The Automobile Industry 305
live off monopoly profits. O Wôn-ch’ôl, then the assistant vice minister for mining and manufacturing at the MCI, evaluated Sinjin as too oriented toward short-term profit maximization and disinterested in contributing to the long-term development of the industry through a timely increase of local content.10 Thus Park authorized the entrance of Hyundai Motors in 1967, followed a year later by Asia Motors. Hyundai produced vehicles with imported SKD kits and technology from Ford; Asia Motors produced passenger cars and buses under a technology license arrangement with Fiat. By 1968 the South Korean automobile industry had three assemblers—Sinjin, Hyundai, and Asia—with licensing arrangements with Japanese, American, and European multinationals, respectively. The entries soon backfired. With a wide variety of models produced inefficiently with relatively low domestic content ratios, the three assemblers were on the verge of becoming mere MNC-controlled inefficient automakers, much like those of Latin America.
Search for a Strategy, 1969–1973
Ironically, Park searched for ways to move the auto industry into the manufacturing stage precisely when the industry had become too crowded with the entries of Hyundai and Asia Motors. Moving from the labor-intensive assembly stage to the capital- and technology-intensive manufacturing phase would surely make the industry even more inefficient and the loan-financed automakers even more vulnerable to the danger of being unable to meet their payment obligations should a recession develop. Park knew of the danger, but would not let it stand in the way of his efforts to build a national champion. On the contrary, confident of the state capacity to relieve corporate distress and make industrial adjustments in hard times, and captivated by his own vision of HCI, Park ordered MCI minister Kim Chông-ryôm in October 1968 to raise the local content of locally assembled vehicles. The question he struggled with was not whether, but how to move into the manufacturing stage. The technocrats were to answer that question.
In December 1969, with Kim Chông-ryôm in control of the Blue House as the chief of staff, new MCI minister Yi Nak-sôn made public a Basic Promotion Plan for the Automobile Industry. To develop the parts and components industry, schedules to increase local content were set up by the MCI for each passenger car model. The ministry also listed the auto parts chosen for domestic production. Presumably, the automakers’ license to assemble cars depended on their timely implementation of the local
Economy and Society
306
content program. In parallel to these bureaucrats’ stick, the Ministry of Finance (MoF) offered carrots, pledging to provide preferential access to foreign and domestic loans to the automakers that met the MCI-formulated local content schedules.11 Then, in February 1970, Yi Nak-sôn designated the construction of an engine plant as a concrete way to achieve the goals of the Basic Promotion Plan. To prevent the problem of surplus capacity from increasing to a threatening level, only one assembler was to be chosen among Asia, Hyundai, and Sinjin as the producer of engines for the entire passenger car industry, on the basis of three criteria: that it establish a joint venture with a multinational in the production of engines, that it export surplus engines in excess of domestic consumption, and that it involve as many domestic vendor firms as possible in the development of locally produced engines. The assembler chosen was expected to become a dominant producer, because the other two assemblers would use its engines for their products. By expressing its preference for a joint-venture operation, the MCI also prompted the assemblers to strengthen their foreign business alliances to secure the necessary technology. The parts and components industry welcomed these policies, because the higher local content requirement meant that they would be protected from imports in developing key auto parts.
The dominant assembler, Sinjin, was the first to respond positively to the new state initiative. In March 1970, Sinjin and its licensor, Toyota, submitted a plan to the MCI to establish a joint venture for the production of Sinjin automobiles, not just engines. It looked like Sinjin had formulated the winning strategy until the next month, when China’s premier Zhou Enlai announced that as part of the “Four Principles,” the Chinese would prohibit Japanese companies with business operations in South Korea or Taiwan from entering the China market. Five days later, Toyota decided to withdraw from South Korea in order to enter the China market, judging it to be potentially more promising than the South Korean one. Desperate to secure an alternative foreign partner, Sinjin contacted various MNCs until it hit upon General Motors.
