In November 1965, factional struggles culminated in the takeover of the company by Sinjin, which had links to Nissan’s archrival Toyota. Again (and as in Taiwan), the company was initially lucrative but subject to criticism for its high prices.
In 1967 the government allowed two new firms to enter, purchasing market competition at the cost of a predictable proliferation of models and inability to attain economies of scale. To counter these problems, in 1969–
1970 the government developed plans to encourage the creation of a single engine plant. Such a plant would have conflicted with the division of labor set up by the international assemblers, for whom the Korean market was still far too small to merit special attention. The plan also ran afoul of Zhou Enlai’s proclamation of the “four principles” guiding Sino-Japanese interrelations before the normalization of diplomatic relations, under which China would not deal with Japanese firms investing in Taiwan and Korea.
In June 1973, just before the oil shock began to shake the global economy, the South Korean government embarked on a much more aggressive policy to encourage local firms to design independent models.50 The new policy, formalized in 1974, required assemblers to increase drastically their use of local components, design independent models, and limit the engines of mainstream models (80 percent of production) to no more than 1.5 liters. Only Hyundai developed a car that could be considered even reasonably independent. The chaebol, with government support, were able to draw on organizational skills developed in one sector and apply them to new sectors. Hyundai hired an Italian firm to design the body of its new Pony model, and manufactured the engine, gearbox, and rear axle under license from Mitsubishi. George Turnbull, a former executive with British Leyland, managed the project.51 Foreign loans guaranteed by the Korean
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government supplied more than 70 percent of the capital, while policy loans and generous tax provisions also helped.52 Domestic demand grew rapidly from an extremely low base.
Most accounts of the Korean auto industry give great credit to the Long-Term Development Plan of 1974, but it is important to recognize the severe limitations of the industry through the end of the Park regime. Even at its peak of 113,564 passenger cars and 78,576 trucks in 1979, the volume of production was still far from achieving economies of scale, and not much higher than in Taiwan.53 Hyundai began exporting in 1976, but volumes were tiny—the first export order comprised six cars for Ecuador.54
Quality was terrible. Most telling, the cars were dumped overseas at as-tonishingly low prices—less than half the price charged in the domestic market.55 Such tactics not only grossly violated norms of international trade, they were also economically unsustainable. In the words of a Hyundai executive, “Between 1972 and 1978 Hyundai Motors was essentially a bankrupt company supported by other Hyundai companies.”56 And Hyundai was the strongest of the Korean automakers.
To make matters worse, the South Korean economy crashed in 1980. As Park’s heavy industry drive reached a climax in the late 1970s, inflation, debt, and low capacity utilization plagued the economy. In the December 1978 National Assembly elections, the leading opposition party gained a plurality of votes, though the electoral rules under the yushin constitution kept the ruling party in power. The Park administration began to retrench, but the second oil shock only exacerbated the problems. Then in October 1979, Park was assassinated. By 1980, Korea’s auto industry was in desperate straits. Production dropped by half, and barely improved in 1981 to about 69,000 passenger cars and 52,000 trucks. Trivial levels of exports provided little relief. Despite Korea’s strong overall industrial base and experiment in exports, production languished behind even that of Taiwan, which produced about 137,000 light vehicles in 1981. South Korean production capacity was woefully underutilized and quality continued to lag.
The Park administration had stumbled on a contradiction: overcoming the forbidding barriers to genuine localization of production in automobiles required a longer period of stability than Park’s hard-charging, crisis-prone style of economic management could provide.
Faced with disaster, the Chun administration pushed a series of macroeconomic stabilization measures that succeeded in taming inflation, while its industrial policy focused on cutting and rationalizing excess capacity.
