Park Chung Hee Era

by Byung-kook Kim

  From the standpoint of the state, the establishment of the GTCs was crucial to its goal of export growth. In the eyes of the chaebol, the GTCs

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  became another instrument of conglomeration and diversification. The acquiring of a GTC instantly provided the chaebol with additional privileged access to preferential policy loans. The trading house also helped the chaebol in bringing small- and medium-sized producers into their network of vertical and horizontal kyeyôlhwa (affiliation). There were also the benefits of building up high-quality manpower, gathering quality information on overseas markets, and acquiring managerial expertise inside the chaebol organization, which could assist their pursuit of new business opportunities. Moreover, because the chaebol were forbidden to own commercial banks, GTC export credits could help finance their sprawling industrial empires. The organization of chaebol came to look like a concentric circle of firms, with the GTC at the core, assisting affiliate firms with export credits, market information, and managerial expertise and coordinating their collective actions. By 1979, half of South Korean exports were handled by chaebol-owned GTCs.45

  The Park regime was shrewd in utilizing export credits as both carrot and stick to discipline the chaebol in the direction of government goals.

  Every year, the Ministry of Commerce and Industry (MCI) announced the minimum amount of paid-in capital and total export volume, as well as the minimum number of export items, export destinations, and overseas branches, that a GTC had to meet to retain its GTC status. For those that met the requirements, the state banks provided loans up to the dollar amount on their letters of credit at preferential foreign exchange and interest rates. GTCs with exceptional export records were even exempt from showing their letters of credit in order to receive credit from domestic banks and could borrow up to 1.5 months’ worth of their past export record.46 Conversely, in the case of a GTC that failed to meet the target goals, the MCI immediately revoked its GTC license. During the 1974–

  1978 period, it was those chaebol with HCI affiliate firms and GTCs that grew into a formidable power bloc in the South Korean economy.

  As in the case of launching GTCs in 1975, it was the chaebol that initiated the idea of exploiting the Middle East boom of the mid-1970s to earn badly needed foreign exchange to stabilize the South Korean economy and fund HCI-led economic growth. This period looked extremely gloomy for the resource-poor, export-dependent South Korea, with the 1973 oil crisis shaking it from its foundations by pushing up the price of crude oil from $1.75 per barrel to over $10 in less than two years. Whereas the Japanese automakers developed fuel-efficient cars on the basis of their technological capabilities to break out of the dual challenges of rising oil import bills and stagnating export sales, Chông Chu-yông looked to the Hyundai Construction Company rather than to Hyundai Motors for an exit strategy. He

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  had no choice; Hyundai Motors, only established in 1967, was struggling to raise the local content of its products, let alone innovate with foreign technology. By contrast, Hyundai Construction had more than ten years of experience building infrastructure in Thailand and South Vietnam.

  Hyundai went to the Middle East in the fall of 1975, with the same spirit of learning-by-doing that had proved fruitful in Southeast Asia in the 1960s. A breakthrough came when Chông Chu-yông successfully bid for the Jubail Industrial Harbor project in Saudi Arabia, the crown jewel of Middle East construction projects worth $931 million,47 which was nearly half of South Korea’s annual national budget. The state became aware of the vast opportunities to earn foreign exchange in the global recycling of oil money and swiftly changed gears in a way typical of Park. The MoF

  channeled massive policy loans, while the Ministry of Construction (MoC) relaxed regulation on overseas construction and restrained “excess competition” among South Korean construction companies bidding for construction projects in the Middle East through the formation of cartels.

  Taking these measures as the state’s signal to emulate Hyundai, second-tier chaebol companies rushed into the Middle East construction market. Until the bubble burst in the mid-1980s, the boom was to provide South Korea with massive foreign exchange earnings with which to weather the 1973

  and 1979 oil shocks. It is estimated that the earnings in the Middle East construction markets contributed about 10 percent to South Korea’s GNP

  growth from the late 1970s to the early 1980s.48

  In the areas of state guidelines and regulations too, the chaebol proved crucial in prodding the state to look into new ways to achieve its policy goals. The EPB came to learn about the new possibilities for raising funds in international markets when Daewoo became interested in pioneering this frontier. Daewoo’s mid-level managers worked closely with mid-level MoF career bureaucrats, who defined their role as facilitating the business activities of private firms, to devise new regulatory rules on international financing.49 Similarly, when the Ministry of Transportation (MoT) announced broad long-term guidelines to modernize the South Korean transportation system, Hyundai Motors quickly responded with its own plan in August 1973 to help the MoT realize its goal.50

  As each of the chaebol dramatically expanded its empire during the 1970s to seize the business opportunities of HCI, it felt the pressures of further centralizing its corporate governance structures. As in the 1960s, the innovator was Samsung. The Samsung chairman’s secretariat enhanced its responsibilities for strategic decision making and business monitoring and grew in personnel. The secretariat became the “brain” of the Samsung Group, establishing mid- and long-term goals for the entire conglomerate,

