BUSINESS, FINANCE AND LABOR EVENTS

January 2006

Happy New Year -- Dollar to Won Ratio Drops (Jan-May 2006) The US dollar sank on a five-day losing streak -- starting on New Year's day -- to below the 1000 won barrier creating fears amongst exporters that their goods would become non-competitive with the slide in the rate. Last year, a dollar on average bought W1,024. The sudden drop created fears in the export driven Korean economy. The greenback on 6 Jan, which opened at 995.00 won, traded at 995.1 won at one point, up 7.8 won from 5 Jan's close, the lowest level since November 1997. "Currency authorities and offshore investors are locked in a kind of behind-the-scenes money game, and so far speculative offshore investors seem to have the upper hand," said Lee Jin-woo, an official with National Agricultural Cooperative Federation Futures. "Without special momentum, the dollar will keep losing ground for the time being."


Drop drops (5 Jan 2006)

The South Korean currency authority sent a strong signal of intervention to stem the won's rise, but this did not seem to have had a major impact. The government, through state-run banks, bought dollars worth about $200 million to help contain the won's further rise. But the government was not enough to reverse the direction of the won's rise as offshore investors and exporters dumped their holdings. It soon fell below W990. On 9 Jan the dollar changed hands at 979.2 won. The dollar dropped to 975.00 won on 10 Jan, but rebounded later as the government stepped in to buy the dollar -- with billions of won pumped in the government effort was only partially successful in stabilizing the market. The won continued to slip.

Government officials were wary of letting the won appreciate against the dollar because it made South Korean exports more expensive. The central bank estimated that each percentage-point gain by the local currency against the greenback led to a 0.06-percentage-point fall in economic growth and a 0.1-percentage-point slide in inflation. Each percentage-point rise by the won against the U.S. dollar also resulted in a $520 million cut in the nation's current account surplus.

The Bank of Korea said the situation was only "temporary." In an interview with the Chosun Ilbo on Jan. 12, central bank Governor Park Seung said there were no factors to drive the dollar down further overall this year.


Drop drops (13 Jan 2006)

By 15 Jan 2006, nearly 30 percent of small and medium enterprises in Korea suffered losses from exports due to the won's surge against the U.S. dollar. According to a survey of 113 companies by the Korea Federation of Small and Medium Business, 29.57 percent of the respondents said the won's sharp appreciation had rendered their exports unprofitable. A stronger won made Korean exports more expensive, dealing a blow to exporters. According to the findings, 62 percent of the firms surveyed said they continued to ship their products overseas despite suffering losses. Another 5.2 percent said they had given up overseas shipments out of fear that exchange-rate fluctuations would affect their profits. In order to cope with the exchange-rate swing, 40 percent of the companies surveyed said they would cut costs, while 33 percent said they would raise product prices.

On 16 Jan the won-dollar exchange rate continued its downward trend and fell to as low as 970.3 won per dollar. The current policy of government intervention in shoring up the won was NOT working. The monetary authorities of the Bank of Korea are losing influence over the foreign exchange market because the government has lost the trust of market players. On some occasions, those in the foreign exchange market move along a different course from the course of which the Bank of Korea has planned for the market.

In fact, foreign exchange dealers in Korea are reluctant to trust the Bank of Korea foreign exchange authorities because they have suffered losses due to their confidence in the government. As a result, the government now has to bear higher costs to manage the foreign exchange market, a serious byproduct of mistrust. "If the government enjoys the strong confidence of dealers, it takes only a few words and a purchase of $100 million to raise the won-dollar exchange rate by five won. In reality, the government has to buy $200 million to $300 million to generate the same result," an exchange dealer explained.

On 27 Jan South Korean Finance Minister Han Duck-soo said that the Korean won's ascent against the U.S. dollar has been excessive, and that the currency authorities are closely watching the currency market. "It is difficult to say what the appropriate currency exchange rate is...but it (the won's gains) have been excessive," Han said in an interview on a local radio program.

Local exporters, in particular smaller enterprises, want the authority to take prompt action, saying the won needs to fall against the yen and the greenback to keep their products competitive in overseas markets.

On 2 Feb 2006, the greenback plummeted below W960 during the session but inched up later to close at W961.10, hitting yet another eight-year low.

Unable to control the problem, the Bank of Korea attempted put a positive spin to the problem. The Korea Herald stated on 2 Feb, "local currency yesterday maintained its solid rally against the U.S. dollar for a second consecutive day on clear signs of an improving economy and a steady inflow of foreign capital." Suddenly the "dollar drop" was "a rally of the won against the dollar." It stated that the won's gain had "little immediate impact" on exports as exporters are not as vulnerable as they were in the past, stressing that the Bank of Korea will not intervene in the market as heavily as it has in the past. Critics say market intervention is undesirable because it is too costly and the effect is only short-lived. Meanwhile, global rating agencies have applauded the nation's move to let the currency move more freely against the dollar in recent years. (Source: Korea Herald.)

On 7 Feb 2006, the dollar fell W6.20 to close at W964.60. By 12 Feb, the dollar closed at W976.80. On 20 Feb the dollar ended at 967.20 won down from 972.60 won the previous day, but opened at 969.50 won on 21 Feb.

By 13 Mar the greenback rose to W980. The won continued to hover between 980 and 970, but started to lose ground in the summer falling into the 950s. In Aug it started to inch up slowly. On 25 Aug the dollar opened at 960.00 up from 959.20 won.

Losses in Foreign Currency Reserves The rapid depreciation of the greenback against the Korean won is estimated to have lost the nation some W4 trillion (US$4 billion) this year in the value of its foreign currency reserves, which are mostly in U.S. dollars. That means 3 percent of the budget for the year (W145 trillion) has vanished in just 15 days. Losses were likely to mount as economic think tanks said the dollar would continue to fall. As of late 2005, 65 percent of the nations' currency reserves of US$210.4 billion was estimated to be in dollar assets, meaning loss on evaluation was some W3.98 trillion since Jan.1. Critics said that the ROK's reserves were "way too big."

A recent report by the Korea Chamber of Commerce and Industry sets appropriate reserves given Korea's economic size at $68 billion or three months worth of imports. But as of late 2005, Korea had as much as $142.4 billion in U.S. dollars, the report says. In other words, the country suffered W2.69 trillion in loss on evaluation unnecessarily. The government itself admits that reserves are far too big. Former finance minister Lee Hun-jai, speaking in the National Assembly late in 2004 when reserves stood at $200 billion, said that was appropriate combining reserves of $150 billion plus another $50 billion for reunification. (SITE NOTE: The amount held in reserve for reunification started as $20 billion in 2003, jumped to $40 billion in 2004 and $50 billion in 2005. To analysts though this amount is only a drop in the bucket if North Korea hemorraghed while the South picked up the hospital tab. It has to the potential to bankrupt South Korea.) (Source: Chosun Ilbo.)

The Bank of Korea stated that dollars the government accumulated from selling the local currency are added to foreign-exchange reserves, which rose $4.3 billion to a record $214.7 billion as of Jan. 15, according to the Bank of Korea The increase in reserves, the fourth-largest after Japan, China and Taiwan, signaled that the central bank may have sold the local currency. To insulate the local currency market from speculative trading, Korea began to restrict access to real time currency trading data on 1 Feb.

Bank of Korea Posts Deficit Snowballing bond issues to curb a rapid appreciation of the Korean won were expected to cause a record high deficit to the Bank of Korea. As the Bank of Korea has floated a massive amount of currency stabilization bonds over the past several years, the bank is currently burdened with growing interest payments, which aggravates its bottom line. The BOK announced last September it would post a net loss of 1.4 to 1.5 trillion won ($1.4-$1.5 billion) in 2005, and bank officials and economists also largely agree that the deficit estimates will set a record. The bank said a total of 6.1 trillion won was paid in interest to bondholders last year.

The Finance Ministry announced the aggregate amount of circulating currency bonds exceeded 155 trillion won as of the end of 2005, up 8.7 percent from the same period of 2004. Amid a growing influx of U.S. dollars by surging exports, the central bank has been sporadically buying U.S. dollars to keep up the faltering exchange rate of the Korean won to the greenback. As Korea depends heavily on exports to power its economy, the government and BOK are concerned that a further appreciation could erode their price competitiveness in the global markets.

Nearly 60 trillion won was raised from currency stabilization bonds from 2003 to 2004, most of which were invested to tame the foreign exchange market. "Since the BOK currently holds around 6 trillion won in reserves, we can offset the prospective deficits," a BOK official said. If the reserve is completely dried up, current laws guarantee that the government should compensate for any loss that the bank could incur in the future. Under mounting interests accruing to the bonds, the bank went into the red in 2004 with a 150 billion won net loss after keeping the balance in the black for seven consecutive years since 1997. (Source: Korea Herald.)

Future of Won:Dollar Rate (Feb 2006)

The won hovered around the 1000 mark for all of 2005 and was anticipated to do the same in 2006. However, the dollar in early January continued to slide against the won to an eight-month low on 5 Jan, closing at W987.30, down another W11.20 from the previous session. This was the lowest close since Nov. 14, 1997 when a dollar bought W986.30. In a mere four trading sessions this year, the greenback thus lost W24.30. (SITE NOTE: The media has collective amnesia about the low won rates. The lowest rate was in Nov. 14, 1997, when it stood at 986.30 won. But we remember the early 1990s when the rate was 780 won to the dollar and our retirement check was simply not enough to get by on. Those were terrible times for military families or retirees living on the economy.)

The dollar was expected to fall as far as W960 and hover between W970 and W980 in the first quarter of 2006 before sliding a little further, a researcher with the Samsung Economic Research Institute says. The LG Economic Research Institute adjusted its forecast for the dollar exchange rate from W1,005 last October to W990 and discussed whether to make further downward adjustments. Other Korean economic think tanks were also considered readjusting their estimates downward as well. Some stated that the won may fall as low as W930. (SITE NOTE: In Oct 2006, the won broke the W928 barrier, but later stabilized around W930.)

Experts predict the decline will continue since the Fed's rate-hike cycle is expected to draw to a close in the first half of this year and the U.S., which has suffered a massive trade deficit, will pressure East Asian countries with ample surpluses to raise the value of their currencies. Another reason the trend will last is that foreign investors have turned to non-dollar assets in emerging markets, while Korean exports will grow, though not to the record levels seen last year, and keep glutting the market with dollars, a researcher with Samsung Economic Research Institute said. (Source: Chosun Ilbo.)

First Company to Declare Emergency (Mar 2006) SEE HYUNDAI SCANDAL

Korea Export Growth Slowed Due to Holidays (Mar 2006) Korea's export growth slowed sharply in January, hit by the Korean won's strength against the U.S. dollar and fewer working days from the 28-30 Jan Lunar New Year holiday. Exports rose 4.3 percent from a year earlier, to $23.4 billion, compared with 11.2-percent growth in December the Ministry of Commerce said. The growth rate is the lowest since May 2003, when exports rose an annual 3.5 percent. It was also the first time since June that export growth was in single digits. "As a rule, exports are concentrated at the end of the month, but since the Lunar New Year holiday fell on Jan. 28-30 this year, overseas shipments fell noticeably," said Shin Dong-shik, head of the ministry's trade bureau. He added that many manufacturers had given workers five days off, further reducing the number of working days. Some critics stated the real test is whether the trend continued into February as oil prices had reached "danger levels" and small to mid-sized companies were claiming the dollar drop was impacting on their export competitiveness.

Companies Shift Production Overseas (Mar 2006) With the U.S. dollar stuck below W1,000 since the start of the year, Korean exporters were in a race against time to cut costs. Those with overseas factories were expanding production there to even out the effects of a strong won. LG Chem, the LG Group's chemicals arm, decided to procure all materials supplied to its PVC plant in Tianjin, China locally and has started to expand production lines for PVC raw material there. Renault Samsung has asked Japan's Nissan to pay it in won instead of dollars for the SM3 model it exports through Nissan's distribution network.

But there is a danger involved. The Korean government rushed in and developed land in China to sell to Korean companies. But there was a hitch. The Chinese put in a stipulation that if the developed land was not sold within two years it would revert to the Chinese. As such the Korean government has taken a beating and is now selling land at distressed prices to the Chinese. The ROK will be lucky if they get 50 percent of their invested money back from the sales of the land. The great influx did not come to the economic zones that it planned.

In addition, there has been other problems with the increasing wages in the coastal cities of China. The once cheap labor market that caused the Koreans to flock to China, has suddenly been disappearing as the Chinese economy is booming. Many of the companies are pulling up stakes and moving their operations to the interior where cheap labor still can be found.

Won:Dollar Rate hits 945 won:$1 (Apr 2006) The won-dollar exchange rate fell to 940 per dollar on 21 Apr 2006 with the prospect of the end of the current U.S. interest rate hike in the near future. The won-dollar exchange rate on the Seoul Foreign Exchange Market was down from the previous day and closed at 945.6 won. This was the lowest rate in eight years and six months since October 27, 1997 (939.9 won). The won-dollar exchange rate went down by 3.0 percent annually last year, but it already fell by 7.0 percent this year. The dollar declined after it was revealed that the minutes of Federal Open Market Committee (FOMC) this March, released by the Federal Reserve Board (FRB) April 18 (local time), said that “most members think the end of interest rate increase era is pending.

Won:Dollar Rate hits 927 won:$1 (May 2006) South Korea's currency finished at a new eight-year high against the U.S. dollar on 8 May on a bullish run in the local stock market and the global weakness of the greenback. The Korean won ended at 927.9 against the dollar. As of May, the local currency gained more than 7 percent versus the dollar. The dollar continued to float around the 930 mark. Local currency dealers forecast that the won could strengthen further to the 920 won per dollar level.

The only good news was that people going for education in America would make a savings. Some stated that they are waiting for the rate to drop to 800 before they exchange their won for dollars.

Won:Dollar Rate Dollar at 953.60 won:$1 (July 2006) On 25 Jul, the won was up from 952.10 won to 953.6 won. The businesses are suffering and now even North Korea has asked to be paid their tourism fees in Euros. Small and mid-sized export businesses are the ones that are most deeply impacted by the high oil prices coupled with the high exchange rates.

Won:Dollar Rate Dollar at 930 won:$1 (Nov 2006) The won reached W965.6 on 14 Aug then started its decline. It rallied in Oct, but at the end of Oct the won started a decline again bottoming out at W930.3 and then stabilizing at around W930.4.

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Happy New Year! A New 5,000 Won Note (Jan 2006) The main reason for issuing new banknotes is to prevent counterfeiting and forgery. Banknote-designing involves changes in both size and figurative design. It costs a lot to issue coins and banknotes. Banknotes can be said to represent the face of a country. As such, they should be convenient in size and refined in design. The note change came amid increasing numbers of counterfeit 5,000-won banknotes. (NOTE: In 2005, counterfeit 5,000 won notes increased 126 percent to about 950 notes.) The bank decided to issue new banknotes with improved anti-forgery features.



