Profiting in Pieces; Thriving after the bust-up, surviving units of Daewoo spark a rethink of what went wrong at Korea Inc.

Byline: B. J. LEE

In late 1999, in the aftermath of the Asian financial crisis, Daewoo Group was considered all but dead by the international financial community. 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, and buoyed by the overall recovery of the Korean economy, Daewoo's shipyard and trading subsidiaries are enjoying record profits. The auto unit is thriving and has hired back all 1,600 of the workers it fired after the crisis, in contrast to continuing job losses at its new owner, GM. Daewoo's construction-equipment unit, recently sold to another Korean conglomerate, is leading its market in China. 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 remaining 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 Korean peers like Hyundai raises a serious question: Did the Asian crisis expose Korean companies as fundamentally flawed, built on foundations of debt, as many originally 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. "Had it not been for the IMF-imposed unreasonably high 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 dizzyingly high that it blinded many critics to 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 the defining excess that made his bankruptcy bigger ...