Park Chung Hee Era

by Byung-kook Kim

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  chose to bring out the models previously produced by their licensors for European markets with only minor modifications under the new brand names of Camina and Brisa, respectively. Thus GMK and Kia accommodated the state only partly, manufacturing independent, but not original, models. Only Hyundai Motors developed an original model, Pony, against all odds.

  As Park had to win over reluctant EPB and MoF bureaucrats with his charisma and power, Hyundai founder and owner-manager Chông Chu-yông had to overrule the skepticism of many of his men at Hyundai, who thought the financial and technological barriers too great. The Pony Project was pushed by Chông Chu-yông and his younger brother and the president of Hyundai Motors, Chông Se-yông. Chông Chu-yông was the man Park valued as his business partner—an ambitious, audacious personality willing to take on anything with a “can do” spirit. With his family’s controlling shares of the Hyundai Group and under the opaque corporate governance structure of chaebol, Chông Chu-yông was able to introduce the Pony in the local market after three years of development in 1976. The citizen car became an instant hit, enabling Hyundai Motors to increase its market share from 19 percent to 39 percent in a mere year. By 1979, it was to command a market share of 51 percent. The introduction of citizen cars, coupled with a continued hypergrowth of per capita GNP, meanwhile helped expand South Korea’s total number of auto production over seven times to 204,447 between 1973 and 1979. The success was owed to several factors.

  First, the Pony Project succeeded because it was an integral part of the larger HCI drive, which provided Hyundai Motors with a supply of internationally competitive inputs. In particular, as shown in Chapter 7, the Pohang Steel & Iron Company, a state enterprise promoted as a national champion with Japanese reparation funds since 1967, had by the mid-1970s begun supplying steel products at a lower cost than the Japanese steel mills.17 The rapid expansion of automobile production, based in part on the steel industry’s timely provision of internationally competitive steel products, in turn contributed to the productivity and profitability of the steel industry.

  Second, fortunately for Hyundai Motors, its development of the Pony coincided with an increasing liquidity in the international financial markets because of a massive infusion of petrodollars. After the 1973 oil crisis, global financial institutions began recycling the great sums of oil money by expanding their loans to oil importers at relatively low interest rates.

  Taking advantage of the large supply of petrodollars, some late developers, including South Korea, embarked on “indebted industrialization.”18

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  Hyundai was a beneficiary of the ample liquidity, financing more than 70 percent of its required capital through foreign loans, which totaled $61.2 million by 1976. The automaker borrowed money from Suez Bank (France), Barclays (England), and Mitsubishi Bank (Japan), and the foreign loans were guaranteed by the state.

  Third, the Pony Project yielded positive results because it effectively exploited the opportunities of collaboration provided by the highly competitive world automobile industry. In order to overcome the technological gap, Hyundai Motors had actively sought technological licensing arrangements since it had been established in 1967 with support from Ford. Once it launched the Pony Project, Hyundai Motors began diversifying its sources of technology. Ironically aided by its image of technological backwardness, which made MNCs underestimate Hyundai’s potential as a competitor, Hyundai Motors was able to obtain technology from several sources in the development of its Pony model. The car design came from Italy; its internal combustion engine from England; and the engine block design, transmission, and axles from Japan.

  Among foreign sources, it was Mitsubishi Motors that Hyundai came to rely on the most. In May 1973, Chông Chu-yông and Chông Se-yông visited Mitsubishi to request technological and managerial assistance in the development of the Pony, although its primary licensor since 1967

  had been Ford. The transnational coalition building had begun the year before, when the Hyundai Group entered the shipbuilding industry with the assistance of Mitsubishi. Hyundai’s Ulsan shipyard was a replica of the Mitsubishi shipyard, and Chông Chu-yông hoped to replicate the Hyundai-Mitsubishi alliance in the automobile industry. During the development of the Pony, the engineers of Mitsubishi Motors resided in Hyundai Motors’ Ulsan plant to design the layout of the assembly lines and to supervise their construction. Hyundai engineers were also sent to the Mitsubishi plant to be trained by its engineers. Parallel to the training, Hyundai Motors began importing key parts and components of internal combustion engines, transmissions, and axles from Mitsubishi Motors.

  At the same time, Mitsubishi Trading Corporation supplied loans to finance the construction of the Pony assembly lines in the Ulsan plant. The Hyundai-Mitsubishi alliance in the automobile industry was part of the larger trend of South Korean–Japanese collaboration emerging across industries. In addition to the two countries’ cultural similarity and geographical proximity, the organizational similarity of group-based investment coordination between the South Korean chaebol and the Japanese keiretsu, and the dense web of personal ties developing between the top managers of the two countries over years of collaboration contributed

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  to the development of close ties between various industries of the two countries.

  Fourth, massive state support was also crucial to the development of the Pony model. The Ministry of Finance had state banks provide policy loans at preferential interest rates based on the newly established National Investment Fund. It also exempted the automakers from paying corporate taxes for the first three years of a new plant’s operations and returned up to 10 percent of the capital invested to the automobile producers as “investment tax credits.”19 Moreover, from the outset, Park made himself available to Chông Chu-yông to gather information on the automaker’s needs.