Many analysts assert that the government’s effort to merge the leading auto assemblers failed. Alice Amsden, for example, dismisses the merger campaign as “short-lived and abortive.”57 Instead, she and other analysts
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stress the political power and increasing size of the chaebol, particularly Hyundai. It is true that the initial merger efforts foundered, but compelling firms to merge against their wishes is always difficult (as it was in Japan), and it should come as no surprise that a policy that amounted to asking affiliates of GM (Saehan, soon to become Daewoo) and Ford (Hyundai) to merge their operations was doomed to failure.58
And yet, in the end the Chun government did succeed in imposing reorganization, largely by imposing limitations on the smaller players. Mergers continued, including the absorption of Jeep producer Kôhwa by Tonga (later Ssangyong).59 More important, from early 1981 through the end of 1986, the government strictly limited the number of producers. It pushed Kia out of passenger cars, leaving only leaders Hyundai and Daewoo. A similarly strict division of labor governed trucks, where Kia received a monopoly in light trucks in return for exiting passenger cars. At the same time, the government changed tack on the introduction of foreign capital, encouraging each of the companies to strengthen its links with major global assemblers. From 1982 to 1986, Daewoo established a new joint venture with GM, Kia took capital injections from Mazda and its American parent Ford, and Hyundai accepted both technology and a 10 percent capital share from the Mitsubishi group.60 However, in line with the Korean government’s exacting policies on direct foreign investment, Hyundai retained management control and the right to import parts and technology from Mitsubishi’s competitors and to compete in third markets.61 The government also provided support to parts makers. Hyundai and Daewoo, the only passenger car producers, first established supplier associations during this crucial period.62
In standardizing engine sizes at 1.5 liters and reducing producers to just two firms, Korea distinguished itself from virtually all other developing countries, and finally made it possible to gain economies of scale in auto assembly.63 In 1983 production of light vehicles barely eclipsed the level reached in 1979, and even then it was only about 25 percent higher than that of Taiwan. From 1984, exports, led by Hyundai’s redesigned Pony, began to play a significant role. In 1986, the last year under the enforced division of labor, passenger car production exceeded 450,000—four times the peak of 1979 and almost eight times the level of 1980, the last year before the enforced rationalization. In 1987 production almost doubled again to 789,819 units. During the same period, production in Taiwan, which failed to implement rationalization policies, barely doubled. Aggressive investments by large business groups were not sufficient: only government-enforced rationalization enabled South Korea to attain the economies of scale vital to competing in automobile manufacturing. And
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even that rationalization was temporary and unexpected, coming in response to the economic and political crisis surrounding Park’s death. Fortunately for the Korean auto industry, that extraordinary period lasted long enough to allow Korean companies to make a critical breakthrough in production efficiency.
The South Korean firms differed from the Japanese in some critical areas, especially in relations with suppliers. Assemblers such as Hyundai tended to deal directly with, and often supported financially, their full range of vendors, rather than developing a tiered pyramid of cooperating suppliers. The main contractors delivered most of their output to one assembler, and few exported, a sharp contrast with Japan and even Taiwan.64
Organizationally, the Korean auto firms
largely followed the Japanese approach. Only Hyundai developed significant independent skills in body, chassis, and engine design, and even then only slowly; most of the Korean firms continued to rely on Japan.65 After an abortive initial campaign to storm the North American market, they concentrated on exports to less developed countries, before returning to North America. Even more than the Japanese in the rapid growth period, they were heavily indebted and, with the occasional exception of Hyundai, at best marginally profitable.66
As the Chun administration’s rationalization measures wore off, the typical tendency of chaebol to use preferential credit to expand aggressively reasserted itself. Kia’s return to passenger car production in 1987 caused few immediate problems; indeed, Kia soon passed Daewoo to become the second-largest producer. However, Ssangyong also moved into passenger cars and in late 1994 the government yielded to heavy political pressure to allow the Samsung group to enter auto production. The specter of excess capacity was only partly banished by renewed success in exports. Even before the collapse of the Thai baht sparked the Asian financial crisis of 1997, several chaebol, including Kia, fell into insolvency. Although Kia had been relatively specialized and well run as an auto company, it overin-vested in autos, the truck maker Asia Motors, and specialty steels. By late 1998 Kia fell under the control of Hyundai in a merger of the largest and second-largest auto producers that gave Hyundai around three-quarters of the domestic market.
Ssangyong failed in 1997 and was acquired by Daewoo in early 1998.
Within a couple of years Daewoo, which had passed Kia to rank number two, then collapsed, leaving billions in debts and leading to numerous indictments. Samsung, the late entrant, fell into the hands of Nissan, its technology supplier, and thus into the Renault camp. Even Hyundai, the strongest and most independent Korean firm, sold a 10 percent share to Daimler-Chrysler. With the partial exception of a couple of firms in the
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Hyundai-Kia group, Korean suppliers remained very weak compared with their competitors in Europe and Japan.
Nonetheless, Korea strengthened its position as one of a handful of leading automobile production sites, and Hyundai began to challenge Toyota for leadership of the global assembly industry. President Park’s dream of a proudly independent Korean industry may have faded a bit in the face of global consolidation that affected even the United States and Japan, but without question Korea’s success in automobile design, production, and assembly surpassed anyone’s expectations.
Despite the many important differences separating South Korea from the other major industrial powers in East Asia, when it came to key developmental projects such as promoting the steel and automobile industries, Japan, Taiwan, and South Korea adopted and implemented policies that were more similar than regional specialists have usually appreciated. Often the differences were greater across industry than across country. Korea’s giant steelmaker the Pohang Iron & Steel Company not only looked rather like Japan’s Nippon Steel, one of the major forces behind POSCO’s initial design and construction, but also followed a path of development remarkably similar to that of China Steel in Taiwan, though with the construction of the Kwangyang mill, POSCO traveled further down that path.
