The following is the eighth (Chapter 7 summary) in a series of articles on the book, entitled “Corporate Korea’.—Ed.
By Kim Kwang-sooh
While successful conglomerates, such as Samsung Group, LG Group, Hyundai Motor and SK Telecom, achieved continued growth after the currency crisis in 1997, dozens of other large enterprise groups including Daewoo Group either bankrupted or liquidated in the aftermath of the financial crisis.
Among others, Daewoo Group, which once grew to run nearly 400 overseas subsidiaries as one of top-ranking enterprises, was disintegrated in 1999 due mainly to excessive business expansion and debt.
With advent of the global digital economy, information technology (IT) industry in Korea made rapid growth after the currency crisis. Particularly, semiconductor segment recorded high growth of around 40% between 1998 and 2000 after Samsung Electronics successfully developed 256mega DRAM, leading in the industry.
Encouraged by the growth in digital economy and IT industry as well as venture craze around the world, IT venture bubble started in Korea in early 1999. The number of startups surged and investment by venture capitals exponentially increased. The number of startups increased from slightly over 2,000 in 1998 to nearly 11,400 in 2001.
The amount of investment in startups also sharply increased from approximately $171 million to over approximately $1.582 billion in 2000, nearly ten-fold growth. Likewise, the venture bubble also blasted in a rapid pace. Since it hit the peak of 7,490.9 point in February 2000, the KOSDAQ venture index plunged to 915.3 point in December of the same year, largely affected by a sharp drop in prices of IT stocks across the world.
Despite most of startups bankrupted and lost trust of the market, 82 startups successfully survived and grew into firms with over $90 million in annual sales as of 2006. Among them, NHN, an Internet portal, grew as a company with annual revenue of approximately $325 million and net profit of approximately $8.27 million as of 2005. And Reigncom (now Iriver), an MP3 player manufacturer, grew into a company with annual sales of approximately $409 million in 2005.
After the currency crisis, small and mid-sized companies sharply increased in number. Statistics showed that the number of new small and mid-sized companies increased by over 60,000 between 1997 and 1999, and that in 1999~2005 grew by 50,000 annually on average.
This phenomenon was attributed mainly to drastic cut in employees by large enterprises due to the currency crisis, as part of these retirees founded new businesses. But profitability at smaller companies rapidly declined. For instance, profitability at companies ranked below 25 percentile among those with annual revenue of less than $4 million recorded as low as minus 60% since 2000. Reasons for such poor business results at smaller companies are complex. They include sluggish sales in home market, emergence of Chinese economy, lack of efforts to invest in technology and innovation after the currency crisis, and distortion in competition thanks to government financial assistance. And unlike large manufacturers, most small and mid-sized companies had little capability to exploit overseas markets.
Among dozens of bankrupted or disintegrated enterprise groups after the currency crisis, Daewoo Group’s case is especially noteworthy because it was once the second largest enterprise groups in Korea in the 1990s. Established in 1967, Daewoo Group rapidly grew by expanding business areas from textile and trade to electronics, communication, construction, shipbuilding, automobile, heavy equipment, finance, tourism and more. It seemed to stand as one of top-ranking enterprises in the 1990s, but the group had to be eventually disintegrated in 1999 due to enormous financial difficulty caused by the currency crisis, extended recession and expansion-oriented business strategy.
As of November 1998, it operated 396 overseas subsidiaries, but it heavily depended on loans and debt, facing liquidity crisis soon. Daewoo Group attempted to raise funds by issuing commercial papers (CPs) worth approximately $15 billion, but failed due to government restrictions.
At the time of its collapse in June 1999, the total amount of Daewoo Group’s debt reached approximately $51.66 billion. Thus, Daewoo Group was disintegrated and disappeared in late 1999. Several affiliated companies, including Daewoo Electronics, POSCO Daewoo, Daewoo E&C and DSME, remained to use ‘Daewoo’ in their company names even after they were acquired by other enterprises.