People have traditionally been featured in currency. Ancient rulers were often inscribed on coins to show off their prestige. People, featured in banknotes, are historical figures of a country. Three historical figures current pictured on the W1,000, W5,000, and W10,000 notes are all male, surnamed Yi, from the Joseon Dynasty. They are King Sejong, who created Hangul or Korean alphabet, Confucian scholars Yi Yi and Yi Hwang.

The new 5,000-won notes, 143mm x 68mm, are smaller than the old ones. The overall color is reddish yellow, and the face of Confucian scholar Yi Yi is featured. The Ojukheon, the birthplace of Yi Yi, and bamboo trees are also featured on the front side of the note. Women and scientists from the history were suggested for the design, but it was decided to maintain the existing figure, Yi Yi, because it seems to take too much time to reach a national consensus on a new face.

Immediately after issuing the 5,000 won notes, it was discovered that about 40 notes had slipped out without a hologram. A young boy received a note as a gift and noticed the hologram was missing. The value on the erroneous note was in the millions of won -- but the Bank of Korea stated that it was a hand-check error and it involved only one sheet. Soon afterward the Bank of Korea announced that it was removing the new 5,000 won bills from circulation because there were problems with the hologram whereby they could be counterfeited. However, there was no major panic over the issue and Koreans sluffed it off as nothing.

In the future, new 1,000 and 10,000 won notes will be released. In Feb 2006, the design for the new 1,000 won notes was released. The Korea Minting and Security Printing Corporation has already started delivering the new W1,000 banknotes to the BOK since May 19 and began printing the new W10,000 banknotes from July 7, to be supplied to the central bank soon. (See May 2006 for 10,000 won note)



Won Rate Falls (Nov 2006) The won-dollar exchange rate closed at 934.1 won on 11 Nov, down 2.5 won from the previous day. The rate is the lowest in about half a year since May 12 (932.7 won). The won-dollar exchange rate, which went up to 963.8 won on October 9 immediately after North Korea’s nuclear test, fell by around 30 won in just one month. Falling foreign exchange rates against the dollar and yen are attributable to U.S. economic weakness, a weak dollar, Japan’s move to freeze interest rates, and the North Korean nuclear crisis being subsided.

The Ministry of Commerce, Industry and Energy is concerned that the trade balance for Korea’s biggest export markets, the U.S., China and Japan, will deteriorate due to the strong won. Korea recorded a loss of $14.597 billion in trade with Japan from January to July this year, up by $683 million from last year.

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First Time Use of "Circuit Breaker" as Kosdaq Freefalls (Jan-Feb 2006) Seoul share prices tumbled across the board on a steep fall in U.S. stocks in mid-Jan and raging international oil prices. On 23 Jan the tech-heavy Kosdaq market halted trading of stocks for 20 minutes to contain further falls from panic-driven sell-offs. The trading was suspended for 20 minutes at 2:19 p.m. It was the first time ever that the Kosdaq market has launched the ``circuit breaker'' that suspends share trading in fear of further declines. Under the circuit breaker system, regulators can suspend stock trading if the market falls more than 10 percent for more than one minute. The Kosdaq market introduced the circuit breaker on Oct. 15, 2001. The main Korea Stock Exchange has halted trading three times since April 2000.


A stock quote screen shows that the tech-heavy Kosdaq index fell 63.98 points to 601.33, Monday. The exchange activated the first-ever circuit breaker since the establishment of the Kosdaq market to contain further falls. More than 95 percent of the Kosdaq stocks fell. KOSPI also lost 2.06 percent, or 27.35 points, to close at 1,297.43. (23 Jan 06) (Yonhap News)

On 23 Jan 2006 a total of 895 shares dropped on the Kosdaq market, the largest number of falls ever seen on the junior market. It means that more than 95 percent of the 931 stocks listed on the Kosdaq suffered declines. The market's percentage fall is the biggest in four years and four months. Trading resumed at the Kosdaq 20 minutes later, but the market couldn't recover earlier losses. The benchmark KOSPI index also lost 2.06 percent, or 27.35 points, to end at 1,297.43. Dealers said investment and trust firms led institutional selling amid worries that further falls in stock prices may weaken their investment returns. (Source: Korea Times.)

End of a Stellar Run The Korean stock market may be close to the end of a stellar run since exporters' profits are falling, Bloomberg speculated on 12 Feb 2006. The financial news agency cited a stronger won as the cause why "the rally that made Korean stocks last year's best performers in Asia may be over." "The won has risen 4.4 percent against the dollar this year, the third-largest increase among 15 Asia-Pacific currencies," it said. "Every 1 percent gain in the won against the dollar will reduce this year's earning per share by 2 percent at Hyundai Motor, the country's largest automaker, according to a Merrill Lynch & Co estimate." (SEE HYUNDAI MOTORS SCANDAL.)

It quoted Christopher Wood, a global strategist at CLSA, as pointing to problems for Korean exporters from the won's climb against the dollar and yen. Meanwhile, the Korea Composite Stock Price Index closed down 14.44 points or 1.08 percent at 1,320.79 points on 12 Feb, and the tech-heavy Kosdaq slid 2.4 points to 653.21 points. The dollar gained W9 from the previous session to W976.80.

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Insanity Reigns: Xenophobic Business Environment (Feb-July 2006) Overseas investors drastically expanded their presence in the South Korean economy following eased merger and acquisition regulations after the 1997-98 financial crisis. After Sovereign Asset Management's campaign in 2003 to take management control of the SK Corp., the central Bank of Korea raised alarms with "abuses" by foreign funds, primarily speculative funds. South Korea's blue chip "chaebol" conglomerates called for tough measures to defending managerial control from the alleged possibility of hostile foreign takeovers.

There were fears that one out of 10 South Korean companies could become a takeover target for foreign investors as foreign ownership of the country's 10 largest business groups reached 46.9 percent as of the end of Dec 2004, and exceeded 30 percent for the top 20 companies by market capitalization. According to the Korea Chamber of Commerce and Industry, foreigners held more stake than local investors in 53 major Koreans companies at the end of 2004. Foreign investors were also the second-largest shareholders of 138 publicly traded companies as of October 2004, raising concerns that these companies would become a potential takeover target by foreigners. (Source: Washington Times.)

In Apr 2005, the South Korean chaebols braced themselves for possible takeover bids by foreign investors as many offshore funds have explicitly stated their intentions to overhaul the country's family-controlled management. According to financial regulators, a total of 71 cases of foreign investors changed their purpose of investment from "simple investment" to "participation in management." The figure accounted for around 30 percent of the total 240 foreign investors holding more than 5 percent stakes in domestic firms.

The threats against the chaebols by foreign capital gave rise to nationalistic feelings. The names of international investment funds who attempted hostile takeovers and failed are Sovereign Asset Management and Hermes Investment Management. Sovereign Asset Management attempted a hostile takeover of SK Corp., and Hermes Investment Management threatened a hostile takeover of Samsung Corp.

5 percent Rule (Apr 2006) The strict "5 percent Rule" came after Sovereign's aggressive campaign to overhaul the management at SK Corp and the increasing foreign presence on the domestic stock market. Under the government rule, any shareholders, including foreigners, who retains a stake of more than 5 percent in a local company, were required to state the specific purpose of the investment -- greater managerial participation or just investment.

Foreign investors complained the disclosure rule was a "draconian" requirements and contradictory to the country's aim of attracting foreign capital. The Financial Times called the disclosure rule discriminatory against foreign investors, labeling them "economic nationalism" in South Korea which is increasingly hostile to them. Quoting a foreign fund manager as labeling South Korea "schizophrenic" in its relations to foreign funds, the British daily said the regulation was in a stark contrast with South Korea's aim of becoming a financial hub in Northeast Asia.

Seoul's financial regulators defended the stock rule as aimed at enhancing transparency in South Korea's financial community. "The new system is meeting global standards and the system has been designed to closely resemble what is place in the United States and other nations," said an official the Korean Financial Supervisory Services (FSS). Finance and Economy Minister Han Duck-soo said his government would not discriminate against foreign investors nor allow them privileged benefits either. "We will actively attract foreign funds but their illegal activities will be punished under strict rules (just) like domestic investors," he said. (Source: Washington Times.)

BACKGROUND:

NTS Raids Foreign Companies (April 2005) This whole xenophobic fiasco started in Apr 2005 when the National Tax Service supposedly was looking into funds for "unlawful tax evasion" and "wrongful profits." There were allegations from the international press of "paranoia" and "economic nationalism" in Korea -- and this was fueled by the Roh administration trying to condemn the foreign companies who bought companies at rock-bottom prices after the 1997-98 IMF Crisis and then sold them at massive profits when the economy recovered. To the world, this was sound business, but to the Roh administration, this was piracy. One of the primary targets was Lone Star, the largest shareholder in the Korea Exchange Bank. ANY overseas fund that reaped huge marginal profits by selling off shares in banks and real estate they bought cheap in the wake of the 1997 Asian financial crisis. (SEE BUSINESS EVENTS: LONE STAR AFFAIR)

After the raids in Apr 2005, there was rising concern in international opinion over economic nationalism dealing with the 5 percent rule and caps on the number of foreign directors on Korean banks.(Source: Chosun Ilbo.)

The funds complained the Korean government pledged to create an environment where foreign capital could be freely invested in Korea, but conducted raids on offices without prior warning. It was suspicious that the funds targeted by the NTS probe were also the targets of concerted criticism of Korea's "progressive" civic groups with the backing of the Roh administration. Foreign investors believed that the probe was political since it came just ahead of parliamentary by-elections in Apr 2005 -- in which the Uri Party recieved a smashing defeat without winning a single seat.

A few overseas financial firms announced their intentions to pull out of Korea. The American Chamber of Commerce (AMCHAM) protested that the raids on the funds "will greatly hurt Korea's national image, and Korea's foreign investment environment will rapidly freeze over." The unfairness of the situation was echoed that foreign financial firms took the risk and invested in Korea after getting advice from the nation's leading lawyers, and then were labeled criminals just because they made some money. (Source: Chosun Ilbo.)

NTS Levy $214 million Tax Bill (Sep 2005) In Sep 2005, the NTS slapped fines on five U.S funds including Lone Star and the Carlyle Group with a W214.8 billion (about US$214.8 million) tax bill after completing a probe of six firms. It started the investigation in April amid a climate of public resentment of foreign funds, which many say bought up troubled local firms cheap only to sell them for huge profits. The funds are Lone Star, Carlyle, Goldman Sachs, Westbrook and AIG.

The most remarkable aspect is that the NTS for the first time vetoed tax avoidance by companies nominally based in a tax haven. The profits from real estate transactions are taxed by the nation where the property is located, but as for stock sales, they follow the OECD international taxation model in which profits made from stock sales are taxed where the investors reside. However, the OECD does say that local tax authorities can levy taxes after consultation with other Model Tax Convention nations when there are suspicions that speculative capital has set up "paper companies" in an attempt to dodge taxes.

The NTS pursued the case with the premise that the bases in the tax havens were "paper companies" for the specific purpose of evading taxes. According to the NTS, the funds evaded taxes by nominally basing themselves in tax havens, paying higher interest to their overseas affiliates, using illegal expenses or not reporting security transactions in accordance with the law.

Lone Star, the most active overseas fund in Korea, was slapped with a punitive tax of W70 billion (about $70 million) on a profit of W280 billion from selling the Star Tower building in southern Seoul. In Sep 2005, Han Sang-ryul, the head of the NTS investigation bureau, said the tax office planned to report two or three executives of foreign funds to the prosecution for tax evasion and notify the Financial Supervisory Service of the funds' violation of regulations. (Source: Chosun Ilbo.)

ROK Position on Foreign Funds (Oct 2005) The Korean positions is that foreign funds evade tax in Korea by establishing paper companies in tax havens. Thus the U.S.-based fund Lone Star has a subsidiary in Belgium, and the W280 billion profits from real estate it made in Korea were made in the name of that firm, so Lone Star did not pay a penny in tax on account of a dual taxation avoidance treaty between Korea and Belgium. (See Business Events: THE LONE STAR AFFAIR.)

But the NTS now operates on a principle of "real taxation," which says that tax can be levied on the actual investor. As such, it taxed not Lone Star's affiliate in Belgium but its headquarters in the U.S. Although it bars dual taxation, the Korea-U.S. tax agreement provides that profits from transferring real estate can be taxed. (SITE NOTE: This concept can be challenged as it now changes the rules that states the "crimes" of a subsidiary can be laid at the doorstep of the parent company -- even if the parent company is not aware of the acts of the subsidiary. This principle makes it foolish for any company to invest in Korea.)

The real taxation principle, though leaving room for legal conflict, is an international criterion recognized by the OECD. Korea had all but given up taxing foreign funds on account of dual taxation avoidance accords. It has been so engrossed in wooing foreign capital since the financial crisis that it has paid little attention to its dark side, such as the harm speculative funds can do. That is why it matters that the NTS has now invoked the principle. (Source: Chosun Ilbo.)

In Oct 2005, the case stemming from the NTS complaint was referred to the Seoul Central District Prosecutors' Office. The accused include Steven Lee, the former head of Lone Star Korea, three other executives, and 16 Korean affiliates of the fund. They are suspected of evading taxes by deliberately under-reporting transactions and illegally transferring money abroad. A prosecutor said the crux of the investigation was to decide whether Lone Star can be punished under Korean law for tax evasion by nominally basing itself in an overseas tax haven. (Source: Chosun Ilbo.) (SITE NOTE: In Apr 2006, public prosecutors officially sought Lone Star's cooperation in pressuring Steven Lee, a former head of the U.S. investment fund's South Korean office, to return to face charges of embezzlement and tax evasion. The action came after visiting Lone Star Chairman John Grayken said Lee had confessed in an internal audit last year that Lee embezzled millions of dollars from the company. (Source: Yonhap News.) There was not much chance that this would happen.)

Hermes Investment Management Limited ("Hermes") was disappointed to note that the Korean Prosecutor has filed an indictment for summary judgement, in respect of allegations that have been made against a former fund manager of the firm.

Hermes believes that it has complied with Korean laws and regulations in all its activities and has cooperated fully with the Korean authorities in respect of their investigation. Hermes does not accept the Korean Prosecutor's charges and is currently reviewing the position with its legal advisers to determine what further steps it may take.

Richard Bernays, Chairman of Hermes said: "We are disappointed that the Korean Prosecutor has filed charges against the firm. We believe that Hermes has complied with Korean rules and regulations in all of our activities. We will continue to co-operate fully with the Korean authorities. At the same time, we will be reviewing the matter with our Korean legal advisers before determining our next step. " (Source: Hermes Press Release.)

"But is all this a bubble ready to burst? Interest rates are now at very low levels, and a quick rise might make the debt difficult to manage. One big trouble spot: About 60% of credit-card volume in Korea is cash advances, compared with less than 20% in the U.S." This suggests that many cardholders are paying off one card by getting cash from another. Delinquency rates are still low, but that's because some companies are aggressively writing off delinquent accounts. In addition, "low delinquency rates are shielded by the explosive growth of the volume," says Seoul-based Morgan Stanley Dean Witter & Co. analyst Michael Chung. "That will change once interest rates start rising." (NOTE: Korea does not have an revolving installment repayment system (payments based on percentage of outstanding balance owed) as the US credit card companies do. Instead credit cards must be split into monthly repayments or repaid in full.)

