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Moreover, Ulsan’s geographical proximity to P’ohang, the site of an integrated steel mill then under construction, and to Pusan, South Korea’s largest port, serving as the gateway to the Japanese market, worked in its favor. The strategy was to get the automakers and related industries to promote each other’s growth as consumers and suppliers, respectively.
Similarly, Park, rather than being discouraged by the absence of globally competitive vendor firms, looked at it as a reason to develop chaebol assemblers. Again, they were to sow the seed for a dense web of robust vendor firms rather than wait until their suppliers’ maturation to acquire international competitiveness. The political drive to build a thick network of vendor firms and subsidiaries began in 1973, when Park chose the automobile industry as one of the strategic sectors in the drive for heavy and chemical industrialization (HCI). To exploit the synergy effects of industrial clustering, many of the parts-and-components producers located their factories in Ulsan and other industrial zones near their assemblers. The state also emulated Japan in encouraging vendor firms to affiliate (kyeyôlhwa) vertically and horizontally around a chaebol assembler, while at the same time supplying as many standardized parts and components as possible to multiple assemblers, with an eye to strengthening their ability to engage in coordinated actions, pool resources, and exploit greater economies of scale. The kyeyôlhwa was South Korea’s way to counter the obstacles of small markets, limited resources, and weak supplier networks through a state-brokered and -subsidized restructuring of inter-company relations and product standardization.
Likewise, the state’s policy on corporate ownership structures was drawn
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more ideologically than technocratically. Park was aware of the dangers of MNC domination. Because multinationals chose sites and scales of production, automobile models, and their cycle of change from the perspective of their headquarters’ interest in maximizing profits at the global level and operating a worldwide division of labor among its subsidiaries,1 their market domination usually ended up stagnating the auto industries of developing economies. In a few large third world economies like Brazil, some of the multinationals were ready to transform their subsidiaries into a producer of major parts and components in the 1970s as part of their strategy to produce a “World Car,” but none would have welcomed any of its subsidiaries’ hypergrowth on the scale that Park envisioned for South Korean automakers. The market was too small, with annual domestic sales total-ing less than 150,000. There was also a grave security risk.
The dangers of MNC domination, however, do not mean that the opposite strategy of maintaining local ownership by automobile producers with the goal of export promotion, rather than focusing solely on the domestic market, and of seeking maximum linkage effects, despite initial difficulties, was technocratically rational. But this was exactly what Park pursued. He assumed that locally owned automakers by definition had an organizational interest in producing cars under their own national brand name and developing into a national champion. The assumption would turn out to be correct only in the case of Chông Chu-yông (Hyundai) among his numerous chaebol partners. With this assumption, Park forged a dual alliance between the dirigiste state and local capital as the driving force to upgrade the auto industry. Although South Korean automakers imported key technologies and auto parts from MNCs, Park and his chaebol partners, especially Chông Chu-yông, resisted foreign domination by holding on to the principles of local ownership and national management. As Chông Chu-yông argued and Park agreed, no multinational was ready to join Park’s vision of HCI, which, if successful, would compete with the MNC
for a larger share in global markets on the basis of national brand name and product models. The strategy entailed high risk and high costs, given the formidable entry barriers of the capital- and technology-intensive auto industry.
To sum up, the “technocratic” strategies of maximizing linkage effects with related industries, consolidating vendor firms into a closely-knit web of kyeyôlhwa, and maintaining the national ownership of the auto industry emerged out of Park’s Napoleonic ambitions, his distinctive understanding of Japan’s path to the modernity, and his nationalist beliefs and prejudices. To call such strategies “technocratic” hides as much as it reveals about South Korea’s political and economic mechanisms of industrial
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hypergrowth. Certainly, the state behaved technocratically, searching for a strategy that most effectively achieved a given set of politically formulated goals within the constraints of resource scarcity. However, because those goals were set by a man who aspired to become a “Meiji,” the state’s technocratic strategy turned out to be a carefully calculated but still dangerous gamble, if not wishful thinking. The strategies’ technocratic limitations were visible in policy outcomes. The South Korean automakers remained too small, too backward, and too poor to construct worldwide supply and marketing networks through the end of the Park era. The state’s designa-tion of the auto industry as a strategic HCI sector guaranteed massive financial incentives to those who pursued the state’s goals, but the massive injection of resources aggravated surplus capacity and corporate distress.
Through the Park era, the backward and forward linkage effects with related industries and vendor firms, as well as the ownership policy, proved to be more an obstacle than an opportunity for growth, as they undermined the fledgling auto industry’s competitiveness.
Alongside the state’s calculated but risky gamble to pursue Park’s goal of forging a national champion, the local automakers’ entrepreneurial spirit and managerial know-how shaped the auto industry’s trajectory of development. The state created a business environment for risk taking, but it was the local automakers, especially Hyundai Motors, who actually took the risk of entering the manufacturing stage in a big way. They individually advised Park on broad policy guidelines and were ultimately responsible for implementing state policies. For the state to have its way, it needed business cooperation and business talent. Moreover, once the investment was made, the balance of power between the state and big business changed from one of state dominance to one of state- chaebol sym-biosis, because the state defined the survival of the automakers, heavily financed by state loans, as in its own political interest. At the same time, the state apparatus became internally more fragmented and burdened with increasing interagency rivalry and conflict as it grew in the process of orchestrating the HCI drive. The expansion of the state’s role, power, and resources ironically undermined state autonomy by provoking societal interests, especially the chaebol, to influence the state’s exercise of power in the direction of their interests.