Park enthusiastically endorsed Sinjin’s partnership with GM for not only economic but also security reasons. The United States’ 1969 Guam Doctrine that sought U.S. military disengagement from East Asia had instilled in South Korea a fear of abandonment. The entry of a major U.S.
company like General Motors was judged as verifying continued U.S.
commitment to the defense of the southern half of the peninsula. Taking advantage of these security concerns, General Motors was able to win major concessions in its negotiations with Sinjin. GM was to control the financing, receive a 3 percent royalty based on total sales, and charge a
The Automobile Industry 307
management fee of $750,000 per year. The result was the birth of General Motors–Korea in June 1972, a 50–50 joint venture with General Motors and Sinjin each investing $24 million.
Hyundai Motors also welcomed Yi Nak-sôn’s Basic Promotion Plan, but for a different reason. As a newcomer to the auto industry, Hyundai looked at the plan as an opportunity to surpass Sinjin in market share and technological leadership in one stroke. Characteristically, Hyundai aggressively approached Ford regarding the establishment of a joint venture, but it soon decided to go it alone, concluding that the two had unbridgeable differences on strategic issues ranging from the scope of the business to the size of exports to the control of management. As a multinational that needed to maintain the division of labor among its subsidiaries worldwide and interested in maximizing profits at the level of its entire global operations rather than with any particular business entity in that chain of production, Ford was insistent on limiting the joint venture to the engine plant. Ford was less interested in establishing a new manufacturing hub in South Korea than in transforming it into one of the sources of engines in Ford’s global production network. By contrast, Hyundai wanted to develop the joint venture into an integrated automobile manufacturer rather than a mere engine producer. Linked with the issue of production was the issue of sales. Whereas Hyundai hoped to utilize the worldwide sales network of Ford to export the fully assembled vehicles of the joint venture, Ford was interested only in exporting the joint venture–manufactured engines to its other subsidiaries as goods internally traded within Ford’s production chain.
As Hyundai geared up to proceed on its own, Park and his MCI bureaucrats reconsidered their options. South Korea was then in the middle of regime change, with Park imposing the yushin constitution top-down in October 1972 and plunging into the HCI drive in January 1973 to demonstrate the superior regime qualities of the yushin. Moreover, as detailed in Chapter 7, Park put in place an institutional mechanism of forced savings to back the chaebol groups’ massive entries into the heavy and chemical industries with subsidized loans by establishing a National Investment Fund in July 1973. To back the HCI drive with industrial policy, the MCI also created three new posts of assistant vice minister as part of its effort to reorganize its functions, powers, and staff along the sectoral lines of HCI.
One new division was to focus on the automobile industry. In other words, not only the Park regime’s political interest in putting the auto industry on a new footing, but also its institutional capabilities to do so increased dramatically in 1972 and 1973 due to the launching of yushin. Consequently, Park approved of his MCI technocrats’ critical reassessment of their pre-
Economy and Society
308
vious attempt to develop auto assemblers through a high degree of linkage with the local parts and compo
nents industry. The outcome was the extremely ambitious Long-Term Plan for the Promotion of the Automobile Industry, which the MCI announced in April 1973 and the cabinet adopted in July of the same year.
Although the Long-Term Plan was much more carefully prepared than Yi Nak-sôn’s Basic Promotion Plan of 1969, it looked nationalistic to the point of being unrealistic. The emphasis on raising the ratio of local content remained as high as in the Basic Promotion Plan, but this time, the MCI required the additional development of “original” South Korean models. The idea was that of Kim Chae-gwan, who was brought in from the Korea Institute of Science and Technology (KIST) to take the job of the assistant vice minister of heavy and chemical industries. He saw that the development of original South Korean models was the key to breaking out of the auto industry’s stagnation.12 Up to that time, the South Korean industry had assembled their MNC licensors’ passenger cars, whose models altered frequently not only to satisfy changing consumer tastes, but also to raise entry barriers to a prohibitively high level. Consequently the South Korean auto assemblers faced a severe problem of market size in two senses of the term. First, given the country’s low per capita income, the domestic market for passenger cars was inherently limited. Second, the frequent change of models, in addition to the assemblers’ desire to carry a full range of models with the goal of realizing economies of scope, resulted in the assembly of too many foreign models for too short periods, thus preventing the realization of economies of scale even more.13 The inefficient assemblers, in turn, failed to serve as the engine of growth for the parts and components industry.