The government was slow to react to all the warning signs, though it began efforts to limit card use, lowered card maximum borrowing limits and began measures to share personal credit information. But it was too little, too late. By December 2003, the average South Korean consumer had four credit cards. Total debt on these credit cards totaled a mind-boggling US$97 billion, an alarming 14 percent of GDP in 2003. The worst news was that 15 percent of the card holders had defaulted on their loans. In Dec 2003, Time Magazine called it a "House of Cards" in describing Korea's credit card spree. "Bad accounts have mounted so quickly at card companies that the country's largest issuer, LG Card, recently nearly ran out of money and had to temporarily suspend its ATM cash-advance service. LG was bailed out last week with a $1.69 billion emergency loan package provided by its creditors, mainly banks."

In 2004, the South Korean government was trying to keep LG Card's problems from destabilizing the country's financial system. One-third of South Koreans are LG customers. It is estimated that one of 10 South Koreans above the age of 15 is unable to repay their debt. To state that Warburg Pincus benefitted from "insider information" is rather ridiculous as "analysts" were all warning of the over-extension of credit and potential problems with liquidity. To claim the fund managers needed an "insider" to tell them that LG was going to end up short of funds due to the over-heated borrowing frenzy is ridiculous -- it could be deduced from all the warning signs.

This is simply another example of how the Roh administration is pushing its investment policy that makes it illegal for an foreign company to make a profit in Korea. By charging companies with "illegal insider information" it is trying to shift the blame away from the failed economic policies that caused the credit card crisis in the first place. The insanity is that this may drive investors into other countries where investment is safer -- and NOT retroactively punitive.

In Apr 2006, the impacts of the xenophobic witch hunt dealing with the Lone Star Fund and KEB has led many foreign bidders for LG Card to seek domestic banks to enter into partnership with them to increase their chances of succeeding. By May 2006, there were signs that previously interested foreign bidders were bailing out. The gloom that has descended over the business environment in Korea to keep out foreign ownership has definitely impacted on the strategies of those bidding for LG Card. This is a strange phenomena as the volume of foreign-owned shares is steadily on the rise, as is the number of foreign investors with 5 percent or higher stakes in listed local firms, the Korea Exchange said on 20 Apr. As two more foreign companies pulled out (Nokia-Korea and Sony) their factories, the investment in Korean companies are increasing.

NTS probes Newbridge Capital over sale of Korea First Bank (Apr 2006) According to the industry sources, the National Tax Service (NTS) seized documents at Newbridge's local office on April 10. The agency, however, refused to comment. The move came after the NTS decided that Newbridge Capital was based in Labuan, Malaysia -- a tax haven for the purpose of selling the Korea First Bank in 2005. (SITE NOTE: This is part of the xenophobic drive that somehow foreign companies are ripping off the Koreans. The NTS was conducting checks on foreign-invested companies here to determine whether they benefit from "unfair" tax benefits. Subject to the checks are 4,889 companies in which foreign investors owned more than 10 percent stakes as of the end of 2004.)

The NTS is conducting an investigation into U.S.-based private equity fund Newbridge Capital Ltd. over the sale of its stake in Korea First Bank in 2005. The move came after the country's top tax official hinted earlier this month that Seoul is considering levying taxes on Newbridge's estimated gain of more than 1 trillion won (US$1.06 billion) from the sale of the lender to Standard Chartered PIc in April 2005. Newbridge bought Korea First Bank for 500 billion won in late 1999.

After the sale of the bank, the fund donated 20.4 billion won ($20 million) to the state-run Korea Asset Management Corp. and others, apparently to appease growing public criticism of its nonpayment of capital gains taxes to South Korea. The U.S. fund has maintained that it is not obliged to pay taxes to South Korean authorities under a U.S.-South Korea accord on the avoidance of double taxation. (Source: Yonhap News.)

Seoul City Government Gets into Act on Foreign Company Taxation (May 2006) Seoul City slapped additional taxes on thirteen foreign firms of W36.3 billion (US$33 million) for evading tax or using tax loopholes to reduce their taxes when purchasing large buildings worth trillions of won. The city has asked the Government of Singapore Investment Corporation (GIC) to pay W16.7 billion in additional tax for its purchase of Star Tower from the offshore investment firm Lone Star.

The Seoul Metropolitan Government says it picked out 66 foreign-owned companies suspected of dodging taxes among 126 that conducted large-scale real estate transactions since 1998. Twenty of them have been subjected to an inspection and slapped with additional taxes. The city plans to start investigating the remaining 46 within the first half of this year. (SITE NOTE: Though this is independent of the Newbridge and Lone Star fight with the NTS, it is part of the same package of a xenophobic business environment that is being formed in Korea -- and now in Seoul in particular.)

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Xenophobic Korean Business Environment, Hostile Takeovers and Shareholders' Rights (Feb-July 2006) In Apr 2005 the targets of the NTS audits were identified as foreign companies (mostly US) who allegedly took huge profits avoiding tax payments. The problem is that instead of closing the tax loopholes, the NTS simply changed the rules and retroactively applied the "real taxation" rule. It was obvious to the business community that the actions were politically motivated -- incited by the "progressive" NGO activist groups and backed by the Roh administration. The subsequent rationalizations to explain to the world public how this is rooted in the fear by nationalistic groups of a foreign takeover -- albeit in the form of a business takeover -- is all irrelevant. Business operates on set international principles that as long as it is legal, profits can be made. The companies were advised by Korean legal experts but then the NTS changed the rules and applied it retroactively.

The test case for this xenophobic business environment was the battle for "shareholders rights" between the SK Corp and Sovereign Asset Management, a majority shareholder of SK Corp. In 2002, the SK Global Co. scandal shook the confidence of foreign investors by doctoring its books. The chairman of SK Global was convicted of involvement in a US$1.2 billion fraud at affiliate SK Networks Co., formerly SK Global Co. Chey's appeal on 30 March 2003, upheld his conviction. Chey, the son-in-law of former South Korean president Roh Tae-woo and nephew of the founder of the SK group, was one of 10 directors convicted in June of wide ranging malpractice within SK Group. The most serious fraud involved SK networks, the trading company previously known as SK Global, which had its accounts manipulated to hide $5.6bn of losses. Sovereign tried to force Chey into resigning, but failed while Chey remained free on bail pending his appeal in Mar 2003. The conviction was upheld in Jun 2003 and Chey entered prison in July 2003. Despite his conviction, Mr Chey kept his position as chairman of SK Corp. However, after only three months he was released from jail on bail pending his appeal -- and after a short hospital rest, he reentered management in his old position.

The world investment circles monitored the developments of this scandal as a signal of Korea's willingness to reform its chaebols -- and whether accusations of the xenophobic nature of the Korean business environment were true. (See Roh Promised Reforms of Chaebols all Smoke and Mirrors for details of the Sovereign Asset Management versus SK Global test case.)

In 2002 Sovereign questioned the right of the SK Group to urge the oil refiner to participate in the bailout plan as the SK Group was NOT a shareholder of SK Corp. and it was NOT even a legal entity. Sovereign tried to block the move. It failed. The battle over whether majority shareholders had a financial right to control the destiny of a chaebol-controlled company was lost by Sovereign when the domestic and foreign shareholders of SK Group approved the bailout plan -- and the decision was backed by the Korean courts. After other bailout actions of other SK Group subsidiaries by SK Global, Sovereign started a hostile takeover battle.

By 2005, Sovereign found that the Roh administration was NOT willing to reform the chaebols -- and the "old-boy" network was simply too strong. The lack of transparency in the affiliations between chaebols, banks and other power blocks simply could not be broken -- and it was apparent that there was ACTIVE support from the Roh administration to prevent any form of foreign influence. Under the Roh administration, the world learned that for all the talk of reform, the government was unwilling to tackle the powerful chaebols.

In March 2005 the Joongang Ilbo reported, Sovereign Asset Management tried to turn the annual meeting into a referendum on SK Corp. Chairman Chey Tae-won. The reappointment of Chey Tae-won as a board member supposedly came from 60.63 percent of the shareholders.

In Jun 2005 the Seoul Court of Appeals granted probation on Chairman Chey Tae-Won's three-year sentence on his appeal of his June 2003 lower court conviction. Though it reaffirmed the stock manipulation conviction of Chey, the reason for probation given was: "The court recognized that the events that led to the charges against Mr Chey occurred in the process of trying to resolve problems from the past that he inherited when he became chairman. The court believes that Mr. Chey did nothing motivated by self interest." (Source: SK Newsletter.)) The Korea Times stated on 6 Dec 2005, "Chey Tae-won, who received a very kind and timely get-out-of-jail-free-card just last week from an appeals court. Despite upholding Chey's original conviction of accounting fraud in the order of 1.5 trillion won, the court decided he will never have to serve any more jail time as long as he keeps his nose clean. He did three months of a three-year sentence before being freed on bail and, according to the court, has since made sufficient ``efforts toward a more transparent management'' of his company as to warrant this second chance."

However, others viewed the court reasoning for granting probation as absurd. Chey traded off his shares in the Sheraton-Hilton at inflated prices to garner a $60 million dollar profit and traded equity shares to consolidate his control of the SK Group -- the key point in his conviction. If that is not "self-interest" than nothing is. As to the problems being "inherited" by Chey, he was chairman for seven years when most of the fraud took place.

In Jul 2005, Sovereign Asset Management sold off its entire 14.8-percent stake in SK Corp., ending a two-year attempt to change the company's management. "Having exhausted all of the legal rights currently available to shareholders under Korean law, Sovereign is now exercising the only meaningful right remaining open to us - withdrawal from our investment in SK Corp.," Mark Stoleson, head of Group Investments at Sovereign, said in a statement. Of course, Sovereign made a massive profit on the transaction, which the press immediately pounced on to show how foreign investors were simply in Korea to make a quick profit. Sovereign is estimated to have earned an 800 billion won profit from the sale. It reportedly sold 19 million shares to mostly foreign investors for about 49,000 won a share. (Source: Money, Jul 2005.) The private equity firm reportedly made a 4x return on the investment but would have held it longer if not for the local push against its reform. It just goes to show that pushing your companies to do the right thing in Asia, especially when it's in public and not in private, often makes enemies, not friends. (Source: Mansell Group.)

This test case has now appeared in every financial newsletter throughout the world. It is used as a textbook example of how shareholders -- the real owners of the company -- are cut out of the decision making processes by the Korean board of directors and their "old boy" network which has the monies to purchase stocks to give the boards a voting majority. It also illustrates how the Korean court system "forgives" the chaebol leaders for business malfeasance and how the Presidential pardons of convicted chaebol leaders "cleans the slate." The lesson learned in Korea is that even if you defraud a company of millions of dollars for your own personal gain, you can still evade punishment and remain on the board of directors. The failure of the ROK government's frequent claims to ensuring corporate transparency are shown to be cosmetic and lacking in substance. In addition, it has shown that there are two standards of justice under the Roh administration egalitarian reform policies -- the rich like Chey Tae-won and poor are NOT equal in the eyes of Korean law.

However, the move by Sovereign that appears as cutting one's losses in disgust is still viewed by Koreans as a ploy to increase its profits. Analysts recalled "a Dubai-based investment fund Sovereign Asset Management that reaped huge gains after selling its stake in SK Corp. last year. Sovereign demanded SK improve its corporate governance, hinting at possible takeover of the nation's largest oil refiner. But its purpose of investment in SK Corp proved to maximize its investment returns." (Source: Korea Times, 7 Feb 2006.)

The next test case was started with the Icahn insistence for management say-so in the operations of KT&G by shareholders.

Icahn Hostile Takeover Attempt of KT&G In Jan 2006, the New York billionaire Carl Icahn, who has a reputation for snapping up companies in distress, increased his holdings in Korea's KT&G to become the third largest shareholder with a hand in managing the $8 billion cigarette and ginseng maker. KT&G, a state-run monopoly until the late 1980s, accounts for about 80 percent of the tobacco market with more than 30 cigarette brands. Icahn's name strikes fear into the hearts of many who recall his hostile takeovers of large companies like the moribund U.S. carrier TWA and steelmaker USX. More recently, he pressured the world's biggest media conglomerate Time Warner to buy back its stocks.

Icahn reportedly told KT&G at the end of last year to sell off its ginseng subsidiary to boost the stock price, raising fears of another management conflict with an overseas fund here after what Korean's call the "SK Crisis," the sorry tale of Sovereign Asset Management's bid to seize management control of SK Corporation last year.

In Jan Icahn sent representatives to Seoul to urge the former state-run Korean company to list its rapidly-growing ginseng unit on the stock market and sell its real estate properties in order to boost its share price. According to KT&G executives, Mr. Icahn's representatives said the company's share price, despite rising about 50 percent over the past year, was undervalued compared with firms in other nations. They asked the executives to take radical steps to correct the problem. Such steps, the executives said, included selling land in Daegu, Cheongju, Jeonju and Suwon, where KT&G's plants, now closed were located. Another suggestion was listing the firm's ginseng subsidiary on the stock market. They also recommended that KT&G sell off its non-core assets such as Buy the Way, its convenience store chain, to increase share value. (SITE NOTE: Actually the Buy the Way chain idea was to combat the influx of foreign tobacco makers by providing an outlet for KT&G domestic brands. Domestic brands were under attack as foreign tobacco companies were actually "dumping" their products in Korea to increase their market share. After the shareholder's meeting on 24 Mar, it was announced that KT&G C said that it was in talks to sell its convenience store business, Buytheway Co., to local snack maker Orion Corp. In a regulatory filing, the company said it was also considering the sale of its stake in YTN, an all-news cable network.)


KT&G (Korea Tomorrow & Global) Privatized in 2002

But executives of KT&G, which controlled three-quarters of the domestic tobacco market in a country where one in four people smoke, rejected the proposal, said the company did not intend to sell the land, nor to list shares in its ginseng subsidiary. KT&G felt it was better to improve the undeveloped land to increase its worth and then sell. KT&G planned to re-develop its eight idle factory sites worth 57 billion won ($59 million) at book price in a bid to boost their value. He also said the re-development will be made in the interest of shareholders and over a long period of time, at least three to four years per site.

KT&G said in late Jan 2006 that it would buy back three million shares, equivalent to a 1.8 percent stake in the company, and pay a dividend of 1,700 won ($1.80) per share, up 100 won from a year earlier. KT&G will bring in a homegrown fund in the face of U.S. corporate raider Carl Icahn's attempt to gain a say in the management of Korea's tobacco company, the company's top executive said. He didn't rule out the possibility of a management buyout (MBO) to take the company private.