In autos, Korea closely followed the Japanese pattern. The Korean auto industry became far more successful than its counterpart in Taiwan, but as this chapter has emphasized, South Korea did not pull decisively ahead until the Chun administration reorganized the industry in the turmoil surrounding the death of President Park. Industries matter: for integrated steel makers, installing and managing capacity will always be crucial, while automakers in all countries focus more on new model design and relations with subcontractors and dealers. Governments often exercise determinative influence over steel companies, but they typically have more complex relations with auto firms.
Of course, to say that the governments of Northeast Asia all adopted dirigiste approaches to development, but promoted autos quite differently from steel, does not mean that their approaches to development were identical. Indeed, I have argued elsewhere that variations in the political systems of the three countries carried important implications for industrial policy.67 Significant differences show up even in the two strategic industries discussed here. Japan, for example, had by far the largest and most advanced economy in Northeast Asia; government intervention, even in steel and autos, tended to be more indirect (especially after about 1970) and more often explicitly politicized.
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The defining difference between South Korea and the others was the aggressive use of preferential credit and governmental loan guarantees.
Those loans and guarantees, it should be noted, went not just to the chaebol but to public enterprises as well. The biggest difference between POSCO and China Steel, which generally followed remarkably similar developmental trajectories, was the aggressive support the South Korean government gave to growth even at the expense of low rates of profitability. Taiwan, always more cautious than Korea, grew even more so over time. In the case of semiconductors, for example, Taiwan’s government played a crucial pioneering role, but quickly privatized production facilities. It continued to support the industry with tax breaks and research funding, but it left financing largely to the companies themselves, which increasingly tapped the equity markets rather than depending on banks owned or directed by the government.
Similarly, the provision of financing to successful exporters in Korea profoundly affected small- and medium-sized enterprises. Contrary to the virtually universal impression, the share of employment and output coming from small firms was nearly as large in Korea as in Taiwan,68 but as we noted in the case of the auto industry, small firms in Korea were more dependent on large assemblers for help in finance and exporting. On the other hand, while large chaebol business groups played a more important role in Korea than in Taiwan, the materials reviewed here do not suggest that they became genuinely independent of government support and control either during the Park regime or after its demise.
Thus, notwithstanding some important differences, particularly regarding the greater use of subsidized credit in Korea, the review of the auto and steel industries given above suggests that policy toward crucial industries during the rapid growth period was surprisingly similar—and statist—
across the three countries. Differences were more likely to stem from variation across industries rather than from fundamental differences in government policy.
How should we account for the remaining differences, the particular style of statism, especially the South Korean government’s greater decisiveness and willingness to allocate capital and assume risk? Formal institutional factors no doubt explain some of the differences. During the periods of most rapid growth only Japan had a fully democratic political system, so naturally the Japanese government was more sensitive to political concerns. In that period, Japan and Taiwan conducted local elections and used a multi-member electoral system infamous for its tendency to promote factionalism, while South Korea had a strong president but no local elections.
The Korean government under Park and his successors was less compelled
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to factor local reactions or factional implications into its policymaking.
The lack of local elections helps explain why the Korean government focused on assemblers such as Hyundai to the near exclusion of part suppliers, while Japan and even Taiwan provided significant support to parts companies.
In Taiwan, local business had grown up under Japanese occupation and was familiar with Japanese ways of doing business. But the government and the ruling party, the Kuomintang, had experience in governing on the mainland, relatively independent from Japanese influence. Because Park and his officials had grown up under the Japanese, the approach and institutional structure they introduced made much deeper use of the Japanese structures.
At least as imp
ortant as institutional structures were differences in the goals and capabilities of the ruling parties in the three countries.69 The KMT lost the mainland when it failed to control inflation, corruption, and instability. After the outbreak of the Korean War in 1950 caused the American navy to begin patrolling the Taiwan Strait, the main threat to Taiwan came in the form of subversion and capital flight rather than invasion. As a result, while the KMT prized industrial development, it never accorded it priority over economic stability or diplomatic support. The party could afford to focus on broad economic and political goals partly because the KMT brought to Taiwan a formidable political organization rendered even more capable by the reforms of 1950–1951. The KMT did not require campaign contributions from big business, nor did it contest the limited election campaigns held on Taiwan primarily on the basis of the party’s contributions to economic development.
In contrast, the historical lesson impinging on Park and other South Korean leaders was the need to repel external invasion and influence, first from Japan, then from North Korea. Moreover, while Korean presidents exercised a degree of direct administrative control unprecedented in Japan or even in Taiwan, they could not rely on strong, well-organized parties to maintain social support. Reliance on the chaebol reflected not only a recipe for rapid industrial growth but also a search for allies and contributors.
Thus, as regional specialists emphasize, differences in the political regime and ruling parties of the Northeast Asian countries have led to important differences in industrial policy, with equally important consequences for industrial structure and patterns of economic specialization. In the key periods of industrial development during and immediately after the Park era, and particularly in core sectors such as steel, autos, and electricity, however, outsiders are right to detect a broadly similar, and highly
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