Daewoo: Surviving a Bust-Up

In late 1999, in the wake of the Asian financial crisis, Daewoo Group was considered all but dead. More than $30 billion in debt, South Korea's second-largest conglomerate became the world's biggest corporate bankruptcy to date. Twelve of its member companies fell under creditor control. Charged with cooking the books, its founder, chairman Kim Woo Choong, fled the country to avoid prosecution.

Seven years later, the severed arms of Daewoo have come back to life. Overhauled by creditor banks, Daewoo's shipyard and trading subsidiaries are enjoying record profits. The auto unit is thriving and has hired back all 1,600 workers it fired after the crisis, in contrast to continuing job losses at its new owner, GM. Kim, who returned last year after six years of hiding overseas, has been sentenced to 10 years in jail and a $22 billion fine, but buyers are still vying for units of his dismantled empire. "The name Daewoo no longer symbolizes Korea's humiliating financial crisis," says Lee Tae Yong, CEO of Daewoo International, a trading and energy company. "It now represents the newfound pride and confidence of the Korean economy."

The comeback of Daewoo and other Korean firms like Hyundai raises a question: did the Asian crisis expose Korean companies as fundamentally flawed, built on foundations of debt, as many had assumed? Today, a new storyline is taking hold—that Daewoo and its peers were solid firms undone by short-term factors, like high interest rates pushed by the IMF in return for its $55 billion bailout of the Korean economy. "Had it not been for the IMF-imposed interest rate of 30 percent per year, Daewoo would have survived," says University of Seoul management professor Yoon Chang Hyun. "Daewoo went down because of a short-term money mismatch."

No one disputes that Chairman Kim relied too much on debt. Some of his companies had debts 10 times bigger than their capital, a level so high it obscured the fact that Daewoo was making good ships, cars, televisions, telephones and excavators at competitive prices. And while Kim's aggressive global expansion (he tried to build car plants in Uzbekistan, for example) came to be seen as his defining excess, the international sales forces he created are now a key strength of Daewoo companies.

Kim initiated what he called "world management" in the early'90s, building a global sales and manufacturing network. He focused on big emerging markets—Brazil, Russia, India, China—before the pack. Today, Daewoo International has 800 employees, and nearly 40 percent have worked overseas for an average period of eight years. About 200 of them can speak Chinese, the language of Korea's biggest trading partner. It graduated from creditor control in 2003, and turned a profit of $170 million in 2005.

The creditors who came to possess Daewoo units were mostly Korean banks, since there were no other takers. Now they are selling for huge profits. Several banks are about to sell Daewoo's construction unit for $7 billion after a bidding war among five suitors. Korea Development Bank recently dropped plans to sell Daewoo's securities firm after a record profit of $400 million last year. Analysts expect fierce competition when the shipyard and other Daewoo units go on sale.

There are still skeptics, who attribute the recovery of giants like Daewoo and Hyundai to huge injections of taxpayer money. The government spent nearly $36 billion to prop up Daewoo units after the group's breakup in 1999. But defenders of Daewoo say the current value of its surviving units is far more than $36 billion, suggesting the bailouts were a good investment. They also note that many smaller Korean corporations vanished despite bailouts, because they lacked the solid core of Daewoo and Hyundai. Yoon even argues that, had the crisis come several years later, Daewoo might never have gone under, "because its world-management system was about to bear fruit." At least it is now, albeit too late for the founder to enjoy.