The billionaire's Icahn Partners Master Fund, registered in the tax haven of the Cayman Islands, said on 3 Feb 2006, it bought 10.7 million shares of KT&G, acquiring 6.59 percent of the company for the purpose of taking part in managing the company. The fund, virtually owned by Icahn, became the third biggest shareholder after Industrial Bank of Korea, which held 15.84 percent including treasury stock, and Franklin Mutual Advisers, which owns 7.14 percent. The fund was to exercise its right to vote in a general meeting of shareholders, it said in its report to the Financial Supervisory Service. Anyone acquiring a stake of more than 5 percent is required to declare the purpose to the Korean financial authorities.

The intervention of foreign investors in KT&G boosted the firm's stock value in early Feb. KT&G share prices soared on speculation that major shareholders will compete to raise their stakes in the company. It closed up 9.88 percent at 56,700 won on 3 Feb. (Source: Chosun Ilbo.)

Icahn and his investors made it clear that their stake investment in KT&G was intended to have a say in management. They emerged as the second largest shareholder of KT&G, followed by Franklin Mutual Advisers with a 7.15 percent stake. Among other major shareholders are the Industrial Bank of Korea with 5.85 percent and KT&G's employee shareholder group with 5.78 percent. However, KT&G looks to have the upper hand as it had backing in 20 percent of shareholdings made up of treasury stocks (5.75 percent), Industrial Bank of Korea's 5.85 percent stake and other domestic institutional investors, compared to Icahn's 6.59 percent.

However, KT&G's management owns only a small stake, with 61.78 percent of the company owned by foreign investors. Its biggest shareholder Industrial Bank of Korea can exercise voting rights for just 5.9 percent of the stock. One analyst pointed out that KT&G shares are not cheap, and predicted Icahn would attempt to throw in its lot with other foreign investors rather than try to control the company by itself. KT&G, which takes 75 percent of the Korean tobacco market, has been attractive to foreign investors. The full-year profit of the company whose market capitalization reaches 7.7 trillion won rose 9.2 percent year-on-year to 515.9 billion won in 2005.

On 6 Feb, Icahn and a group of foreign funds proposed three candidates to contest seats on the board of KT&G, signaling that they wanted to have an active role in managing the nation's largest tobacco group. The move came just days after Icahn raised his stake in KT&G to 6.59 percent stake from less than 5 percent by teaming up with Steel Partners II, LP and other foreign investment funds. In the upcoming shareholders meeting, the three-year terms of six of the manufacturer's nine outside directors will expire. Shareholders will have to decide on how many outside directors to elect from nominees, including Icahn's three nominees. To become an outside board member, they need to get approved at an annual shareholders general meeting scheduled for March.

Icahn's nominees for the KT&G's 12-member board are Warren Lichtenstein, legendary 39 year-old head of Steel Partners II, LP; Steven Wolosky, a New York-based attorney; and Howard Lorber, CEO of Vector Group, a U.S. tobacco maker. They are up against KT&G's candidates Aekyung CEO Ahn Yong-chan (47) and Daehan Investment and Securities adviser Kim Byeong-gyun (60). (Source: Chosun Ilbo.)

From the start it was expected that the Icahn group would have the representation on the board, but the question was how many. (Source: Korea Times.)

On 10 Feb KT&G said it had selected Goldman Sachs as its counselor in its efforts to better combat corporate raider Carl Icahn's bid to "take a bite out of it." At that time, it was thought that the Icahn and his supporters were unlikely to attempt to take over management control of KT&G, but would sell their stake in the end after raising share prices of the company with calls for management improvement, according to the Korea Center for International Finance -- as it had done in the past in other takeover bids. (Source: Korea Times.) The stock of KT&G rose 16 percent to 59,000 won from 51,600 won on 13 Feb. The value of shareholdings held by Icahn and his friendly forces reached 631.8 billion won as of 10 Feb with the return on investment estimated at 35.7 percent. (Source: Korea Times.)

However, the wishful thinking of Icahn selling out did not materialize. Instead, it became apparent that there was a possibility of a a hostile take-over bid. It was estimated the shareholdings of KT&G and its friendly forces were at 39.9 percent, while Icahn and his allies were expected to raise their stake to 16 percent. Friendly shareholder groups of KT&G include Industrial Bank of Korea with 5.85 percent, employee shareholders with 5.75 percent and domestic institutional investors with 16.64.

Then KT&G announced the five candidates, including the three executives recommended by Steel Partners, for two board vacancies, meaning that at least one of the foreigners has no chance of being elected to the 12-member board. Steel Partners "demanded" that KT&G make an extra board seat available so all three of its foreign director-nominees can be put to a fair vote. Steel Partners protested with an accusation that the company's nomination procedure is an "antitakeover device." Ichan and his partners claimed that KT&G violated the local law by "limit(ing) the number of directorships that may be filled by the Committee at just two, while the company is guaranteed the election of four of its director nominees."

KT&G responded that the company had effectively limited the open seats for two possible nominees rather than six - saying that Icahn and his partners failed to follow the procedures for nominating its candidates to four other seats on the board for audit directors, in addition to two seats for nonexecutive directors. A company official responded that it is unfortunate that the adherence to "established local market practice and securities laws" should be interpreted as a takeover defense. (Source: Korea Herald.) The dispute was likely will end up in the courts.

On 17 Feb, KT&G said that it planned to collect proxies from shareholders to fend off a foreign investors' bid to seat their nominees on the company's board up to the March 17th shareholders meeting. On 24 Feb, the Icahn faction went one step further than simply trying to achieve management representation -- that was actively being thwarted by the KT&G management. U.S. investors Carl Icahn and Warren Lichtenstein made a tender offer Friday to buy KT&G Corp., South Korea's largest tobacco company. The U.S. investors offered 60,000 won (US$61.91) a share, 17 percent more than KT&G's closing price on 23 Feb in South Korea. Stock prices shot up to 57,000 won a share. As expected, KT&G rejected the acquisition offer after an emergency board meeting on 27 Feb stating, "The acquisition offer is no help to boost shareholder value."

"A series of recent steps KT&G has taken including refusal to sell its idle real estate assets show that the company is completely neglecting shareholders' rights," Icahn and partners claim, prompting them to take over the firm. While Icahn and partners say they proposed a friendly takeover to control the company, stock experts argue the bid was effectively hostile from the start, adding it was unlikely company management will accept the offer. "If Icahn and partners actually start to buy KT&G shares, it would be the first-ever case where foreign investors attempt a hostile takeover by buying shares in a domestic listed company," an official with the Financial Supervisory Service said. There were conflicting views whether Icahn would succeed.

On 1 Mar Steel Partners' CEO LP Warren Lichtenstein struck back at the board by making a formal request for detailed financial information to include payments given to the board of directors, fees paid to Goldman Sachs Inc. and Lehman Brothers Holdings Inc., and donations made to the company's social welfare foundation. It stated that in 2004, KT&G raised the compensations made to the board of directors from the previous 500 million won to 1.5 billion won, and raised it further last year to 3 billion won; such pay raise seems to have been excessive even considering the sales growth the company achieved. KT&G replied that it was set aside for the boards of the nation's leading corporations. (NOTE: KT&G is NOT one of these leading corporations.) Lichtenstein also questioned whether it was in a "legitimate, appropriate manner" to donate 17 billion won ($17 million) to the company's welfare foundation since it was founded in 2003, including 12 billion won given to the foundation from July 2005 to January this year.

Rumors circulated that industry insiders got calls from representatives asking if the shareholder would hand over the KT&G shares for 80,000 won per individual share. The allies of Icahn allegedly contacted the National Pension Service - one of the major domestic shareholders of KT&G - asking if the agency would sell its stake for 80,000 each. Facing increasing pressure from the U.S. investors, KT&G reaffirmed its commitment to the shareholders' interest by raising the dividend per share from 1,600 won to 1,700. (Source: Korea Herald.)

On 6 Mar it was announced the Icahn faction was taking the KT&G to court. On Feb. 24, foreign investors led by Icahn filed the complaint with the court in Daejeon, where KT&G is based, to halt the election process. The court was expected to issue its decision on the request by the Icahn-led team to block any important decisions regarding the election of directors at the shareholders meeting scheduled two days after that date. The Icahn faction requested that the court invalidate decisions made at the March 17 shareholders meeting. They asked KT&G to adopt cumulative voting so as to give all three of its candidates a chance to be elected to the board at the same time, but KT&G rejected the request.

On 7 Mar KT&G announced that an "outside director" may be elected to the board. KT&G’s original plan was to fill both outside directorships with its own candidates. It apparently changed its mind after failing to muster sufficient support from foreign investors, who own around 60 percent of the company. ”KT&G has obtained around 40 percent friendly investors and Steel Partners and associates around 35 percent, according to our estimates”, KT&G president Kwak Young-kyoon said. “But even if Steel Partners and associates succeed in putting one of their candidates on the board, it won’t be enough to change the big picture in terms of company management.”

As the shareholders meeting approached, the proxy votes was cut-off one day early prompting the Icahn faction to protest that it adversely affected the voting rights of the foreign shareholders. The Icahn faction cried "foul" but the FSS stated that everything was above board and off-shore votes could be cast up to the cut-off date.

On 14 Mar the Daejeon District Court rejected a request sought by the Icahn-led investors to stop voting to elect new board members at the company's annual shareholder meeting on 17 Mar. When Icahn and the other investors failed to obtain an injunction to stop the election at the meeting, attention was focused on the outcome of a proxy battle at the meeting. The court ruling meant that KT&G would gain an early advantage to beat the Icahn side. The Icahn side would have to settle for one elected director. Meanwhile, some FSS officials urged the Ministry of Finance and Economy to come up with countermeasures to better protect Korean firms from hostile acquisitions in the market but the ministry has made clear it has no plans to do so.

On 14 Mar, KT&G said it had decided to accept a due diligence request from its domestic allies, a move expected to build more shareholder support for the current management in the near future. The National Pension Service, South Korea's biggest institutional investor with a 3.11 percent stake in KT&G, said it would support KT&G at the annual shareholders' meeting -- rejecting the Icahn offer to purchase its shares.

The due diligence request from the Industrial Bank of Korea and Woori Bank was accepted by KT&G. The Industrial Bank of Korea, KT&G's third-largest shareholder with a 5.96 percent stake, and Woori Bank were considering buying a 9.75 percent stake owned by the tobacco company's employees to help KT&G defend itself from Icahn's hostile takeover bid -- including the possible purchase of treasury shares, after due diligence. Commenting on the two banks’ move, the U.S. financier said, ``Woori and IBK are not industry participants. There is no strategic element to this proposed sale. Any sale of shares should certainly be conducted through a competitive bid process or a public offering to ensure maximum return by KT&G.’’ On 15 Mar the KT&G Corp. said its board had made no decision about a plan to sell treasury shares to its domestic allies, one day after activist shareholders led by U.S. billionaire Carl Icahn threatened to sue the Korean company to obstruct the move. "Contrary to the misrepresentations of the dissident shareholders...the board has yet to make any decision regarding the possible sale of its treasury shares." The tobacco firm countered when it said in a prepared statement that it ``will provide all of the same information to any other shareholder who expresses interest in reviewing this material.''

On 17 Mar the Icahn faction succeeded in placing Warren Lichtenstein on the board of KT&G. The Chosun Ilbo stated, "A cat among the pigeons, the new outside director is expected to work for his and Icahn’s bid for control of the company in a boardroom full of KT&G-appointed directors." Lichtenstein won 39.6 percent of the vote for one of two outside directorships up for grabs. The other is Ahn Yong-chan, the CEO of Aekyung, with 34.9 percent. The result was as expected. The only thing that was uncertain was the exact percentage of shareholder votes either side would be able to command. The result was 52 percent overall for KT&G and 48 percent for the offshore funds. (Source: Chosun Ilbo.)

After the shareholder's meeting on 24 Mar, it was announced that KT&G C said that it was in talks to sell its convenience store business, Buytheway Co., to local snack maker Orion Corp. In a regulatory filing, the company said it was also considering the sale of its stake in YTN, an all-news cable network.

On 6 Dec it was reported that Carl Icahn sold most of his shares in KT&G taking about 145 billion won in estimated returns, ending a one-year battle with the tobacco maker's management over how the company should be run. The three funds led by Icahn sold a 4.75 percent stake, or 7 million shares, in KT&G for 425 billion won, or 60,700 won apiece, according to Citiglobal Market Securities, the lead manager of the share sale. It was a discount of 3.8 percent to the previous day's closing of 63,100 won. Unspecified foreign institutional investors bought the majority of KT&G shares from the Icahn-led funds, it said.

The share sale cut Carl Icahn's stake in KT&G to less than 1 percent from 4.87 percent, or 7.76 million shares. Analysts said that Icahn might have sold all of his shares already. ``Carl Icahn's move was expected after the U.S. investor-led funds severed its alliance with Steel Partners, led by Warren Lichtenstein, last August,'' Baik Woon-mok, an analyst of Deawoo Securities said. ``But the move came somewhat earlier than expected as it sold shares before receiving dividends for this year.''

Market watchers said Icahn seems to have sold most of his shares as his funds achieved their profit targets. His sudden departure is likely to trigger a fresh debate over foreign corporate raiders as Icahn sold his stake in KT&G after indicating that he will carry out a campaign to improve KT&G's corporate value. In August, the shareholdings of Icahn-led funds stood at 4.87 stake, while Steel Partners held 2.87 stake. Icahn-friendly shareholdings reached 6.6 percent last February when Icahn jointly bought KT&G shares with Steel Partners. ``Considering KT&G shares rose 33 percent to 60,000 won from 45,000 won last February, Icahn's pure investment gains are around 105 billion won ($130 million) from the stock sale,'' Kim Tae-hoon of KT&G said. If dividends for 2005 were combined, Icahn's gains are estimated at about 145 billion won. Despite a steep fall of KT&G yesterday, analysts said the effect of Icahn's departure will be short-lived and positive for KT&G in the long-term.

``The foreign selling will not affect the fundamentals of KT&G,'' Baik said. He has set a 12-month stock price target of 70,000 won for the company. Cha Se-hyun of Dongbu Securities also said the recent stock buyback and high dividends plan of KT&G will bring investors back soon. ``From now on, prospects for the company's earnings will decide the direction of the stock price,'' Cha said. (Source: Korea Times.)

Hostile Takeover of Hyundai Development in the Wind Samsung Electronics, which has the biggest market capitalization, is 53.5 percent foreign-owned. For POSCO, the figure is 68.4 percent, for LG Philips LCD 53.7 percent, for Hyundai Motor and SK Telecom 49 percent each, for Kookmin Bank 85 percent and for Hana Financial Group 81.2 percent. If the Icahns of this world set their sights on them and rally overseas shareholders in support, things could be even worse than at KT&G.

In Nov 2005, it was said that Hyundai Development, Korea's biggest apartment builder, may be taken over by foreign investors. Analysts said it was quite possible that foreign shareholders would try and take management control. Some analysts say that foreign funds could pull out their investments after reaping huge gains by spreading rumors of hostile takeover plans. Foreign investors are focusing on the management rights of the apartment construction company after the death of Chung Se-yung, a former Hyundai Group chairman who is Chung Mong-gyu's father and a younger brother of late Hyundai founder Chung Ju-yung.