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  coordinating personnel policy among the member firms, making strategic investment decisions, analyzing the impact of state policy and the trends of overseas markets, and providing support to member firms in the areas of public relations, overseas market expansion, and computerization, among others.51 The secretariat grew to seven teams with 40 elite staff in 1972, and to twelve teams with 71 staff by 1978. By 1980, it was to have ten teams with 139 staff.52 The other chaebol conglomerates soon came to look at the Samsung chairman’s secretariat as a model. Ssangyong established a Central Office for Coordination in 1969, Sôn’gyông (Sunkyong, which later became the SK group) an Office of Planning and Coordination in 1974, and Hyundai a Central Office for Planning in 1979.53

  In 1978, Samsung pioneered another managerial innovation to strengthen its coordination capabilities by dividing up highly heterogeneous member firms into six smaller subgroups along the sectoral lines of trading, heavy and chemical industries, light manufacturing, electronics, construction, and services. The reorganization allowed the Samsung Group to balance the business requirements and goals of specialization and conglomeration, managerial professionalism and family control, and group control and firm autonomy. Through the reorganization, member firms came to work more effectively within a unified small subgroup structure while Samsung retained its family-management style.

  From the standpoint of the chaebol, the Park era presented a tremendous opportunity for corporate growth as well as for corporate crisis. For those chaebol willing to work with Park under the rules of high risk and high payoff and capable of achieving the goals set by the regime, the state promised and delivered privileged access to resources. Whereas Hyundai was given lucrative government contracts, Daewoo was offered opportunities to take over and turn around insolvent business firms with generous loan packages. On the other hand, what Park perceived as a breach of the political exchange he had contracted for with the chaebol met with harsh punishment, as in the case of Samsung with the Han’guk Fertilizer incident. At the same time, however, Park’s ability to wield the stick was a variable, not a constant, being formidable during the early years of his political rule, when strong preexisting ties between the state and the chaebol were lacking . As the ties between the two deepened and widened with the launchin
g of FYEDP projects, and as Park committed political support in return for the chaebol’ s entrepreneurial leadership, the state saw its stick getting shorter and thinner.

  The Park era was one of reorganizing big business in South Korea. Of the ten largest chaebol groups of the early 1960s, only three remained in

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  the same exclusive club of the Big Ten by the early 1970s. The number was to fall to two by 1980. Thus the 1960s were a turbulent time for the old chaebol, but a tremendously profitable time for the new chaebol. By the early 1970s, there existed a group of highly motivated chaebol owner-managers who were poised to take advantage of state subsidies to build the heavy and chemical industries. The Park regime rewarded their risk taking by limiting other firms’ entry into HCI development, which conferred on the entrants oligopolistic profits with which to weather the difficulties of HCI projects. This strategic choice resulted in the segmentation of big business, with the Big Four undergoing the process of remarkable conglomeration and diversification within the heavy and chemical industries. The structure of big business created by Park’s HCI drive remained the same until the Asian financial crisis shook the chaebol from top to bottom in 1997–1998.

  The chaebol groups’ business success sustained South Korean economic development in spite of the oil shocks and rising trade protectionism, and economic development in turn allowed the Park regime to acquire instrumental legitimacy and sustain itself. The chaebol were dynamic players, sometimes following Park, other times leading the state, and still other times partnering with multinationals rather than with the state in their search for corporate growth.

  c h a p t e r

  t e n

  The Automobile Industry

  Nae-Young Lee

  Some say that the rise of South Korean automakers was a miracle.

  Others portray it as a necessary outcome of the work of a technocratically driven developmental state, visionary entrepreneurs with a “can do” spirit, or their partnership based on asymmetric political exchanges.

  Still others argue that it was neither a miracle nor a product of a superior state or chaebol institutional capabilities. They brush automaker success aside as growth generated through a massive injection of resources rather than as a continuous improvement of productivity. For some, the automakers had an easy way to growth, with the state subsidizing their entry into new lines of production, taking over the costs of adjustment during crisis, and awarding rents with which to make up business losses. Chapter 10 takes the South Korean auto industry as a case study to critically review all three schools of thought. By tracing the industry’s volatile history of hypergrowth, structural crisis, and top-down restructuring, and through identifying the formidable challenges of forging a national champion, it will argue that, in contrast to developmental state theories, the South Korean state pursued a strategy technocratically full of limitations, but successful in achieving an auto industry take-off because it not only backed the automakers with massive support but also let failing ones go under.

  The problem with the miracle thesis is that by focusing on the outcome of hypergrowth, it ignores the politically and economically challenging processes of coalition building, risk taking, innovation, and restructuring

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  which brought about that outcome. Indeed, the outcome was beyond all imagination. The South Korean auto industry was born only in 1962 with the assembly of a Nissan passenger car model, but by 2001 it had become the fifth-largest automobile producer and the sixth-largest exporter in the world. The outcome, however, looks like less of a miracle when the processes of the industry’s development are analyzed. In a word, getting the industry to take off and grow into a major player in global markets was an extremely challenging task, and South Korea ended up paying massive political and economic costs in the process. What looked like a miracle was, then, a product of bold risk-taking, hard work, and great sacrifice over four decades.