The importance of chaebol capabilities, however, should not be overemphasized. Different local automakers ended up pursuing different business strategies with varying levels of success, showing not only that state policy alone did not determine industrial performance, but also that the chaebol automakers varied strikingly in their corporate capabilities. Whereas Hyundai Motors pursued the high-risk, high-payoff strategy of developing into a locally owned exporter of independently designed passenger car
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models in the way Park wanted, Sinjin opted to form a 50:50 joint venture with General Motors in the hope that this move would minimize business risk and serve as a political safety net. Kia, as a distant third-ranked automaker, emulated Hyundai—but in very un-Hyundai ways, manufacturing an outdated Mazda model for its mini-export drive. The winner was Hyundai, which bet on the risky “Pony project” in the mid-1970s.
That triumph came not in Park’s lifetime, however, but in the mid-1980s with a steep rise in exports to U.S. markets. Then there were Saenara, Sinjin, and Asia Motors, which all fell while trying to become chaebol.
The main objective of Chapter 10 is to show that forging a national champion was a political game much more challenging for Park to play than it has been portrayed in developmental
state theories and the chaebol literature. The problem was that the ambition to build a dynamic auto industry capable of challenging MNCs in Park’s lifetime could not be technocratically achieved. Rather this ambition dragged the developmental state into calculated but dangerous policy gambles and taxed his financially overburdened chaebol partners with surplus capacity. Whatever technocratic and entrepreneurial capabilities South Korea’s state apparatus and big business possessed—and they did have capabilities—those capabilities could not guide South Korea out of its destructive cycle of crises because of the overly ambitious goals that drove policy in the first place. Yet Park held on to his ambition. More incredibly, despite its vulnerabilities, the South Korean auto industry continued on its track of crisis-ridden hypergrowth, while Hyundai Motors laid the ground for its eventual transformation into a national champion. What made this possible was the combination of two seemingly contradictory measures. On the one hand, for the automakers that made Park’s ambition their passion, he provided massive subsidized resources during good times while taking over a major share of their adjustment costs during bad times. At the same time, however, Park was not afraid to let failing automakers go under. On the contrary, he seized the opportunity for the state to thoroughly restructure failing automakers before or as part of their takeover by a third party. With bank debts rescheduled, excess workers laid off, and production lines streamlined under state support, Park thought the South Korean auto industry could start anew its task of forging a national champion.
Assembly Stage, 1962–1969
The development of South Korea’s auto industry began in earnest in 1962, when local entrepreneurs were encouraged by the military junta to enter the auto market as assemblers of licensed foreign models.2 Park and his
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staff sought to develop the industry not only for its own sake but also as an engine for growth for the myriad of related industries that fed into and out of the process of car making. Included in the sectors that Park hoped the auto assemblers would trigger growth were not only the parts-and-components sector of the auto industry but also the steel, machinery, electronic, and chemical industries. To promote the auto industry, the military junta adopted the Five-Year Plan for the Promotion of the Automobile Industry and the Law for the Protection of the Automobile Industry in 1962, which prohibited the import of finished vehicles, barred the import of parts and components except for the assembly of finished vehicles, and reduced taxes and tariffs on parts and components imported for the assembly of finished vehicles.3
The choice of the local producers who were to implement the 1962 policies was heavily influenced by political calculations, given intense factional struggles within the military junta. The mainstream, consisting of Kim Chong-p’il and his colonels at the Korea Central Intelligence Agency (KCIA), was then clandestinely organizing the Democratic Republican Party (DRP) to aid Park’s 1963 bid for presidential power. They turned to the auto industry to raise some of the required political funds. Having become the junta’s bridge to Japanese political and business leaders in his capacity as a key negotiator of diplomatic normalization of relations between the two countries, Kim Chong-p’il helped Pak No-jông, a Korean expatriate businessman living in Japan, win a license to assemble Nissan cars. Thus was born Saenara Motors, which began importing semi-knock-down (SKD) kits of Nissan’s Bluebird model in 1962 duty-free to be put together in South Korea. The imported price of one SKD kit stood at 130,000 won, whereas the assembled vehicle fetched a price of 250,000
won in the marketplace. With this huge profit margin, Saenara was able to contribute political funds to Kim Chong-p’il. Saenara, for its role as both a pioneer in the automobile industry and a source of political funds, was granted tax exemptions for five years.
Despite its profitability, Saenara Motors collapsed in July 1963 when the junta could not let the company import SKD kits in the face of the shortage of foreign currency in the aftermath of the disastrous currency reform of June 1962. Moreover, not only the civilian opposition but also the rivals of Kim Chong-p’il within the junta began accusing him of working with Pak No-jông to earn monopoly profits. In a complaint to the National Assembly, Pak No-jông disclosed the amount of political contributions he had made.4 Along with three other political scandals,5 the Saenara incident provoked calls for the removal of Kim Chong-p’il from his positions of power in the KCIA and the forthcoming DRP. Kim survived the at-
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tack, but Saenara ended up under the joint management of the Ministry of Commerce and Industry (MCI) and Hanil Bank.