Franklin Templeton Investments (22.87 percent stake in Hyundai Development via its two subsidiaries in Singapore and Luxembourg -- Templeton Asset Management (16.4 percent) and FTIF Templeton Asia Growth Fund (6.47 percent) -- was the majority shareholder and announced that it is willing to participate in the management of the Korea's construction company. It changed its investment purpose to the Financial Supervisory Service (FSS) and Korea Exchange (KRX), from "normal investment" to ``management participation.''

The Hyundai Development incumbent chairman Chung Mong-gyu is the second-largest shareholder (13.34 percent). Even if the shares of Chung's friendly powers were included, the shares of the second-largest shareholder would only reach 16.89 percent.

London-based Hermes Pensions Management, is the third largest (7.03-percent) has also changed its investment purpose and now wishes to take part in management. The British fund's move attracted keen attention as its subsidiary, Hermes Investment Management, has been criminally accused of alleged manipulation of Samsung Corp. stock prices.

Los Angeles-based Alliance Capital Management, an arm of the Capital Group, holds a 6.03 percent stake and Capital Income Builder of the U.S. with 3.3 percent. In Nov 2005, Toscafund Limited, a British hedge fund, purchased a 5.57 percent stake in the company, raising the ratio of foreign shareholding in Hyundai Development to over 70-percent. (Source: Korea Times.)


Foreign Funds (Chosun Ilbo)

POSCO Vulnerable to Hostile Takeover POSCO Co., the world's fifth-largest steelmaker, will probably increase its purchase of its own outstanding stock to discourage a hostile takeover bid. Samsung Securities analyst Kim Kyung-joong said in a research report that the South Korean steelmaker may boost its stock buybacks to raise its friendly shareholdings from the current 20-percent level. In recent months, analysts have been warning that POSCO's position makes it lucrative as a target for a hostile foreign takeover.

Calls for Protection against Hostile Takeovers On 8 Feb, the government dismissed calls for stronger protection for local companies against hostile mergers and acquisitions following moves by foreign investors to influence management at the nation's tobacco monopoly. "We promote an open economy, and based on this principle, we are discouraged from discriminating against foreign investors operating here," said Deputy Finance Minister Kim Seok-dong in a briefing yesterday. "Also, companies exposed to foreign investors are expected to gain in terms of corporate governance." He went on to stress that existing laws would be sufficient to protect local companies against hostile M&A attempts. (Source: Korea Herald.)

At the same time, Yoon Jeung-hyun, chairman of the Financial Supervisory Service, on 8 Feb 2006 remarked that Korea needs to review its long-held policy that prevents cross-investment between commerce and finance as economic policymakers are striving to find a way to counter the growing influence of global players on the local financial sector. Korea has made little progress in nurturing major homegrown players, prompting some people to call for more proactive approaches to cope with the predominance of foreign capital. Whether conglomerates should be allowed into the financial industry has been a long-standing controversy in Korea.

The nation's conglomerates - Samsung, LG, and Hyundai - have dominated the nonbanking financial sectors, taking up 72.5 percent of the insurance market and 35.7 percent of the brokerage market. At present, the business groups largely refrain from acquiring stakes in local banks.

In 1997, the government introduced a law requiring the financial units of conglomerates to obtain the financial regulator's approval before acquiring a stake of more than 5 percent in a non-financial affiliate. The government wants to revise the law to ban conglomerates' financial arms from exercising voting rights on their share holdings in excess of 5 percent. (Source: Korea Herald and Korea Times.)

The shareholding limit, when introduced in 1987, was designed to rein in family-owned business groups bulking up by creating subsidiaries or acquiring other companies. Advocates sought to discourage the chaebol from borrowing beyond their means for expansion and, at the same time, prevent economic power from being concentrated in the hands of a select few.

It was scrapped during the 1997-98 financial crisis because it was feared it would expose domestic companies to a greater risk of being taken over by foreign corporate raiders. But it was reinstated in 2001 to police families controlling chaebol, who were denounced for exercising more power than warranted by the amount of stock they held.

This argument in favor of the regulation may still hold true. Even so, it is overshadowed by the need to protect domestic corporations from hostile takeover bids by foreign hedge funds. If it was needed to remove the shareholding cap in 1998 when takeover threats lay dormant, it is all the more necessary to do so now because they have become realities. (Source: Korea Herald.)

(SITE NOTE: It seems that Korea has amnesia. We have a different view of the events over this law. The law was not abolished in the 1997-1998 "IMF Crisis" -- or simply "IMF" to Koreans -- it was rewritten by demands from the International Monetary Fund (IMF) to force the chaebols to divest themselves of the bank interests because of the lack of transparency in the financial sector. (Though the IMF had nothing to do with the root causes, the financial crisis was popularly named after it.) The root cause of the IMF Crisis was that the chaebols had misused their control of financial institutions to issue cross-assurances to prop up failing chaebol subsidiaries. When the house of cards started to unravel because of external factors in the Asian economy, it moved swiftly in Korea and many major companies were facing bankruptcy or receivership. This action dropped Korea to its knees and required the assistance of the International Monetary Fund to bail the country out of its massive debt. The lack of transparency and other problems dealing with accountability by the chaebols were conditions demanded by the IMF before it acquiesced to the bailout. Korea was pushed by the IMF and other international loan-guarantors as part of the packages to force the chaebols to divest their interests in the banks. However, once the IMF loan was repaid -- well in-advance of schedule -- the chaebols slowly went back to their old ways -- kicking and screaming under Kim Dae-jung calling for delays in legislated reforms -- while using their monetary power to influence politics -- and under the Roh administration seeking to reverse the trend back to the "good ol' days." Using the guise of nationalism, the chaebols are again seeking to regain control of those areas of power that were stripped away from it after the IMF crisis. The chaebols family heads have refused to release control of their empires -- and simply passed management on to their heirs.)

How the Double-Standard Works On 5 Feb 2006, it was announced that Viacom Inc.'s Paramount Pictures bought a 5 percent stake of a DreamWorks SKG unit from Korea's CJ Corp. for about $37 million. Lee Entertainment, a unit of CJ, sold all of its 2.3 million shares in DreamWorks Studio to Paramount on Jan. 31, CJ said in a regulatory filing in Seoul, where the company is based. CJ will book a $36 million gain from the transaction, it said.

In December Paramount Pictures agreed to buy DreamWorks SKG for about $774 million, wresting the movie studio away from NBC Universal and securing the talents of director Steven Spielberg. CJ's subsidiary still holds 4.9 million shares, or 5 percent of DreamWorks Animation, the Korean parent company said in its statement. (Source: Korea Herald.)

Not a word was said in the Korean Press of how a $37 million sale netted CJ a $36 million gain.

Foreign Investment Down Before 1995, foreign direct investment into Korea was less than $2 billion. In 1999 and 2000 it soared to $15 billion per year as foreign investors purchased numerous insolvent companies in the wake of the "IMF financial crisis" -- a misnomer for a crisis caused by chaebol cross-assurances on bad loans. Foreign investment has declined slightly since 2000 but remains well above the pre-IMF Crisis level. Before 1998, foreign investors accounted for only 20 percent of Korea's stock market capitalization, but by the end of 2004, their share had more than doubled to 42 percent.


Direct Foreign Investment Down in 2005 (Sep 2005) (Korea Times)

Before 1998, foreign investors accounted for only 20 percent of Korea's stock market capitalization, but by the end of 2004, their share had more than doubled to 42 percent. According to the Korea Center for International Finance, this is higher than the corresponding shares of stock markets in advanced countries like the United States, Japan, and France, and Asian countries like Taiwan.

The following is an excerpt from an article by Choe Heung-sik, president of Korea Institute of Finance, in the Korea Times on 22 Sep 2005.

As foreign investors raise their investment in the Korean stock market, their shares of stocks of Korea's major companies have risen. In fact, they hold more than 50 percent of the outstanding shares of Samsung Electronics, POSCO, and SK Corp. In addition, after the financial crisis, foreign investment in the Korean banking industry increased sharply as well.

Except for Woori Financial Group and Jeonbuk Bank, foreign investors now hold more than 50 percent of the outstanding shares of all commercial banks in Korea. Korea Exchange Bank, Citibank Korea, and Standard Chartered First Bank all became foreign banks because they are directly managed by foreign capital. We cannot deny the positive economic benefits of the increased penetration of foreign capital into Korea, though there has been some criticism of it. First of all, foreign capital has accelerated Korea's financial restructuring through the acquisitions of insolvent companies and financial institutions.

The inflows of foreign capital into Korea's stock market expanded the demand base of it. Foreign capital also increased the degree of transparency in business management. In the financial sector, it has helped raise confidence in Korea and improve expertise in financial supervision and financial laws and systems. Since foreign banks have introduced advanced financial techniques, the financial supervisory authority has been forced to develop new techniques of financial supervision. Despite all these tremendous benefits, there is still widespread criticism of the penetration of foreign capital into Korea.

As foreign investors have recently become major shareholders in important domestic companies and now even own some banks which are thought to be significant players in the economy, serious concern about the negative effects of foreign capital has been raised.

It has been suggested that, due to the excessive demand for dividends by foreign capital, the fruits of Korea's economic growth have gone to foreigners and the growth potential of the Korean economy has been reduced. In addition, due to the absence of proper instruments for the protection of management rights, the management rights of domestic major companies are in danger of falling into foreign hands, which in turn has led to decreased investment by domestic companies because they have diverted funds to purchase their own stock specifically to protect management rights.

The criticism that foreign capital demands excessive dividends is a mistaken generalization, though it cannot be denied that there are several cases where foreign investors did indeed take excessive dividends by unreasonable methods.

Some empirical studies show that foreign investors' shares of stocks in domestic firms have not significantly affected the dividend allowance. The dividend yield ratio of Korean firms was 1.9 percent in 2004. Of 11 major Asian countries, only Japan and India showed lower ratios, so there seems no reason to worry about excessive dividends going to foreign investors. We need only ensure that the Financial Supervisory Authority thoroughly intervenes in special cases in which foreign investors take excessive dividends by unreasonable or unlawful means.

The assertion that the threat of hostile takeovers by foreign capital has caused domestic investment to shrink may also be off base. The recent slump in investment may not be due to a shortage of funds.

Firms have actually had difficulty in finding good investments. The debt-to-equity ratio of Korean manufacturers fell to 104.2 percent by the end of 2004 from 396.3 percent at the end of 1997. Some of the largest companies in Korea are reported to be flush with cash. If they can find good investments, they will indeed be able to raise the funds for them.

Because some hostile takeovers have been attempted by foreign capital, it is asserted that additional instruments for the protection of management rights should be introduced. However, most foreign capital in the Korean stock market is in portfolio funds, which are interested in capital gains instead of management rights. Since foreign stockholders are not a single entity, they would have to band together in order to pursue hostile takeovers, and this is necessarily very difficult.

It is also true that we already have various instruments for the protection of management rights, like the '5 percent rule,' under which any investor who holds 5 percent or more of the outstanding shares of stock of a company must report the fact to financial supervisory authorities. It can indeed be said that hostile takeovers of major Korean companies by foreign capital are rare events.

Moreover, hostile takeovers do not have only a dark side. They can increase the value of a firm by improving the transparency of management and corporate governance through the supervision of corporate managers. A better means of addressing the threat of hostile takeovers by foreign capital may not actually be the introduction of new instruments for the protection of management rights, but continued market reform.

It would almost certainly become much more difficult for foreign capital to conduct hostile takeovers if corporate value increases due to improvement in the transparency of corporate governance as a result of on-going market reform.

It may also be better for Korean companies not to try to evade foreign capital but to make good use of it after making efforts to increase corporate value. That is, contrary to what we might expect, the threat of hostile takeovers by foreign capital may be helpful in raising the corporate value of Korea.

Though we previously attracted foreign investment to raise international confidence in Korea and to rebound from the financial crisis, we now need to devise a strategy for foreign investment at the government level. We especially need to bring foreign investment into the sector, which has many related industries, but is relatively uncompetitive. Foreign investment is also necessary for the establishment of a cluster of industries and the development of human capital.

We don't have to keep away from foreign capital with unfounded allegations about excessive dividends, falling investment, and hostile takeovers. Foreign capital is not evil. It is only a profit-seeking economic agent. Now is time to wisely make use of foreign capital for the benefit of the Korean economy. (Source: Korea Times.)

In Dec 2005 it was reported by the Korea Stock Exchange that the foreign ownership of local shares fell in 2005 as the foreign portfolios reduced investment in Korea. Foreign investors held 40.47 percent of all shares listed on the main stock market, down from 42.12 percent at the beginning of the year. Our expectations are that the foreign investors will only look at Korea as a profit-taking opportunity -- not a long-term investment area. This was proven true in the run on the Kosdaq in Jan 2006 as foreign investors sold off their shares in a profit-taking frenzy -- entailing the use for the first time of a "circuit breaker" to stop trading. The self-interest of the chaebols and inter-linked affiliations lacking transparency makes Korea a risky long-term investment proposition. The Roh administration talks of encouraging foreign investment but it reality the actions of the NTS in punishing FOREIGN companies shows its xenophobic attitude.

In Jan 2006, the National Tax Service said it would change its practices on tax audits and focus on companies "prone to tax evasion." It said that the first step in the new policy, which went into effect on 19 Jan, was to begin audits of 116 companies that have annual sales of more than 30 billion won ($30.5 million) and are suspected of evading taxes. Though aimed at Korean companies, the NTS also made it a point that some foreign companies were also included. The impression is that Korean is a hostile business environment under the egalitarian policies of the Roh administration. Expectations of massive Foreign Domestic Investment (FDI) increases in the future are slim.

2 out of 10 jobs from FDI Two out of 10 new jobs created over the past six years came from foreign direct investment (FDI), the LG Economic Research Institute (LGERI) stated on 20 Feb 2006. It tracked how much foreigners invested in Korea and how many jobs their investments created in the six-year period starting in 2000. The survey found that foreign investors added a total of $66.4 billion during the time, which helped create about a total 530,000 new jobs, or 87,000 per year. By industry, FDI in the service industry created 302,000 jobs, which account for 58 percent of the total new jobs; 198,000 jobs in manufacturing; and 31,000 jobs in other areas such as gas and construction.


FDI and Job Creation (2000-2005) (Korea Times)

If the FDI goes up in each industry by 1 billion won, 17 to 20 new jobs would be created in the service sector, more than the average of 16.8 jobs created for all business sectors. Ironically, foreign investment in pharmaceutical and petrochemical businesses helped a lot in job creation. But foreign investment in the financial sector helped little in creating jobs. Many local financial firms went through a drastic restructuring during which massive layoffs were made.

