Actually, the succession struggles were worsened, if not precipitated, by the financial problems originating before 2000, as different sons of Chung Ju Yung tried to grab more profitable businesses for themselves and sack insolvent ones on others. Then what actions taken by the Hyundai Group after the crisis of 1997 caused the Hyundai crisis?
Hyundai’s mistake in 1998 was that it did not take into account the extent of changes in government-business relationship that the 1997 financial crisis let loose. The Hyundai Group basically acted as it had done during the development eras before 1997, presumably assuming that the social and political inertia built into the past government-business relationships were strong enough to resist the new market forces. This miscalculation brought the trouble on the Hyundai Group. But, when the crisis plagued Hyundai or Daewoo, Hyundai was differentiated from Daewoo by the existence of such profitable core companies as Hyundai Motors or Hyundai Heavy Industries. Daewoo had no such profitable core companies. Therefore, the solution to the Hyundai crisis was not the bankruptcy of the entire group but the separation of the profitable core companies from the ailing parent group. However, in the past developmental eras, the practices of forming business groups such as mutual loan guarantees or cross shareholdings would have not warranted this solution.
In particular, if the thriving core companies had been tightly linked to ailing affiliates through mutual loan guarantees, the entire group would have gone bankrupt. But as for the Hyundai crisis, the elimination of mutual loan guarantees, one element of the chaebol reform agendas by the government in 1998, contributed significantly to making this solution feasible.
Seeds of crisis
When Kim Dae Jung won the 1997 presidential election, Hyundai attempted to make up for the lost years during the Kim Young Sam government by pursuing an expansionary policy. Table below shows that the Hyundai Group expanded its businesses with sacrificing profitability during the early years of the Kim Dae Jung government (1998-2003).
On the contrary, the Samsung Group, the other top chaebol retrenched focusing on profitability. The total assets of the Hyundai Group increased from 53 trillion won in 1997 to 88 trillion won in 1999 whereas those of the Samsung Group, from 51 trillion won in 1997 to 77 trillion won in 1999. The contrast between the two is more dramatic when the growth rates of total sales are compared. The total sales of the Hyundai Group increased from 68 trillion won in 1997 to 92 trillion won in 1999 whereas those of the Samsung Group, from 60 trillion won in 1997 to 62 trillion won in 1999. But the profitability of Hyundai’s businesses significantly deteriorated during this period: from 179 billion won in 1997 to minus 10 trillion won in 1999. On the other hand, Samsung’s profitability does not show such a big drop: from 129 billion won in 1997 to minus 545 billion won in 1999.
In 1998-99, Hyundai expanded its size by acquiring many companies. In May 1998, it acquired Hannam Investment Trust, an ailing financial company. By allowing this acquisition, the government intentionally or unintentionally sent Hyundai a confusing signal that it was ready to overlook its possible financial problems. In this transaction, Hyundai demanded and got substantial financial subsidies from the government in return for taking over the ailing firms, much like M&As initiated by the government in the past. Hyundai might have thought they were positively contributing to the financial restructuring efforts of the Kim Dae Jung government. When Hyundai Investment Trust fell into difficulties in 2000, it argued that the trouble of Hyundai Investment Trust came from its 1998 “involuntary” acquisition of the ailing Hannam Investment Trust, as well as the inadequate financial assistance it received then for the takeover.
In late 1998 Hyundai acquired Kia Motors, which had filed bankruptcy. Although Kia Motors was under the supervision of the court, the workout process was controlled by the government, not by the court. Unlike the acquisitions by Chung Mong Heon’s subgroup, this acquisition by Chung Mong Ku’s subgroup paid off handsomely by giving monopoly power in the market through the combined automobile companies. In spite of the monopoly issue, the FTC approved this acquisition. Due to the monopoly power and the write-off of Kia Motors’ debts, Hyundai Motors and Kia Motors together realized a profit of 678 billion won in 1999 and more than 1 trillion won in 2000.
Interestingly, the competitor in the bid for Kia Motors was Daewoo Motors, which clearly shows the reckless expansionary strategy of Daewoo. At that time, Daewoo Motors, the only other car producer, was faltering already because the Daewoo Group itself was on the brink of bankruptcy. In January 1998 Daewoo Motors had become the second largest car producer by taking over Ssangyong Motors.
Lastly in 1999, as a result of the Big Deal, Hyundai Electronics acquired troubled LG Semiconductors and Hyundai Oil Refining took over Hanhwa Energy. The takeovers worsened the financial structure of Hyundai Electronics and Hyundai Oil Refining, which eventually fell into a severe liquidity difficulty. Hyundai Electronics suffered later when the cycle in the semiconductor market went through a severe recession; Hanwha Energy, renamed Incheon Oil Refining, went bankrupt in late 2000.
In 2000 Hyundai Electronics’ net income before taxes dropped to minus 2.2 trillion won. Hyundai Oil Refining also realized a large amount of loss, with the net income before taxes reaching minus 247 billion won.
To win political support for these expansions, Hyundai tried very hard and succeeded for a long time, to cultivate “special” relationship with the Kim Dae Jung government by becoming an instrument for Kim Dae Jung’s conciliatory Sunshine Policy toward North Korea and subsidizing it with the Keumkang Mountain Tour.
