Accessibility links

Breaking News

The East: Daewoo Split Has Economic Impact In Transition Nations

By Breffni ORourke

The fate of the debt-ridden Daewoo group, South Koreas second-largest industrial conglomerate, has important implications for the transition countries, where tens of thousands of people depend on Daewoo ventures for their jobs. RFE/RLs correspondent Breffni ORourke looks at the regional implications of this weeks agreement to break up the group.

Prague, 17 August 1999 (RFE/RL) -- The decision in Seoul to break up one of South Koreas biggest conglomerates, the Daewoo group, has sent shudders of fear throughout Eastern Europe and as far afield as Uzbekistan.

Daewoos worldwide empire -- created at breathtaking speed in the last 10 years by businessman Kim Woo Choong -- employs a total of some 45,000 people in the transition economies of Central and Eastern Europe and Central Asia. Although the groups interests cover a spectrum from building construction to financing to refrigerators, its main activity in the transition region is automobile manufacture.

There are car or truck factories in Poland, Ukraine, Romania, the Czech Republic and Uzbekistan, and in some of these markets, such as Uzbekistan, Daewoo vehicles have achieved a dominant market position.

The decision in Seoul to break up the group means that Daewoo will sell off 19 of its 25 diverse industrial units, concentrating the remaining six units mainly in car manufacture worldwide. The plan is meant to eliminate excessive diversity, which has led the company into debt, and to increase Daewoos chances of surviving by focusing on automaking as the core activity.

But the car division has to carry its share of thousands of millions of dollars of the groups debt, and there are questions about how secure the future is for the European and Central Asian subsidiaries, most of which are joint ventures.

A Daewoo spokesman in Seoul (Jang Chong Ha) took an optimistic line in Seoul today. He told RFE/RL by phone that the car plants in the transition countries have been performing well and that there are no fears for their survival. "We have no plans to lay off employees." Said he.

Jang said Daewoo is in talks with the big U.S. automaker General Motors about a strategic alliance on world markets. But he said nothing has been decided that would affect the Eastern Europe or Central Asia operations, and any reports to the contrary are wrong.

However, industry analysts express some doubts about how Daewoo will be able to cope in the coming months. London-based analyst Hilton Holloway told RFE/RL today that the enormous expansion rate of the car division in so many international markets in recent years, and its heavy debt burden, puts a question mark over the whole operation:

"I would say that the car division will see some difficulty in the next few months."

Holloway, the news editor of the British magazine "Car," said Daewoo's commitment to the emerging markets makes generally good business sense considering the expected expansion rates of these markets. But in the broader perspective, a major hurdle facing Daewoo and all other manufacturers now is the oversupply of cars to the world market. He estimates that 20 percent of all cars made this year will remain unsold. thus cutting into profits, and eventually putting some manufacturers out of business.

Another leading British-based analyst, Mark Bursa of the Financial Times organization, told RFE/RL today that he considered Daewoo to be an "accident waiting to happen" for a long time, in view of its indebtedness.

He agreed with Holloway that Daewoo has expanded too quickly, but he says that some of the Eastern European subsidiaries are in better positions than others. Speaking of the Polish Daewoo-FSO joint venture in Poland, he says:

"The outlook is actually quite good, because in three or four years Poland will be in the European Union, and Daewoo will have a very large car factory there that is already starting to serve the EU with cars which will count as European-made. The problem is: Who will own that factory? I don't think Daewoo is in a position where it can survive on its own now."

Bursa say the most obvious option for Daewoo is the prospective alliance with General Motors.

He's not quite so optimistic about the future of some of the other Eastern European plants. He says the Daewoo joint venture in Ukraine with local manufacturer Avtovas was never a good deal from the start. It has been struggling to sell vehicles that don't yet fit Ukraine's unripe market.

In Romania also, the wholly owned Daewoo subsidiary has had a difficult time competing with the local Renault-backed Dacia factory, which has been able to undercut Daewoo prices.

As to labor layoffs in the region, Bursa does not see major job losses -- in the short term. Eventually, he says, labor will have to be cut, as it has been in other parts of the world, in favor of automation:

"But at the moment, I think they can survive with higher levels, because the wage costs are still a lot lower in Poland, Romania and other countries where Daewoo manufactures than they are in the West."

Many worried families dependent on Daewoo for employment will be hoping that such an analysis is accurate.