Meanwhile, overseas investments by domestic companies, which seek cheap labor in countries like China, have taken 46,000 jobs from Korean workers for the six years to 2005, the survey said. The Ministry of Commerce, Industry and Energy forecast that this year's FDI will be hovering at $11 billion as the FDI trend is not expected to show a drastic change for the time being. (Source: Korea Times.)
"Korea is NOT Investor Friendly": Samsung Joint-Plant Built in Singapore -- NOT Korea (July 2006) Samsung Electronics’ semiconductor plant, which will be built in Singapore for the first time ever, was originally to be constructed in Korea. The plan was changed, however, as the joint partner for the project, the German-based Siltronic, opposed it, citing the poor investment environment in Korea. German companies say, “Korea is not investor-friendly.” Before the decision, Samsung Electronics and Siltronic recently agreed to invest $4 billion ($2 billion each) to establish the joint corporation in Singapore for production of 12-inch wafers. Supposedly Samsung Electronics invested upfront capital of $400 million in Singapore in a joint venture with Siltronic.

An official of Samsung Electronics said on 16 Jul, “We originally planned to build the semiconductor plant, the production base of a joint venture with the German semiconductor material firm Siltronic, in Korea, but it was cancelled due to strong opposition from Siltronic.” The reason Siltronic opposed to the plan was because of the unfriendly investment environment in Korea, which makes foreign companies leery. Siltronic showed dissatisfaction with the weak infrastructure in Korea, which makes it difficult for foreign companies to do business, and, in particular, was worried about the education of the residential employees’ children in the country, citing the lack of international schools. Siltronic also pointed out the anti-business sentiment in Korea as well as the unfavorable policy for foreign companies as additional stumbling blocks for foreign investments in Korea.

Due to the opposition of the joint venture and the Singapore government’s pledge for active support, Samsung had no choice but to decide on the plant site in Singapore. Supposedly Samsung "made a great effort to construct the plant in Korea" -- but reality prevailed in that Singapore was simply a better choice.

The director of the Singapore Economic Development Administration met with the people in charge at Samsung and Siltronic in person. The commitment of the Singapore government to promote foreign investments and the administrative procedure in Singapore only take a few hours. The opinion was that the government officials there have the same mindset as business people. Because of these factors Singapore successfully attracted the plant of Soitec, a leading French semiconductor material company, to the country.

To attract the corporation, Singapore made drastic pledges, such as an exemption of corporate taxes for 15 years from the point of the plant's operation, and $27 million in government subsidies for R&D and employee education. In addition to this, it agreed to loan the $4 billion at a long-term low yearly interest rate of two percent for 10 years and to lease the site for the plant at $30 per pyeong for the next 60 years. The plant will employ 800 people. (Source: Donga Ilbo.)

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February 2006

Pension Plan in DEEP trouble (Feb 2006) The greatest problems of the current national pension system are "unstable finance" and its "blind spots." The opposition parties in the National Assembly's Special Committee on Pension Reform also believe that true pension reform will not be possible without resolving these two issues.

According to an analysis acquired exclusively by Dong-A Ilbo from the Korea Development Institute and the Korean Institute for Social Insurance, the date when the fund is expected to dry up has moved up from 2047 to 2040-2042, yet politicians seem to be unconcerned. Due to this, future generations will have to clear up additional debts worth 70 trillion won in total, or 80 billion won a day.

If the framework of the current system remains until 2030 without a makeover, the debt will snowball to 1,883 trillion won. Amid this turmoil, Rhyu Si-min has taken office as the Minister of Health and Welfare, and the president and the prime minister have mentioned the likely reform of the National Pension Fund. The fund is expected to be one of the biggest issues the administration will face this year.

According to undisclosed data from the National Pension Service, as the pension reform process has been delayed, the people's distrust, anxiety, and complaints have reached a dangerous point. The National Pension Fund commissioned a public opinion research company to carry out a survey on the satisfaction created by the National Pension Fund in December 2005. According to the survey of about 1,200 pension subscribers and recipients, those unhappy with the pension numbered 46.5 percent; those who were somewhat satisfied on average numbered 37.2 percent, and the completely satisfied numbered a mere 16.3 percent. (Source: Donga Ilbo.)

Blind Spots The blind spot problem is indeed serious. One out of three people subject to pension subscription remain unsubscribed. In particular, of regional subscribers except for wage earners, one out of two are outside the national pension system, most of whom are low income class. Under the current national pension system, small contributions made by pensioners now will give big returns to them later, explains the National Pension Service. Consequently, the poor, who have to worry about making a daily living now, are excluded from the chance to receive benefits in the future.

"Most of those unsubscribed to national pension are people in potential poverty, who desperately need pension benefits in later life. Without them, the national pension system aimed at achieving income redistribution and social security will lose its meaning," pointed out professor Kim Yong-ha of Soonchunhyang University.

Kim Dae-chul (38) is a part-time worker at construction sites and earns 30,000 to 60,000 won a day, which adds up to less than one million won a month. His monthly earning is less than the minimum cost of living for a family of four, 1.17 million won. Making matters worse, his income changes seasonally making it all the more difficult for him to sustain his family. Under the current system, Kim has to subscribe to the national pension plan and pay 81,000 won monthly. "The government says that if I pay now, I will get four to five times what I paid later. But how can I afford to pay 80,000 won when it is hard enough to make a living for the family?" complains Kim. As Kim's case illustrates, the national pension is a pie-in-the-sky for the poor. (Source:Donga Ilbo.)

According to the Korea Institute for Health and Social Affairs, 16.88 million people were subject to the national pension system as of December 2003. Among them, 11.12 million people (65.8 percent) actually subscribed to the national pension plan. The remaining 5.76 million people (34.1 percent) will not receive any pension benefits after retirement. Most micro-business owners or non-regular workers have no interest in the national pension system. The problem is that such micro-business owners, daily workers, dispatched workers, and service workers are in the low-income bracket and are likely to fall into poverty after retirement. Out of 5.48 million irregular workers, only two million are subscribed to the national pension plan, posting the subscription rate of mere 36 percent. The situation is worse for part-timers working in micro-businesses with less than five employees. Only 7.8 percent of them are covered by the national pension, leaving most of them with insecure futures. One official at the National Pension Service admitted that it does not make sense to levy pension fees on people incapable of paying for the purpose of guaranteeing secure post-retirement after 30 to 40 years.

Park Se-won (39) runs an iron factory in Busan. He has six employees, but only one has the four major workers' insurance coverage including the national pension plan. Park said his workers do not want to subscribe to the national pension system because the monthly contribution of 108,900 won is burdensome for workers earning a mere 1.2 million won a month. He added that he had suggested to his employees that the company will pay a portion of the contribution, but they asked to give the money to them instead. (Source:Donga Ilbo.)

Korea Development Institute estimates that as of 2005, 78 percent of people 60 and over do not receive national pension benefits, and eight out of 10 elderly live in the blind spots of the system. Moreover, if the current system is sustained, one in three elderly people will remain outside the pension system even after 40 to 50 years. Cho Jun-haeng, researcher at Korea Pension Research Center, said that although the national pension plan guarantees twice the interest rate of regular savings, people are unaware of this fact and avoid subscribing to the pension plan. Many point out that there must be measures for the poor whose incomes are less than the minimum cost of living and thus unable to pay the pension fees. Examples of such measures include the basic pension system proposed by the opposition parties and the filial piety pension system suggested by the Health and Welfare Minister Rhyu Si-min. Jeong Gyeong-bae, head of Korea Welfare Economy Research Institute, said introducing a "minimum pension system" is a feasible option which provides the minimum benefits to those with no contribution records. (Source:Donga Ilbo.)

Advanced Nations Do Not Have Blind Spot Problems Advanced countries, which have long adopted a post-retirement pension plan equivalent to Korea's national pension plan, are free from the blind spot issues. That is because most of them have introduced basic pension plan that guarantees the minimum livelihood of the elderly.

Whether it is the Swedish model, which collects taxes to dole out to the elderly, or the British model that runs basic pension scheme under insurance-like payment system, they share the common objective. Most of experts on Korea's pension system predict that Korea, too, will have to adopt such basic pension system in the long run.

Reverse Mortgage Proposed to Solve Pension Problem What is viewed as a scam in the US that involves the elderly being conned into "taking the equity out of their homes" and using their homes as collateral. Unfortunately, in some cases the elderly end up losing their homes. Now the Roh administration is proposing the same. In essence, if the elderly enroll in this plan the banks will provide them with X-amount of money in return for their homes as collateral until their deaths. After their deaths, the home is sold to repay the loan and if value is above the loan, the amount is sent to heir. If sale is less than the loan amount, the debt is not transferred. Sounds good unless the individual lives a long life and exceeds the home value. (SITE NOTE: The biggest danger is the potential to undervalue the homes for resale. It would be the same as foreclosure properties being bought at below market value...then resold at large profits. The potential for insider information and corruption is enormous. The loss is to the heirs, but with this system, the heirs are effectively cut out of the process and have no say.)

There is still a lot more being discussed by the government because the Pension Plan is in deep trouble.

(SITE NOTE: The Pension System is relatively new. When it was first introduced under the Kim Young-sam administration, it seemed like a good idea -- until the politicians found out that they could use it as their private piggy bank. Within a year the fund was bankrupt. Under Kim Dae-jung, the fund was "reformed" but the access to the funds by politicians continued, and the fund dried up again. From these experiences, the Koreans began to mistrust the government administration of the Pension Fund. In the later half of Kim Dae-jung's term, the populace was threatened or harrassed until they paid. Many preferred to find their own retirement funds in lieu of the government's and refused to pay. The harassment got to the point that some lower class people were actually hounded into insolvency. Even foreign teachers were expected to contribute with the promise that they would get money back when they left the country. We have not heard of one person who got his money back. When I was working in our hagwon, the government hounded me to pay into the system, but I fell under another retirement plan as a US Military Retiree and I refused to pay into the plan citing their rule of alternate retirement plan exemptions. Regardless they continued hounding me until we closed the hagwon to move to Songtan and I gave up my E-2 (teacher) visa. Under the Roh administration, the problems with the Pension Fund remains -- but the root cause of keeping the government fingers out of the pot has NOT been solved. Now the biggest problem -- like Social Security -- is that there will be fewer people to fund the system, while the graying population grows. By 2015, the first signs will show up and by 2040 the fund will be at the point of insolvency.)

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Moody's: Korea Sovereign Credit Rating will NOT improve unless Nuclear Issue Resolved (Feb 2006) The U.S. credit rating agency Moody's told the Korean government on 12 Feb that it will be hard for Korea to see further improvement in its sovereign credit rating without any substantial settlement of the North Korean nuclear issue. The Ministry of Finance and Economy is starting up its paper mill to convince Moody's of the improvements its made. (SITE NOTE: We've been stating this premise for years because it is common sense -- the basis of investment is security of the investment. A nuke pointed at your factories is not good for investment -- and the risk must be factored in. But the ROK needs to put a positive spin of how the economic picture is getting rosier for the ROK under Roh. It isn't. The credit rating is to remain at A3.)

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KIPF Forges Documents To Get Budget Money (Feb 2006) The Korea Institute of Public Finances (KIPF) is an institute conducting a specialized research on all aspects of taxation, public finance and financial system. The KIPF is a specialized research institute supporting the development and formulation of such systems and policies, through systematic research and scientific investigation.

In the current financial crisis where President Roh is running around crying the "sky is falling" if the government can't get more money -- but continues to spend uncontrollably, this "think tank" is of great importance in guiding government policy. The KIPF research staff is comprised of PhDs with expertise in the financial area and is tasked with providing "advice" to the government.

KIPF is in crisis after the revelation that it forged a document after managing government projects poorly in order to get more budget money. The state-run research institute has a track record of public criticism after bringing in an unqualified former minister as a guest researcher and punishing a researcher who was critical of government policies.

In December 2005, "P," a worker at the KIPF reported the KIPF to the Korean independent corruption commission. He reported that the KIPF was wasting budget money and that the issue should be investigated because it was not redressed even after the BAI pointed out the waste in a 2001 audit. The report was recently transferred to the BAI.

The KIPF received 4.96 billion won from the Ministry of Information and Communication in June 1999 for a project to create a 60,000-page database, but the KPIF generated less than 10,000 pages of data -- including 2,000 pages that was simply previously translated material of another agency. In April 2000, however, the KIPF submitted a confirmation document that the institute had finished work with a forged official seal of the head of the KIPF by a working-level researcher. The BAI pointed out that the KIPF and National Computerization Agency (NCA) should punish those who were responsible, and supplement the project or return the project fee. The KIPF did prosecute the researcher who forged the seal and issue a warning to the other researcher who was responsible -- but did NOT return the fee.

There have been seven guest researchers at the KIPF since 2004. Four of them were former senior public officials, including a former minister, vice minister, and director. Most of the guest researchers failed to complete their research during their term, which made other researchers complete their reports late. The KIPF became a subject of gossip in January 2005 when it invited Huh Sung-kwan, the former minister of government administration and home affairs, to work for it as a guest researcher.

Another researcher, who criticized government policy, was punished. Roh Young-hun, a researcher who published an article criticizing the 8/31 comprehensive real estate policy in November 2005, was suspended from doing research for a year. (See Korea Times article, 2001 for his opinion in 2001 on the real estate situation.) At the outset of 2006, Choi Yong-sun, the head of the KIPF, stopped Roh from presenting the article at a seminar within the institute and blocked the article from being released to the public. The institute also blocked a report release in 2001, which criticized government public fund management. (Source: Joongang Ilbo.) If this sounds like Roh government censorship, it is. It pays for "think tank" research and then refuses to publish any commentary that is uncomplimentary. Just look at how Roh has handled his feud with the Chosun Ilbo.

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"Big Bang" Market Reform Bill (Feb 2006) The following article is from the Korea Times on 20 Feb that explains the "big bang" to the financial markets in 2008. The bill is supposedly modeled on Australia's Financial Services Reform Act 2001 and it will be scrutinized in the coming months. The Ministry of Finance and Economy (MOFE) announced that a bill has been prepared to let the financial institutions consolidate and create comprehensive financial institutions. Under the ``Capital Market Consolidation Act,'' these non-bank financial firms will be empowered to invest and market the new versatile funds, which freely decides what kinds of assets to include in the investment portfolio.The bill is touted as essential to modernize the financial markets -- but it will be a "survival of the fittest" in the end. The advantage is to the larger institutions.

(SITE NOTE: If the fingerprints of the chaebols are not seen at this time, they will become very evident in the future. What brought Korea to its knees in the 1997 IMF Crisis was the chaebols using banks to issue cross-assurances to buttress failing subsidiaries. Under the "transparency" regulations, the chaebols were banned from having controlling interests in financial institutions. However, in Jan 2006, the Finance Minister was again mouthing words that seemed very much like the return to the "old system" that was regulated out of existence after the crisis -- in the name of protecting the nations' companies from hostile takeovers. Investment banks may engage in all six, but there will supposedly be a ``Chinese wall'' to prevent clash of interests -- but this is not the same as having controlling interests in "friendly" companies that were spun off. This bill allows the chaebols to once again gain control of the financial markets. With these measures in place, the chaebols will be able to ward off hostile takeovers as they can have controlling interests in their companies through financial institutions and funds controlled by themselves. We are not financial experts, but it sure appears to be the most bold-faced move by the Roh administration to give unfettered control back to the chaebols -- disguised as something else.