The Tour made Hyundai indispensable for Kim Dae Jung. However, already in 1999 before the Hyundai Group reaped any real rewards from North Korean projects, such involved affiliates as Hyundai Construction, Hyundai Merchant Marine, and Hyundai found themselves severely short of money. For Hyundai Construction, the net profit before taxes was enormously decreasing from 81 billion won in 1998, to minus 177 billion won, and to minus 3 trillion won in 2000. For Hyundai Merchant Marine, the drop was less dramatic since it had other sources of profit: from 282 billion won in 1998, to 211 billion won, and to minus 406 billion won in 2000. Hyundai, the holding company for the North Korean projects, also realized a large amount of loss, minus 4 billion won in 1999 and minus 129 billion won in 2000.
The new president conveniently overlooked Hyundai Group’s financial difficulties, lest including it in his restructuring program threaten Hyundai Group and, through it, his Sunshine Policy. These ties remained strong until they generated too much problems for the Kim Dae Jung government by sending out the signal to the market that it was not serious in delivering its words on restructuring. The Kim Dae Jung government decided to put the lid on the market mistrust by putting some distance from Hyundai. Starting from March 2000, the government forced the Chung family to give up controlling rights in some ailing subsidiaries, such as Hyundai Construction or Hynix Semiconductors. In fact, the controlling family of the Hyundai Group was preparing it since they had already changed the structure of cross shareholdings in the Group for Hyundai Elevator, instead of Hyundai Construction to become the Group’s new holding company.
Resolution of crisis: Split and the fall of parent group
The government realized the seriousness of the problem only when Hyundai and Daewoo had already raised massive capital from the corporate bond market. In October 1998, the government came down on the loophole by restricting the issuance of corporate bonds by the top chaebols. Then, it was only a matter of time before Daewoo went bankrupt. In August 1999 Daewoo collapsed and, with it, the corporate bond market literally froze. The Daewoo’s collapse ended the “too-big-to-fail” myth as well, and taught the public of the danger in believing in the power of “special” business government relationship to reduce risks. To complete the end of the “too-big-to- fail” myth, the market turned against ailing Hyundai Group, a conglomerate bigger than Daewoo. In 1999, Hyundai Group’s asset totaled 88 trillion won, whereas the total assets of Daewoo Group were 77 trillion won. However, Daewoo’s size was much inflated by reckless borrowings in 1998-99. Shortly before the 1997 financial crisis, Hyundai Group’s total assets were 53 trillion won, compared to the Daewoo’s total assets of 34 trillion won. The businesses, which Hyundai had expanded in 1998-99, had already begun to suffer in 1999. The bankruptcy of Daewoo also prevented Hyundai Group from financing by aggressively drawing on the bond market. Then, the question was whether the “special” government-business relationship could stand the test of market discipline.
The Hyundai crisis coincided with the succession struggle among Chung Ju Yung(aged 85 in 2000)’s two sons: Mong Ku and Mong Heon. The crisis and the struggle partly fed on one another. To some extent, the 1998-99 expansionary policies by different subgroups of Hyundai originated as part of Mong Ku’s and Mong Heon’s struggle to expand their respective share within the group and position oneself for the coming succession to their father. By the time when Hyundai Motors was bidding for the acquisition of Kia Motors, Chung Ju Yung had not made it clear who would control Hyundai Motors and Kia Motors. At that time, Mong Kyu, Chung Ju Yung’s nephew, was in charge of Hyundai Motors. In fact, Mong Kyu’s father, Chung Se Yung, was in charge of Hyundai Motors throughout since its establishment in 1967. Under these circumstances, Mong Ku aggressively backed Hyundai’s bidding for the acquisition of Kia Motors to strengthen his influences. Chung Se Yung was less enthusiastic. In early 1999 after the Hyundai Motors’ taking over Kia Motors in October 1998, the controlling power of both Hyundai Motors and Kia Motors went to Mong Ku under Chung Ju Yung’s intervention. Instead, the controlling power of Hyundai Industrial Development went to Mong Kyu. During this time, Mong Heon in charge of Hyundai Electronics, led Hyundai Electronics’ acquisition of LG Semiconductor, with Chung Ju Yung’s approval. In 1999, Hyundai Oil Refining took over Hanwha Energy through Big Deal and their controlling powers were transferred to Mong Hyeok, another nephew of Chung Ju Yung. Chung Ju Yung’s intention was to split his empire into smaller groups and entrust each to his sons or nephews. However, he moved to split the group, precisely when several core companies — especially, Mong Heon’s — were performing dismally. To some extent, the timing of the split adversely affected the destiny of the entire Hyundai Group because different sons of Chung Ju Yung tried to secure profitable companies for themselves.
From the viewpoint of minimizing the impact of Hyundai crisis on the national economy, the final choice of the Hyundai group was reasonable, though not the best. They chose to split relatively early, and to separate healthy companies from the ailing companies, though not completely. Before the liquidity crisis fully developed, in August 2000, Hyundai Motors was officially separated from the parent group. Another healthy core company, Hyundai Heavy Industries, still remains in the parent group, but is scheduled to split from it by 2003. This split of the Hyundai group into smaller groups significantly narrowed the scope of the Hyundai crisis. The liquidity crisis from 2000 on only impacted Mong Heon’s parent group.
