Rolling in the Dough; A Dozen Companies in South Korea Now Make over a Billion Dollars in Profit, Thanks to Their New, Westernized Profiles

Article excerpt

Byline: B. J. Lee (With John Sparks in New York)

Hyundai Asan was in big trouble. In 2003 chairman Chung Mong Hun committed suicide while under investigation for money transfers to North Korea. The company, which focuses on tourism and other businesses in the North, was losing billions. All eyes turned to Chung Mong Ku, the ill-fated tycoon's elder brother, who was chairman of Hyundai Motor. He was expected to follow the Confucian traditions that long governed South Korea's giant conglomerates, or chaebol, and bail out his late brother's arm of the family company. But the elder brother chose to respect the market and serve his shareholders instead. Today profits are surging, and in March, Hyundai and its Kia subsidiary reached a total market value of $17 billion, surpassing troubled General Motors. "Hyundai Motor has been completely reborn," says Lim Choon Soo, head of research at Samsung Securities. "It is no longer the old chaebol run by authoritarian family owners."

And Korea is no longer the old crony-capitalist economy run by those same business titans. Last year a total of 12 Korean companies, including Hyundai Motor, Samsung Electronics, POSCO and LG Electronics, became part of the elite that Koreans call the Billion Dollar Profit Club. That's up from seven in 2003 and zero in 1997, the year financial crisis devastated South Korea as well as Indonesia, Thailand and Malaysia. The emerging club of profitable Korean giants have a newly Westernized corporate profile. They have abandoned the family-conglomerate structure to hire professional managers and focus on one group of products, in which they often hold commanding shares of global export markets. At the same time these companies have to a striking degree abandoned the old Korean obsession with market share, bigness for its own sake, at the expense of the bottom line. Now the profit motive rules. "The 12 companies have proved that painful reforms translate into bigger profits," says Cho Kun Ho, vice chairman of the Federation of Korean Industries. "They symbolize Korea's remarkable economic turnaround since the financial crisis."

At the height of the '97 crisis, the big question was whether the stricken nations would change. The IMF and Western advisers urged them to wean corporations from backroom loans and push them to compete for capital on open stock markets. South Korea set the pace on reform from the beginning, but only in the last year or so have the results become measurably clear. None of the other crisis countries has produced one global brand name, and Japan has not produced a new one in decades, but South Korea is establishing a small class of them. They have cut down mountains of debt, and have helped pull the average profit margin of companies traded on the Seoul exchange up from negative 3.9 percent in 1999 to 5.8 percent in 2004. The billion-profit club represents more than half the total value of the Korean stock market, which has increased nearly threefold during the past six years to about $450 billion, and now accounts for 57 percent of GDP, up from 29 percent in 2000.

South Korea is seeing the bloom of a full-blown equity culture, in which stocks play a critical role in funneling investment capital to companies. After the '97 crisis, the government made it much easier to list companies on the stock market; at the same time, banks had run dry of capital as many of their borrowers went bankrupt. So companies turned to the stock market to raise money, but in doing so they had to comply with new regulations requiring them to respect minority-shareholder rights, grant real power to independent directors, even open up to foreigners. Foreign shareholders now control about 40 percent of all shares, and work closely with domestic watchdog groups to monitor corporate behavior and the bottom line. "Korean companies are in general more transparent in management than U.S. companies," says Jeffrey Jones, former chairman of the American Chamber of Commerce in Seoul. …