  Fifth, Hyundai Motors succeeded because its competitors blundered. In particular, the front-runner, GMK, made the strategic mistake of choosing the outmoded Chevrolet 1700 as its citizen car and selling it under the local brand name of Camina. The model was too heavy, too large, and too fuel-inefficient for the South Korean market, where the price of gasoline was one of the highest in the world. The 1973 oil crisis dealt a blow to the sales of the Camina, forcing GMK’s market share down from 23 percent in 1975 to 16 percent by 1977. With the decline, the South Korean major shareholder of GMK, Sinjin, suffered financial difficulties and ended up selling its stake to the state-owned Korea Development Bank in 1976.

  When Daewoo purchased the original Sinjin shares in 1978, the joint venture changed its name to Saehan Motors and then to Daewoo Motors with the departure of General Motors in 1981.

  Liquidity Squeeze and Adjustment, 1980–1981

  For a moment, Hyundai Motors thought its victory was near. The automaker had defeated GMK, the joint venture of the world’s largest MNC, in the South Korean market with its own indigenous model. Just as the Pony was introduced in the domestic market, moreover, Hyundai turned to the export market, shipping its citizen cars to Central American markets. The euphoria, however, soon turned into a sense of crisis as the exports failed to get picked up in developing economies. Entry into developed economies was unthinkable, given the low quality of the Pony, the prohibitively high marketing barriers, and the lack of advanced managerial know-how. To make the situation worse, the 1979 oil crisis buried the domestic market in a severe stagflation, throwing the entire automobile industry into a new vicious circle of rising interest rates, declining domestic sales, slow exports, and large excess production capacities. Moreover, pol-

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  itics took an unexpected turn with the death of Park Chung Hee in October 1979. Chông Chu-yông’s greatest patron had suddenly disappeared.

  After a brief period of political opening, Chun Doo-hwan seized power via a military rebellion in D
ecember 1979 and a national subversion in May 1980, with the effect of aggravating the already difficult economic situation.

  The year 1980 was the worst for the South Korean economy since Park’s seizure of power in 1961, spreading rumors of its imminent collapse under the pressures of rising corporate distress. To deal with the issue of economic stabilization, as well as to clear the way for the launching of an authoritarian Fifth Republic (1980–1988), Chun Doo-hwan organized the Special Committee for National Security Measures (SCNSM). The SCNSM’s Economic Committee became primarily responsible for restructuring the heavy and chemical industries, including the automobile sector.

  Within Chun Doo-hwan’s inner policy circle, however, developing a consensus on how to deal with the problem of surplus capacity in the automobile industry was difficult. The familiar conflict between proponents of stabilizers and mercantilists resumed—but in the economically fragile and politically uncertain context of 1980 and 1981.

  The proponents of financial stabilization consisted of the EPB, MoF, Bank of Korea, and Korea Development Institute (KDI), which all shared pessimistic views regarding the growth potential of the auto industry. In keeping with classical comparative advantage theories, they argued that South Korea’s lack of technology and capital prevented the country from developing a competitive automobile industry on its own. Officials from the World Bank and the International Monetary Fund agreed, advising South Korea to concentrate on the development of its parts and components industry, not the assembling of indigenous models.

  The mercantilist proponents of growth through the socialization of adjustment costs were made up of the MCI and its research wing, the Korea Institute of Economics and Technology. They believed that the South Korean automobile industry faced only temporary difficulties, which could be overcome by export promotion. Drawing on the insights of product life-cycle theory and the infant industry argument, the mercantilists argued that with the standardization of auto production technology around the world and the rising costs of labor in developed economies, competitiveness was rapidly shifting from advanced to developing countries. Therefore any drastic restructuring of the South Korean automobile industry would prevent South Korea from exploiting the window of opportunity to develop a locally owned automobile industry. In their eyes timing was crucial. The year 1980 should be not a moment of downsizing but a time of

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  perseverance, with the state continuing its protectionist policies and promotional measures for the automobile industry with an eye to getting it ready for another round of hypergrowth when the global recession ended.

  In the end, the SCNSM’s Economic Committee settled on state-brokered mergers of failing automakers as a way to relieve the problem of large surplus capacity. The industrial rationalization measure proposed to merge Hyundai and Saehan into one passenger car producer and make Kia the sole producer of commercial vehicles. The measure represented the victory of EPB-led stabilizers, who hoped to reduce the number of automakers in the passenger car and the commercial vehicle sectors with the goal of realizing greater economies of scale and tapping the superior resources of General Motors. The idea profoundly aggravated market uncertainty. In a mere eight years since the launching of the 1973 Long-Term Plan, General Motors had changed its joint venture partner from Sinjin to the Korea Development Bank to Daewoo. Now it was under state pressure to team up with Hyundai Motors. Kia had likewise taken over Asia Motors, only to give up passenger car assembly lines in return for the monopoly on production of commercial vehicles. The 1980 merger policy was paradoxical in character. The stabilizers justified it as a measure to reduce the role of the state in economic management, which they blamed for causing severe surplus capacity, but ironically the merger policy ended up being extremely interventionist. It was the state, not the chaebol, which tried to orchestrate the state withdrawal from the market.