From a skeptics point of view, this appears to be a move to gain the support of the chaebols in preparation for the 2007 Presidential election. If the chaebols want this bill to become law, they will fork out heavily to have an Uri Party candidate win at the polls. The folks with the money politics in Korea is the chaebols -- and though Roh promised to leash them in -- it has become evident in recent months that there are two standards in the eyes of the law under Roh: one for the rich and powerful -- and one for the working classes.)

Big Bang Bill Alerts Banks

By Yoon Ja-young Staff Reporter

Korea plans to introduce ``mixed asset funds'' wrapping all kinds of assets such as securities, real estate and derivatives in 2008, while allowing the opening of investment banks similar to Goldman Sachs and Merrill Lynch. These and other financial deregulatory steps are expected to cause a `big bang' in Korea's financial sector, affecting banks as well as non-banking financial institutions.

The Ministry of Finance and Economy (MOFE) announced that a bill has been prepared to let the financial institutions consolidate and create comprehensive financial institutions. Under the ``Capital Market Consolidation Act,'' these non-bank financial firms will be empowered to invest and market the new versatile funds, which freely decides what kinds of assets to include in the investment portfolio.

According to the ministry, the investment banks will be allowed to engage in a variety of financial services ranging from investment banking, wealth management, principal investment and securities services to futures. The bill is expected to tear down ``walls'' dividing the financial section area by area. Modeled on Australia's Financial Services Reform Act 2001, the bill will be submitted to the National Assembly in the second half of this year and will go into effect after a one-year grace period.

In a press briefing, Finance Minister Han Duck-soo said, ``The twin pillars of the act are opening and competition, with the purpose of giving financial firms a freer hand in the development and marketing of products.'' Han is a strong advocate of a plan to turn Korea into a financial hub for the region and the latest measure is regarded as a key part of it.

The act also enables the investment firms to hire salespersons and have them visit house to house, telemarket and engage in e-mail sales for a variety of financial products. At the same time, the investment banks will be obligated to explain, in detail, the risks of the products they sell. Should they fail in their obligations and cause damages to the investors, they have to make compensation.

``Considering Korea is rather a small country with an open economy, we need investment banks more,'' said Kim Hyoung-tae, vice president of the Korea Securities Research Institute (KSRI). ``The businesses with high risk, such as biotechnology or information technology, are growth engines for the Korean economy, and investment banks will be able to support their business ideas come true by investing in such high risk businesses,'' Kim explained.

The consolidation act divides financial functions into six categories _ trade, brokerage, asset investment, investment entrust, advice on investment, and asset management _ and applies the same regulation for the same financial function regardless of what kind of financial company provided the service. Investment banks may engage in all six, but there will be a ``Chinese wall'' to prevent clash of interests, the ministry explained. The ministry also plans to scrap or ease about 40 percent of capital market regulations.

The investment banks will be allowed to develop innovative and sophisticated financial products, such as those enabling clients to hedge against weather and natural disasters, under the new law. Currently, firms can provide only those listed by the law. ``With such creativity, the financial investment corporations will rise as the core of the capital market instead of old-type securities firms or government. There will be a power shift,'' Kim said.

Also, there will be little difference between securities accounts and bank accounts regarding services they provide. People will be able to send money, deposit or draw money at any time, or even use the securities accounts as a salary account. The measure is expected to negatively affect banks as their marketing of financial products often depends on close contact with salary account customers.

The act is expected to trigger a major consolidation of securities, futures and asset management industries, restructuring the nation's financial industry into three major pillars: banks, insurers and financial investment companies. ``It will be a `winner-takes-all' market, and small companies will have to specialize to survive,'' Kim said.

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Government Demands Dividends from KDB and IBK to Makeup Tax Revenue Shortfalls (Feb 2006) On 25 Feb Korea's government-run banks and public enterprises were asked to pay dividends to the government coffers to make up for its tax revenue shortfall. According to the financial industry on 24 Feb, the Korea Development Bank (KDB) will reportedly pay a dividend of up to 380 billion won this year to the government. The KDB, which posted a record net income of over two trillion won in 2005, will pay a dividend at the end of next month after obtaining government approval on its closing accounts by the end of this month.

The dividends will comply with the Korea Development Bank Act, which was revised in 2005 and requires the Bank to allocate some of its net profits to shareholders starting 2006. This is the first dividend payment for the KDB since its foundation in 1954. All of the bank's shares are owned by the government. The Bank's dividend to the government was estimated to be about 300 billion won at first, but that amount increased after the government demanded that it should be between 350 billion and 400 billion won, citing shortages in tax revenue.

The Industrial Bank of Korea (IBK) also increased its dividend rate to the government for 2006. IBK Chairman Kang Kwon-seok said, "Unlike last year, we will apply the same dividend rate offered to ordinary shareholders to the government." The IBK applied a lower dividend rate to the government compared to the one it offered to its minority shareholders last year. (Source: Donga Ilbo.)

(SITE NOTE: The Korean People need to pay attention and start questioning the Roh administration spending policies. It is spending more than it is making in revenues. It continues to dole out millions of dollars in aid to the North with nothing in return. It attempts to fund extravagant schemes (administrative city and self-reliant defense) that have already exceeded the allocated budgets. The decision to demand dividends from state-run banks needs to arouse some interest. This means that the tax increase avenues have been looked at and nearing a dead-end. Raising taxes is political suicide with the upcoming May elections. This is a heads-up.)

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Strike Season Upon Korea (Feb-Mar 2006) The first to go on strike were the KTX attendants who brought on complaints of passengers of poor service on the high-speed trains to Pusan. Then the Korean Railway Workers' Union and the Seoul Metro Workers' Union have vowed to take collective action on 1 Mar, demanding better working conditions and greater labor rights. The union has demanded job security for rail workers and an early implementation of the five-day workweek. It is also asking Korail to scrap its restructuring plan to reduce its workforce, reinstate some 70 laid-off workers and stop discriminating against non-regular workers. The Truckers' Unions -- joined by taxi drivers -- have also pledged to go on strike with rail and subway workers unless management met their demands.



Union member protests in front of Union Poster to protest Labor Reform Bill (28 Feb 2006)

The greatest impact was the reduction of passenger traffic on the rail systems and decrease in freight traffic as existing rail cars were allocated to passenger traffic. However, the real impacts was not to be felt until 2 Mar as 1 Mar is a national holiday. The government mobilized 1027 non-union workers (supervisors and retired workers) and military personnel to minimize any negative effects of a strike planned by railroad workers. The Ministry of Construction and Transportation eased restriction on buses and taxis to make other forms of public transportation more accessible. Local governments were contacted to adjust schedules and routes of busses and other non-rail transportation to help disperse passenger and freight usually handled by trains.

Day 1: 1 March The union leaders declared the start of the strike at 1 a.m. at the Seoul depot, disrupting the nation's railway services. The National Labor Relations Commission had banned the strike, ruling on 1 May that it will arbitrate the dispute between the union and the state-funded Korea Railroad (KORAIL). The commission has the authority to intervene in labor conflicts in sectors critical to the national economy. Its decision to arbitrate mandates a 15-day "cooling-off" period by unionists.

The labor and management of Seoul Metro reached an agreement in the early hours of 1 Mar calling off the walkout and ensuring the Seoul lines 1-4 kept operating. The decision was expected to reduce the impact of the KORAIL strike and prevent serious repercussions to the transportation system in the capital. Seoul subway line No. 1, which is jointly operated by the Korea Railroad Corp., ran only half the normal number of subway cars and stretched out the time between trains.

However, the KORAIL strike continued. The police sought the arrest of 10 KORAIL union leaders. The prosecution said they would be tough on all employees involved in the proposed strike. In response to the warnings issued by government officials and prosecutors, KORAIL union leaders said they cannot accept state arbitration that effectively limits laborers' rights. KORAIL gave its workers until 9 a.m. to return to work or face administrative actions, including dismissal. It said that 16,388 workers were taking part in the strike, but about 1,000 returned to work in compliance with company orders.

KORAIL and the Transportation Ministry said that overall train operations was 46 percent of normal. KTX bullet trains are running at 34 percent of daily capacity due to the worker shortage, while freight movements were hit hard. Only 16 trains ran between Danyang and Jecheon in North Chungcheong province yesterday, down from the normal 82. Hanil Cement was forced to cancel its daily 11,000-ton shipments; Asia Cement delivered only 500 tons of its 10,000-ton output. At the harbor in Busan, containers were being hauled away at less than half the normal rate; rail cars moved only 800 containers rather than thenormal 2,000.

Police were standing by in expectation that they could be needed if the strike turns violent or if authorities order them to act against the strike, which became illegal after the arbitration order was issued. Police officials said about 14,000 men were dispatched to rail depots and terminals around the country.

The same union went on strike in 2003 to oppose the rail corporation's restructuring plans. It ended the strike in disarray after three days because of a public outcry against the union. A year earlier, the union struck to protest plans to privatize Korea's rails, but reached a settlement with management after two days. The union and management have settled 284 of the union's 372 demands. Four issues in particular were sticky: streamling rail operations along commercially sound lines, the rehiring of 67 workers fired after earlier strikes, the addition of 3,200 jobs and an end to differential treatment of regular and non-regular employees. KORAIL wants to cut unprofittable lines that it says its losing 31.9 billion won ($33 million) a year on.

(NOTE: Later Prime Minister Lee Hae-chan would get into hot water for playing golf in Pusan with individuals of convicted of bribery and corruption -- with allegations of being lobbied to prevent a $38 million fine -- instead of attending to business of the rail strike or attending national Independence Day ceremonies. The golfing wasn't the problem, it was who he was golfing with -- a convicted stock price manipulator who was to be fined the next day by the Fair Trade Commission (FTC) which just happened to be under the Prime Minister's office. On 15 Mar, Lee Hae-chan resigned.)

Day 2: March 2 The second day of rail strikes saw only some 44 percent of train and subway services running, with many schoolchildren already missing class or coming late at the start of the new school year. The situation was especially bad on Seoul subway lines 1,3 and 4, where double or even triple the normal number of commuters were packed like sardines on the rare trains. Freight operations fell to just 15 percent of normal levels, leaving containers and cement piled up at the teminals. Roads were also clogged since many commuters took their cars to work instead. Express bus terminals and airports were bustling with increased traffic. According to the Ministry of Construction and Transportation, the KTX operated 39 percent of services and regular trains including the Saemaeul Express no more than 19 percent. The subways operated at 56 percent.

Day 3: March 3 Lee Chul, the head of the Korea Railroad Corp., demanded that striking workers return to work, and said there would be no further negotiations until they did. About 8,000 union members remained off the job the third day of the walkout, and 2,500 were suspended in return. Before Mr. Lee's threat, the union had asked the government to intervene with management. Lee Hae-chan, the prime minister, turned down that request flatly. "The railroad strike is illegal, and the government will not intervene," the administration told the union. About 35 percent of the striking workers had returned to the job by 3 Feb, but the number of train operators and engineers at work was still only 20 percent of a full complement. Things were better at the KTX bullet train, where 99 Seoul-based engineers have returned to work and operations yesterday were 60 percent of normal. Only 40 percent of commuter trains in the capital area were running.

The proportion of workers who returned to their jobs on March 1, the first day of the strike, was 9.6 percent. As of 4:00 p.m. on March 3, 4,338 workers, or 34.58 percent, had returned to work.

As of 3 March, the nation's transportation system and commuters were still in chaos, and KORAIL has suffered enormous losses of an estimated 10 billion won because of the strike; 5.97 billion won from passenger train losses, 1.9 billon won from freight train losses, and 2.27 billion won from subway losses.

Day 4: March 4 About 195 KORAIL workers who stayed off the job were arrested by police, Many other railroad workers, facing threats of stern punishment by KORAIL, returned to work, making this weekend a likely turning point in the KORAIL labor strike. KORAIL fired 1,857 railroad workers who didn’t return to their jobs on 3 Mar, raising the number of dismissed workers to 2,469. (NOTE: Another news report stated: "The company also said it had temporarily dismissed 2,244 workers, including 387 holding leadership positions in the union." We keyed in on the word "temporarily.")

KORAIL expected that KTX high-speed rail service to be restored to 60 percent of its normal operating capacity by 4 Mar. The labor union of the state-run Korean Railroad Corp. said that unionized train engineers and other railway workers would end their strike and return to work immediately. However, if the "disciplined employees" do not return to work, there may be problems in the future.

KORAIL Seeks Compensation for Illegal Strike The Korea Railroad Corp. is reportedly planning to demand compensation for losses it incurred. The railroad operator said on 6 Mar that those losses were about 15 billion won. It also suspended 2,400 strikers. The company said it would sue for compensation from all strikers, another often-threatened but little-used provision of labor law that holds illegal strikers personally responsible for damages. (Source: Joongang Ilbo.)

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KCTU Strikes on 1 Mar In addition to the KORAIL strike on 1 March, the Korean Confederation of Trade Unions, the nation's second largest umbrella labor group, condemned the Labor Reform package that was to be voted on in the National Assembly on 2 Mar and threatened a general strike on 1 Mar. At the center of dispute is a clause allowing companies to hire temporary workers under any circumstances, but then be required to employ them full time after two years of employment. Labor activists argue the bill would eventually help employers hire more non-regular workers, who are cheaper and easy to fire. They also cautioned that such temporary workers would be more vulnerable to summary dismissal by employers prior to the deadline by which they have to be granted full-time status.


Union taxi drivers line up in front of National Assembly to protest Labor Reform Bill (28 Feb 2006)

The lines are drawn for a prolonged standoff between government and labor. The government has made clear that it regards the KTCU walkout as illegal because it is motivated by political gain and has vowed to take firm action. The Supreme Public Prosecutor's Office sought arrest warrants for union leaders who called the illegal strikes, and the Korea Employers Federation warned that it would bring civil and criminal lawsuits against unions that go on illegal strikes.

The KCTU said some 150,000 workers (50,000 according to estimates by the Labor Ministry) -- including those with Hyundai Motor and Kia Motors who took part in the strike for a four-hour period. The KTCU rallied nationwide to denounce the bill on 1 Mar and resumed the general strike on 2 Mar. (Source: Chosun Ilbo.)

Hyundai Files Charges Against Union SEE HYUNDAI MOTORS SCANDAL. Hyundai Motor Corp. filed complaints naming six union leaders with the police on 6 Mar, saying the six had been the instigators of an illegal strike on 1 Mar. The company said it also planned to ask for compensation from the union for losses it suffered during the strike, which was part of a job action called by the KCTU. Kia Motors, a Hyundai Motor subsidiary, also filed a complaint with the police against its union chief and other leaders for a walkout there. (Source: Joongang Ilbo.)

