidiaries can be exploited to the benefit of the whole of the corporation. The opening up of the Eastern Bloc may well prove to be more lucrative for a company like Daewoo that concentrates on lower-priced, higher-volume goods than for its Western competitors.

Daewoo also benefits from skilled management and is determined to attract the best domestically educated and expatriate young Koreans to guide the firm into the next century. Daewoo spends US$6 million each year sending graduates abroad, usually to the United States, so that they can further their studies and return with the necessary skills to lead effective research and development departments.

Daewoo’s major strength could also be its greatest weakness. Daewoo differs from the other chaebols in that its leader is not perceived as an autocratic figure whose decision if final. Instead, Woo Choong Kim delegates tasks to well-trained managers and industry task forces. However, if a major problem does occur—as in the Okpo shipbuilding crisis— Kim will devote his attention to that company until a solution is found. In 1975 Kim announced his intention to retire within ten years, but has repeatedly postponed his departure citing business pressures as the reason.

Principal Subsidiaries

Daewoo Corporation; Keangnam Enterprises Ltd.; Kyugnam Metal Co., Ltd.; Daewoo Heavy Industries Ltd.; Daewoo Precision Industries Ltd.; Daewoo Sikorsky Aerospace Ltd.; Daewoo Electronics Co., Ltd.; Orion Electric Co., Ltd.; Daewoo Electronic Components Co., Ltd.; Daewoo Carrier Corp.; Daewoo Electric Motor Industries Ltd.; Orion Electric Components Co., Ltd.; Daewoo Telecom Co., Ltd.; Daewoo Information System Co., Ltd.; Daewoo ZyMOS Technology Ltd.; Daewoo Motor Co., Ltd.; Daewoo Automotive Components Ltd.; Koram Plastics Co., Ltd.; Daewoo Securities Co., Ltd.; Daewoo Research Institute; Daewoo Capital Management Co., Ltd.; Daewoo Development Co.; Daewoo Shipbuilding & Heavy Machinery Ltd.; Shina Shipbuilding Co., Ltd.; Daewoo Engineering Products Ltd.