The second opportunity to establish an automobile assembler came with Park’s electoral victory in 1963. With the transition to electoral democracy, most of the coup makers took seats in the National Assembly, contending for the position of a crown prince at the expense of losing opportunities to shape state policy. Moreover, the center of gravity in economic policymaking moved from the KCIA to state ministries because Park—
more sure of his political legitimacy and public support after the 1963
elections—felt less need to fall back on the KCIA’s clandestinely prepared economic shock therapies. The change came with the MCI’s announcement of a Promotion Plan for the Automobile Industry in August 1964.
Through the plan, the MCI intended to construct a parts-and-components sector around a single assembler, which would purchase the bankrupt Saenara. Fierce competition broke out among major industrial firms to take over Saenara with the expectation of monopolizing the automobile market. The bidding initially drew five companies, who were then joined by two firms, Sammisa and Sinjin, both of which had strong political ties to the ruling political coalition.
The bidding contest was seen as a proxy battle between two second-tier political leaders. Sammisa was backed by Kim Chong-p’il, the leader of the declining “mainstream” faction in the National Assembly, whereas Sinjin secured the political support of Yi Hu-rak, the chief of staff for the president and a central figure in the rising “anti-mainstream faction.” Using his position as chief of staff, Yi tried to build his own political faction, which prompted him to think about fund-raising. To challenge Kim Chong-p’il’s position as the heir to Park within the ruling elite, Yi needed allies in both the South Korean and the Japanese business communities, who would help him raise political funds just as Kim Chong-p’il’s business associates had done for him during the junta years. The Sammisa-Sinjin rivalry also echoed the competition between Nissan and Toyota over the establishment of a foothold in the South Korean market with the normalization of relations in 1965.6 Nissan drew on the ties it had established with Kim Chong-p’il from the days of Saenara Motors, whereas Toyota aligned with Yi Hu-rak.
The licensing committee members were MCI bureaucrats and Hanil Bank representatives. Their initial choice was Sammisa, which DRP politicians saw as attesting to the resilience of Kim Chong-p’il’s mainstream faction. Then, two months later, the MCI and Hanil Bank reversed their decision and chose Sinjin as the new owner of Saenara, under the pretext of Sinjin’s “superior quality,” to quote MCI minister Pak Ch’ung-hun.7 It was rumored at the time that Park himself ordered the MCI to overturn the ini-
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tial decision because he was worried about Kim Chong-p’il’s growing power.8 One source of Park’s own power stemmed from the uncertainty over whether there would be a presidential succession and who would be the heir in case Park opted for a power transfer. The resilience of Kim Chong-p’il’s mainstream faction threatened to make him a de facto heir.
Park chose to weaken Kim’s source of political funds, Sammisa, in favor of Yi Hu-rak, who lacked personal charisma and thus posed less of a threat.
Consequently, Sinjin took over the Saenara plant in November 1965 and began assembling a Toyota model, Corona, with a local content of 21 percent in May 1966 under a licensing arrangement.9 With the production of the Toyota Coro
na, Sinjin saw its total assets increase more than tenfold over the next three years, from 300 million won in 1965 to 3.2 billion won in 1968. The domestic market for passenger cars and commercial vehicles increased rapidly, although the number of assembled vehicles still stood at the meager level of 30,096 units in 1968.
Ironically, the profitability of Sinjin became a source of its political difficulties. The auto industry drew the interest of South Korea’s second-tier business groups, who were searching for ways to diversify. Tempted by the profitability of Sinjin, but also sensing the growth potential of South Korea’s auto markets, newly established Hyundai Motors and Asia Motors petitioned the state for licenses to enter the industry. They argued that Sinjin was too dependent on Toyota’s capital and technology, which prevented it from contributing to the development of a local parts and components sector. The criticism drew its power from Sinjin Motor’s resistance to the state’s pressures to raise the local content on the ground that the domestic market was too small. Sinjin simply wanted to maintain its assembly operations by continually importing Toyota SKD kits rather than replacing some of the imported parts with locally manufactured ones. This position, however, was politically untenable, because the press had already zeroed in on Sinjin’s monopoly profits. The price of a Toyota Corona hit 870,000 won, whereas the same model was sold in Japan at less than half that price. Although the price differential was inevitable because the small number of cars Sinjin produced forced it to forgo economies of scale, it provoked public outcry, thus enabling Hyundai and Asia Motors to challenge Sinjin’s monopoly status only four years after the passage of the 1964 Promotion Plan for the Automobile Industry.
Park and the MCI bureaucrats were themselves dissatisfied with the slow growth of the local parts and components industry and Sinjin’s risk-averse strategy of remaining a mere assembler of imported Toyota SKD
kits. Park had chosen the auto industry as a strategic sector for its massive linkage effects, but Sinjin Motors negated that rationale by choosing to