  To reshuffle the automobile industry along the lines of the 1980 merger policy, the EPB-led stabilizers needed to overcome two hurdles. First, Daewoo and Hyundai had to agree on who would be the sole South Korean partner with General Motors in the newly proposed joint venture in the passenger car industry. Then there had to be another agreement between the South Korean partner and General Motors on the ownership structure of the new joint venture. Of the two issues, it was the first, concerning domestic ownership, that was easier to resolve. The breakthrough here came with the state’s strategy of bringing about an intersectoral business exchange between Daewoo and Hyundai. In 1980, the two chaebol conglomerates were suffering from surplus capacity in the electricity generator sector along with the auto industry. Zeroing in on the pair’s overlapping businesses, the stabilizers proposed that Hyundai and Daewoo each choose one sector and give up the other. The stabilizers expected Hyundai to choose the electricity generator sector, because they believed that the passenger car industry could develop only with help from General Motors, Daewoo’s joint venture partner.

  To the EPB’s surprise, Hyundai opposed any idea of an intersectoral

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  business exchange on the grounds that it was more competitive than Daewoo in both sectors, although it too suffered from surplus capacity.

  The persistent pressure from SCNSM eventually forced Hyundai to accept its merger plan, but when given the right to choose its sector for specialization, Hyundai chose the passenger car industry against the advice of the SCNSM’s Economic Committee. After Hyundai’s decision, K¤m Chin-ho, chairman of the Industry Subcommittee of the SCNSM’s Economic Committee, announced in August 1980 that Daewoo’s share in Saehan Motors would be acquired by Hyundai Motors in exchange for Daewoo’s takeover of Hyundai’s electricity generator business and that Kia would be given the exclusive right to produce commercial vehicles in return for its exit from the passenger car industry. As their end of the bargain, both Daewoo and Hyundai would withdraw from the commercial vehicle sector.

  Next the stabilizers turned to the issue of ownership shares between Hyundai and General Motors in the new joint venture. Six meetings were held in August and September of 1980 between the representatives of the two companies, only to become deadlocked over the issues of equity ratio and export. Hyundai argued that the equity share of General Motors in the new joint venture needed to be calculated on the basis of not only GM’s share of Saehan Motors (50 percent), but also the total assets of Saehan and Hyundai Motors. Because General Motors owned a 50 percent share of the smaller of the two automakers, Chông Chu-yông argued that the equity share of General Motors in the new joint venture should be only 20 percent and that the management rights ought to be exercised by Hyundai. By contrast, General Motors insisted on having 50 percent of the equity, or at minimum 33 percent of the shares to enjoy veto power.

  The conflict over equity shares and management rights reflected the ir-reconcilable differences in the two sides’ marketing strategy. General Motors insisted that the new joint venture would be a subsidiary in GM’s international production network, producing only models based on the multinational’s design and technology. To be sure, GM proposed building a large parts and components production network in South Korea and selling that plant’s products to the world market through the GM distribution network as part of its larger ongoing effort to redesign the division of labor among its subsidiaries with the goal of manufacturing “world cars.”

  However, it was also keen on preventing its subsidiaries from disrupting its grand vision of specialization and integration within and through its internal organization by pursuing their own independent marketing strategy.

  To balance these two requirements, General Motors took the position that the new joint venture with Hyundai should export vehicles only through the existing sales networks of General Motors and that it should not ex-

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  port cars to any market already dominated by GM subsidiaries. Hyundai, by contrast, wanted to remain independent in
management, freely selecting models for both the domestic and the export market without any restrictions.20

  Given the differences in the two parties’ definition of the mission, role, and organization of the joint venture, negotiations stalled until the military junta turned power over to the Fifth Republic with its leader, Chun Doo-hwan, ascending to the presidency in 1980. Upon the return to “nor-malcy,” the MCI regained control of industrial policy and decided to nul-lify the August 1980 merger agreement between Hyundai and Saehan in the face of the deadlock in the Hyundai–General Motors negotiations. The U-turn was made in 1982 also because forcing a merger on unwilling private companies was criticized as an unconstitutional infringement on private property rights by both the chaebol and the media.

  The political struggle over the August 1980 merger policy revealed the rapidly changing nature of the South Korean state and its relationship with big business. First, with the death of Park the state’s policy orientation changed fundamentally in the early 1980s, with the EPB-led proponents of economic stabilization and liberalization replacing the nationalistic-mercantilist bureaucrats like O Wôn-ch’ôl in key decision-making positions. The August 1980 merger policy for the automobile industry was part of this larger political and economic change. The days of growth at all costs and extreme risk taking were over. The massive policy arsenal developed by the state, along with the authoritarian political mechanisms of control, was now harnessed for stabilization and liberalization. Second, the nullification of the merger policy also showed that after two decades of hypergrowth, the chaebol came to acquire the power to resist the state.