To break out of the vicious circle of too many models, too frequent model changes, too small a market, and too few linkage effects, the Long-Term Plan proposed to manufacture an indigenous South Korean model with an engine size smaller than 1.5 liters as a “citizen car” and to produce it on a much longer cycle than that used by MNCs. The plan also envisioned suppressing the demand for larger cars by levying a luxury tax while increasing the local content of citizen cars to over 95 percent by 1975. In addition, it pledged to promote the parts and components industry by designing a special industrial zone for vendor firms as well as by supplying loans in keeping with the new policy.14 It was thought that more than 80 percent of the total domestic demand for passenger cars would be met by these indigenous models through diverse tax incentives. To protect the producers of the citizen car, the plan also allowed the assembling of foreign models of medium- or large-size passenger cars at a much lower lo-
The Automobile Industry 309
cal content ratio. The measure enabled the automakers to recover some of the losses incurred in the production of citizen cars through the sale of more profitable medium- or large-size cars.
Initially not only the Long-Term Plan but also the larger HCI drive met with skepticism from South Korea’s two economic coordinators, the Economic Planning Board (EPB) and the MoF, who saw both as premature and too ambitious. The total number of vehicles produced in South Korea remained just 26,334 in 1973. But Park was determined to pursue his vision, believing that what economic disadvantages South Korea possessed could be readily overcome by its political advantages. Under the newly promulgated yushin regime, which concentrated political power in the Blue House, Park thought he could make a credible commitment to the development of heavy and chemical industries so that the chaebol would take the risk of entering the targeted sectors, including the auto industry.
With an eye to strengthening the state’s ability to mobilize resources, Park established a cabinet-level interministerial Committee to Promote Heavy and Chemical Industrialization and organized its planning corps under the office of the second senior secretary on economic affairs, O Wôn-ch’ôl, at the Blue House. With Park’s unwavering support, O Wôn-ch’ôl was able to orchestrate HCI projects by getting the entire state bureaucracy to assist in their implementation. The specific task of upgrading the automobile industry fell to the MCI, which meant that Kim Chae-gwan not only was the architect of the Long-Term Plan, but also became its implementer.
The question was which of the South Korean automakers would take the bait.
Hyundai’s Pony Project, 1973–1979
The 1973 Long-Term Plan placed the auto industry at a cross-roads. By tying state subsidies to the production of indigenously designed citizen cars, the plan closely coincided with the interests of Hyundai, which wanted to produce its own models under a national brand for the export market after the breakdown of its joint venture negotiation with Ford. Indeed, demonstrating the close alliance that had developed between the MCI and Hyundai on the basis of their common interests in challenging the multinationals’ global auto industry, the Long-Term Plan was prepared by Kim Chae-gwan in close consultation with Hyundai’s management.
By contrast, GMK found it difficult to follow Hyundai Motor’s example, even with the state’s pledge that it would back up those who took risks. In 1973 GMK enjoyed the largest market share, 40 percent, and had
Economy and Society
310
no intention of export promotion, which could undermine General Motors’ hold over the world market. Moreover, the Long-Term Plan weakened many of the advantages GMK enjoyed as an auto producer. With the introduction of tight regulations on the number of models and the cycle of model changes an assembler could produce and adopt, respectively, GMK
was obstructed from exploiting its greatest source of comparative advantage, product differentiation. In addition, the high local content requirement reduced GMK’s cost advantage by forcing it to rely on South Korean parts and components as much as its rival Hyundai did. Most detrimental of all to GMK interests was the plan’s goal of developing an original model rather than pursuing the GMK strategy of assembling any of the many models it produced through its worldwide production networks. As part of an MNC with an interest in profit maximization at the global level, GMK believed it was economically irrational to develop a new model just for the small South Korean market. GM’s South Korean partner, Sinjin, was also reluctant to pursue an independent strategy, because it profited from assembling foreign models that beat any Hyundai cars. The interests of both General Motors and Sinjin lay in maintaining the status quo.