  The trajectories of the South Korean automakers show the challenging processes of developing a dynamic auto industry under national ownership. Saenara Motors, launched in 1962 as an assembler of Nissan passenger car models, fell only a year later in the midst of political and economic crisis. Sinjin Motors, allied with Toyota, took over Saenara in 1965, only to forge a joint venture with General Motors in 1972 amid the withdrawal of Toyota under the pressures of Zhou Enlai’s “Four Principles”

  and Park’s turn to the manufacturing stage of auto production. General Motors-Korea (GMK) underwent an equally rocky development, with its South Korean shares transferred from failing Sinjin to a state development bank (1976) to Daewoo (1978), while General Motors withdrew entirely from GMK (1981) in a dispute over management control and M&As (mergers and acquisitions). The MNC was to return to take over faltering Daewoo Motors in 2002.

  The fate of other automakers was also tumultuous. Asia Motors produced cars with Fiat technologies for eight years (1968–1976) until Kia Motors—a latecomer with its own modern integrated assembly lines established in 1970—took it over to roll over Hyundai’s expansion of market shares. As part of the state’s effort to rescue the auto industry through competition-limiting industrial rationalization measures in 1980, Kia Motors was given a monopoly over production of commercial vehicles while Hyundai and Daewoo held a duopoly over the passenger car market. The market segmentation was lifted by the state in 1986 after the auto industry recovered from the worst of corporate distress. However, Kia Motors survived only twelve more years; it collapsed in mid-1997, dragging the entire economy into a severe liquidity squeeze. A year later Kia Motors was taken over by Hyundai.

  The miracle, if there was any, was not that of the auto industry, but of Hyundai Motors, which introduced its own independent passenger car model in 1976 and began exporting to U.S. markets in 1986. By 2000

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  Hyundai Motors enjoyed a 70 percent share of the South Korean domestic market, boasted an annual production volume of 1.5 million cars, and annually exported more than 800,000 cars to over 180 countries. Even for Hyundai Motors, however, its “miracle” came only after it weathered severe crises in 1972, 1979–1980, and 2000. With its greatest patron—Park Chung Hee—assassinated in 1979, in particular, Hyundai Motors had to resist the pressures of economic stabilizers within the state to merge with GMK (now renamed Saehan) under unfavorable terms. Had it merged with GMK on the basis of 50:50 equity shares, as GMK demanded in spite of its limited market share and smaller asset size, Hyundai as a producer with the ambition to become a multinational with its own brand name rather than functioning as a subsidiary of an established MNC would have disappeared. That would also have removed much of the drive for export-led growth built into the chaebol-owned auto industry.

  The history of South Korea’s auto industry also raises doubts regarding those who explain its hypergrowth in terms of state or chaebol capabilities. The South Korean auto industry was a graveyard of would-be chaebol. If there was any message in its history of crisis-ridden hypergrowth, it is that the forging of a national champion was an extremely challenging task, even with the state backing the automakers with subsidized loans, license privileges, and trade barriers. Ironically, Park and his state bureaucracy were one of the root causes of their ordeal. His state apparatus did put its technocratic rationality to work, drawing up industrial policy and engaging in administrative guidance fashioned after the Japanese model of economic growth, but this did not protect the automakers from getting trapped in a destructive cycle of boom and bust, because the goal for which technocratic rationality was mobilized was anything but a technocratically rational one. Park intended to grow the infant automakers into a global player on a par with Japanese automakers in his lifetime, producing autos with their own national brand name under an economically sustainable cycle of model changes, and in collaboration with a dense network of nationally owned but foreign technology–licensed suppliers as
well as an extensive global distributive system of sales and services. The goal contradicted South Korea’s national capabilities. The initial conditions of a small domestic market, technological deficiency, capital shortage, limited human resources, and underdeveloped related industries made it the least likely place for developing internationally competitive automakers. Moreover, it was unlikely that MNCs would support a strategy that aimed to weaken their control over global markets through the forging of independent national champions.

  Given Park’s strong grip on the state, technocrats did not have the op-

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  tion of toning down, if not entirely rejecting, his goal. Rather, they ended up reversing the order of policy thinking, identifying the determinants of a chaebol assembler’s successful take-off, from its supplier networks to backwardly- and forwardly-linked industries, to market size, as the target to be restructured and reshaped by the state-brokered take-off of the chaebol assembler. The transformation of a chaebol assembler into a national champion was not only a goal but also a means to create the industrial structures and market conditions that helped the assembler achieve that goal. That is, the chaebol assembler was to pull its suppliers and related industries out of underdevelopment with its hypergrowth. Such circular reasoning put the state on a highly risky policy track. To ensure that the growth of the auto industry triggered the development of related industries and vice versa, Park housed Hyundai Motors in Ulsan, which he had designated as a special industrialization zone in 1966, in part because it was on the coast, with a deep harbor that could accommodate large container ships, and in part because it was located in his native Kyôngsang region.