Unlike in Latin America, where multinationals typically defeated their host governments’ efforts at independent development, in South Korea the state prevailed for several reasons. First, because General Motors entered the South Korean automobile market only in 1971, its joint venture had not had time to construct a strong political base. Its cars’ low local content made its business profitable, but also weakened GMK’s political clout by depriving it of the opportunity to surround itself with parts and components producers with an interest in manufacturing GM models.
Second, as Peter Evans has noted, the role of the local partner of a multinational lies in the development of political safety nets for the joint venture, but unfortunately for GMK, Sinjin’s political influence was on the wane. The political patron of Sinjin, Yi Hu-rak, was not in a position to intervene on the side of GMK. Before 1973, as chief of staff to the president (1963–1969) and the director of the Korea Central Intelligence Agency (1970–1973), Yi Hu-rak had the political clout to protect Sinjin. But he was ousted from power in 1973 after becoming implicated in army security commander Yun P’il-yong’s “aborted counter-revolution attempt” of 1972 (see Chapter 6). The kidnapping of opposition leader Kim Dae-jung from Japan by KCIA agents in an attempt to destroy anti-Park movements abroad also made Yi Hu-rak a political liability rather than an asset for Park, because the scandal entangled Yi in diplomatic conflict between South Korea and Japan. Once he resigned from his post as KCIA director in 1973, Yi Hu-rak was never again part of Park’s inner circle. Hyundai
The Automobile Industry 311
Motors, by contrast, maintained a close working-level alliance with MCI bureaucrats and enjoyed Park’s trust. The Hyundai Group’s risk-taking business strategy fit well with Park’s ambitious HCI drive, and
consequently Hyundai’s support for the Long-Term Plan strengthened Park’s trust of MCI bureaucrats.
Third, despite a decade of hypergrowth, the state still enjoyed an upper hand over the private sector. With tight control over capital markets and the imposition of high nontariff trade barriers, the state had ample policy instruments with which to influence the private sector. In particular, state control over foreign loans enabled Park to reshape the private sector’s investment patterns as well as to increase the autonomy of the state vis-à-vis both the chaebol and the MNCs.15 Moreover, with second-tier chaebol like Hyundai and later Daewoo willing to take risks in order to catch up with the front-runners, Park had ample political space in which to play off the chaebol conglomerates against one another to achieve his goals. In addition, given the loan-financed nature of corporate growth, the expansion of chaebol groups did not mean that they were growing more independent; on the contrary, the rising debt-equity ratio made them even more dependent on the state.
Finally, it was Park’s strong commitment to the nationalist automobile policy that worked most decisively against GMK. After the 1972 promulgation of the yushin, Park exercised absolute authority over South Korea’s policy choices. In September 1973, Park issued a Directive for the Promotion of the Automobile Industry, by which he pledged to transform the willing assemblers into national champions with massive policy loans.16
With Park’s support of the 1973 Long-Term Plan, there emerged a powerful nationalist coalition of mercantilistic MCI bureaucrats, backed by O
Wôn-ch’ôl’s Blue House team of coordinators, on the one hand, and the independence-oriented Hyundai Motors, on the other. Together they competed with the internationalist coalition of General Motors and Sinjin for market share.
Once the 1973 Long-Term Plan put in place the new rules of the game and made massive state resources available for the would-be producers of citizen cars, it was the task of the automobile producers to transform the plan into a workable business strategy. In this sense, it was the chaebol more than the state that ultimately decided the success or failure of the plan in the marketplace. The local content increased and the parts and components industry grew as a result of the 1973 policy shift, but the production of indigenous models was a different story. Not only GMK but also Kia, newly in control of Asia Motors, was reluctant to develop genuinely original models in fear of a steep increase in business risks. The two
Park Chung Hee Era Page 44