The union struck the two automakers for four hours on 28 Feb and six hours on 1 Mar, at the instructions of the KCTU. "The strike was an illegal political strike that had nothing to do with working conditions at our factories," a Hyundai official said. "We cannot stand by and watch these strikes, which are repeated year after year. Our losses because of this strike were 30 billion won ($31 million)." Hwang Yong-yeon at the Korea Employers Federation praised the companies' swift action to seek punishment of the strike leaders immediately after the job action. "The measure was one taken to settle labor and management relations based on the law and principles," he said. Na Seong-lin, a professor at Hanyang University, said Hyundai's decision might be a turning point in labor-management relations here. "In the past, companies had a custom of pretending to be blind to illegal job actions, but Hyundai's case shows that companies will now follow the law," he said. An official at the Korean Confederation of Trade Unions criticized the two automakers, saying their attitude would only worsen labor-management relations.

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Labor Reform Package (Feb-Mar 2006) A National Assembly committee yesterday passed a package of labor reform bills despite unions' threat of a general strike and opposition of DLP which blocked the committee room to enact the passage. The Roh Moo hyun administration has pushed the new labor laws as part of its efforts to increase the flexibility of the labor market. The Committee on Environment and Labor approved the three controversial proposals which the government submitted in November 2004. They are subject to a floor vote at the Assembly's plenary session scheduled to convene on 2 Mar. Both the ruling Uri Party and GNP have pledged to enact them in the current special parliamentary session.

One of the bills would allow businesses to more freely hire nonregular workers such as temporary, part time and subcontracted staff. Companies can hire them for up to two years but have to grant full employee status after that period. The bill is also aimed to better protect the rights of nonregular workers by specifically defining discrimination against employees that will be subject to punishment. However, labor claimed that this provision will allow management to fire the nonregular workers just prior to the two year limit.

If approved, the new laws will apply to workplaces with more than 300 employees beginning in January 2007 and to smaller companies in steps by January 2009. Labor groups fear the new laws would encourage companies to replace their permanent staff with irregular workers in order to cut costs. The unions insist the companies should be allowed to hire such workers only under specific circumstances. The Federation of Employers also was against this bill as it penalized smaller companies who employ 80 percent of the temporary workers into converting them into permanent positions which it claims they can ill-afford. Thus in effect, the bill penalized the people that it sought to protect. The passage sparked fierce protests from labor groups. In a rally in front of the Assembly, the Korean Confederation of Trade Unions, the nation's second largest umbrella labor group, condemned the committee's approval and repeated its threat to stage a general strike on 1 Mar. Unionized transport workers are also set to launch a massive walkout demanding higher salaries and better working conditions.

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Trade with US Falls in 2005 (Feb 2006) The Korea International Trade Agency, citing U.S. Commerce Department data, said that Korea-U.S. bilateral trade fell in value last year compared with 2004. The Korean agency said that Korea was the only one of the top 20 trading partners of the United States in 2005 to see its trade with the world's largest national economy decline. Korea's total trade with the United States in 2005 was $71.4 billion, down from $72.6 billion a year earlier. Korea's exports to the United States last year amounted to $43.8 billion, down more than 5 percent from 2004. Imports rose marginally to $27.7 billion.

The trade body attributed the export fall to weakening competitiveness in products that had been Korea's strong suits. Automobile exports, the largest single product in the Korean export mix, dropped in value by nearly 14 percent. Korea's cell phone exports to the United States fell in value by over 26 percent. "The quick rise in exports of those key products a few years ago brought some corrections last year," said Park Yong-gyu of the association. "But essentially, we're simply trailing the likes of China, Malaysia and Taiwan in overall competitiveness." A Hyundai Motor auto plant in Alabama began producing cars last May, which probably explains part of the lower figure for auto exports. (SITE NOTE: Expansion of the plant was indefinitely postponed due to the growing Hyundai Motor scandal in May 2006.) The trade association made the same point, saying that in general, Korean companies' products are being made in Korea in fewer numbers. (Source: Joongang Ilbo.)

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March 2006

Hynix Executives Receive Jail Time for DRAM Price Fixing -- Then Samsung Execs in jail -- And Other Korean companies Under Investigation (Mar 2006) Four Hynix executives have pleaded guilty to a price fixing charge and agreed to serve jail terms of between five and eight months in the United States, the U.S. Justice Department announced on 1 Mar 2006.

The four executives of Korea’s second-largest semiconductor firm conspired with other companies to fix U.S. prices of DRAM chips for three years starting in April 1999, the department said. It identified the four as D.S. Kim, general manager of worldwide sales and marketing; C.K. Chung, director of global strategic account sales; K.C. Suh, senior manager for memory product marketing; and C.Y. Choi, general manager of marketing and sales support at Hynix in Germany. It added they individually agreed to serve between five and eight months in jail, pay US$250,000 each in fines and cooperate with the investigation. Hynix said that it will give the maximum support to the employees within the boundary of the U.S. antitrust law. The company also hinted that it may help the four executives pay the fine, even though they were individually charged by the U.S. court.

The four admitted violating U.S. law by fixing DRAM prices in meetings and phone conversations with rival manufacturers. U.S. Attorney General Alberto Gonzales said the executives were being jailed to protect the free market. “Individuals who defraud American businesses and consumers by participating in international price-fixing conspiracies will be prosecuted and sent to prison no matter where they live or where they commit the crime,’’ Gonzales said.

Seven former and current executives with Samsung Electronics also face similar punishment. Meanwhile, an international investigation is underway into allegations that Korean Air and Asiana Airlines were part in an airline cartel fixing air freight rates. (Source: Chosun Ilbo.)

It is the first time for South Korean individuals to get jail terms by the U.S. authority in an antitrust case. It is expected that more Korean businessmen will be thrown into U.S. jails, as Samsung Electronics, another Korean company involved in the scheme, allegedly has seven employees bargaining for their sentences at the San Francisco court. The U.S. prosecutors said the price-fixing conspiracy adversely affected sales of U.S. computer makers such as Dell, Hewlett-Packard, Compaq, IBM and Apple.

Four Corporations Fined for Price Fixing (Mar 2006)The Justice Department started its investigation in 2002 and fined four companies more than $700 million -- Hynix and Samsung of Korea, Elpida of Japan and Infineon of Germany. Hynix and Samsung, the two largest DRAM manufacturers in the world, have been charged by the Department of Justice for attempting to drive up the price of the memory chips in the U.S. market from April 1999 to June 2002, by conspiring with two other firms: Elpida of Japan and Infineon Technologies of Germany.

The four non-American companies, as corporations, all have pleaded guilty and were already fined by the U.S. government, with Samsung paying $300 million and Hynix $185 million. However, U.S.-based manufacturer Micron Technology was also involved in the price fixing, but has yet to be charged by its own government. Like Hynix, Infineon also had four employees serving prison sentences ranging from four to six months in 2004, and a $250,000 fine each. However, U.S. manufacturer Micron had only one employee convicted, and the sentence was only a home detention of six months, not an actual jail term. (Source: Korea Times.)

Samsung Electronics Co. and Hynix Semiconductor Inc. are now facing a series of lawsuits by U.S. consumers over price fixing. The sources said besides the fines, the two chipmakers have been involved in settling damage lawsuits filed by consumers in the United States. It is the first time for South Korean companies to face class action lawsuits filed by overseas consumers over price collusion.

In the case of Samsung Electronics, its U.S. subsidiary, Samsung Semiconductor Inc., has already put a total of $67 million in reserve for the settlement of damage lawsuits filed by U.S. consumers over the price-fixing last year. For years, the U.S. government has been probing global memory chipmakers over the price fixing allegations after complaints from the nation's personal computer makers such as Dell Inc.,Hewlett-Packard Co. and Apple Computer Inc. So far, Samsung Electronics Co., Infineon Technologies of Germany and Elpida Memory Inc. of Japan have agreed to plead guilty over the collusion. (SITE NOTE: The US is playing hardball now that the "protected partner" Korea has become a "reluctant ally." This has been brewing for many years with charges of Hynix subsidies, dumping and price fixing going on and on. Now Samsung and Korea Airlines and Asiana are also feeling the heat.)

Foreign governments' anti-trust investigations into Korean companies are expanding, also. According to the Korea International Trade Association, the European Union last week slapped heavy provisional anti-dumping duties on Korean-made side-by-side refrigerators with a capacity of 400 liters or more. The measure came after the U.S. appliance maker Whirlpool lodged an allegation against LG Electronics Inc., Samsung Electronics and Daewoo Electronics Co. Lee Seung-cheol, director of the economic research division at the Federation of Korean Industries, said, "As made-in-Korea products gain popularity in overseas markets, governments and rival firms are increasingly attempting to offset their influence." (Source: Joongang Ilbo.)

Samsung Execs Jailed for Price Fixing Three Samsung Electronics executives will serve jail time in a U.S. jail for their role in a price-fixing scandal. Samsung was the lastest DRAM maker involved to admit to the charge and pay fines to the U.S. Justice Department. Four other Samsung executives are still under investigation.

On 22 Mar Samsung stated that Lee Sun-woo, Samsung's senior manager of DRAM Sales in 2002, Kang Yeong-ho, the associate director of DRAM marketing in Samsung's U.S. subsidiary and Lee Young-woo, the sales director for Samsung's German subsidiary, pleaded guilty and agreed to pay fines and serve jail terms. They were under investigation for conspiring with other Korean and overseas semiconductor firms to fix the price of DRAM chips they supplied to PC and server manufacturers in the U.S. between April 1999 and June 2002.

The Samsung executives, who now work at company headquarters in Korea, will pay a US$250,000 fine each and serve between seven and eight months in a U.S. prison. The Justice Department investigated some 30 Samsung Electronics executives and staff and is reportedly still investigating four of them. Earlier this month, four Hynix executives agreed to serve five to eight months in jail.

Samsung Electronics company regulations say staff sentenced to prison or subject to heavy penalties at home and abroad can be reprimanded. But insiders overwhelmingly say that will not happen since the executives did not act in their own interest. Samsung semiconductor business head Hwang Chang-gyu said the firm is “considering whether we can provide help within the legal limit” to the ill-fated executives. “There isn’t much the company can do in the matter as the department sentenced the individual executives to prison rather than the company,” he added. (Source: Chosun Ilbo.)

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KEB Branches in Japan Censured (Mar 2006) On 3 Mar it was reported that the Tokyo and Osaka branches of Korea Exchange Bank (KEB) will have their operations limited for three months after being found to have allowed illegal remittances. The regulator said Japan's Financial Services Agency has confirmed illegal activities at the two branches of South Korea's fifth-largest lender, warranting administrative action. The branches were found to have failed to report the remittance of funds by illegal aliens inside Japan to the local authorities. Japanese authorities said the bank's actions could have facilitated money laundering by a company strongly suspected of brokering jobs for illegal aliens.

KAL and Asiana Sued for Price Fixing On 11 Mar, KAL and Asiana Airlines, along with other international carriers, were sued by two foreign cargo companies for conspiring to fix fuel price surcharges on cargo flights. In a regulatory filing on 10 Mar, Asiana said that Sisimizi Ltd. filed a suit for damages against Asiana and its rival Korean Air with a U.S. district court on Feb. 28. The Tanzanian firm, which has reportedly been using the defendants to transport woodcarvings, is claiming losses as a result of the fuel price surcharges imposed by the carriers. The lawsuit includes 14 other global airlines.

Then on 11 Mar, it was reported that Zucker's Gifts Inc., a New York-based company had filed a class action lawsuit against South Korea’s two airline companies, Korean Air and Asiana Airlines, and 14 other global airline companies for price-fixing cargo carriage. Zucker's Gifts Inc. brought price-fixing charges between 16 airliners to the New Jersey District Court on March 2 (local time), Asiana spokesmen told The Korea Times. The lawsuit came as the US Department of Justice was looking into the case. The 16 accused airliners include Cathay Pacific Airways, British Airways, Air France and Japan Airlines. As of 2004, Korean Air topped the world's air cargo market with sales of 2.3 trillion won out of 297 member airliners of the International Air Transport Association (IATA), with Asiana ranking 15th. The Korean firms said that no amount has been set for damages.

The US Anti-trust Division began the probe early in February in cooperation with the EU Competition Committee and South Korea’s Fair Trade Commission also joined the probe. ``This is the first time for the Korean anti-trust regulator to jointly investigate the price-fixing case together with its US and EU counterparts. Their cooperation will bring faster results,’’ Lee Tae-hwi, deputy director of the FTC’s service cartel team, said.

Given it took more than four years for the Korean anti-trust regulator to resolve Microsoft’s unlawful bundling of instant messaging software MSN Messenger, it will take at least a year before the cargo price-fixing case is settled, he said. If the airline companies are revealed have colluded on price-fixing, an astronomical amount of compensation is likely along with fines imposed by the US Ministry of Justice, legal experts said. Under a class action lawsuit, victims can file a suit individually and on behalf of all others affected with the court ruling affecting all. (Source: Korea Times.)

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BOK Calls Chaebol Rules Outdated Bank of Korea (BOK) Governor Park Seung on 15 Mar called for the removal of rules restricting top chaebol's equity investment in their units and other companies -- in his farewell speech as he left office. Park said the lift of the investment ceiling is necessary to reinvigorate sagging corporate investment in plants and equipment. The aggregate stock investment rules ban a chaebol unit with more than 6 trillion won in assets from investing more than 25 percent of its net assets into other group subsidiaries and non-affiliated firms. He also said that rules limiting chaebol's investment in banks need to be reviewed. (SITE NOTE: Though we are not financial experts, this seems to be aimed at bringing back the "good old days" prior to the "IMF Crisis" in 1997 that brought the ROK to its knees. The IMF demanded these measures as part of its bailout packages to ensure transparency in the financial sector.Now the outgoing BOK chairman is recommending it be abolished to protect the domestic companies. We question why he made these recommendations a month before leaving his job -- while he didn't state his views during the much publicized Sovereign management control fight with SK Global. We wonder what job in the chaebols awaits him.)

He said that the schemes were introduced to prevent chaebol from sprawling further, but the situation has changed. ``We need to demand more roles from them,'' he said. His comments are likely to re-ignite debates on the need of the anti-chaebol system aimed at protecting companies and banks from the threats of takeover by giant firms with ample cash reserves.

To prevent conglomerates from using banks to expand their businesses, the government has banned a non-financial company from acquiring more than a 4-percent stake with voting rights in a bank. Under exceptional circumstances, they can increase their shareholdings to up to 10 percent with approval from regulators, but their voting rights are limited to only four percent.

``In the past, we had to regulate conglomerates for fair competition, but now we are in dire need for their investments,'' the governor said. ``Gaps are widening between big companies and small companies and banks are reaping record profits, while household debts are growing and income disparity is becoming worse. We should address this polarization problems by attracting investments from conglomerates.'' (SITE NOTE: The fallacy of this thinking is that the chaebols never changed. They have been only biding their time. They have used their political clout to buy out politicians -- including Roh in his political campaigns for office -- and continued to flaunt the laws dealing with white-collar corruption with the aid of Presidential pardons. Now using the xenophobic nature of Korean mindsets -- they warn of the impending doom as foreigners take over the country's businesses.)

Recently, Financial Supervisory Commission Chairman Yoon Jeung-hyun has said the government should revise rules to allow companies to acquire a greater stake in local banks, calling for freer competition between industrial and financial capital. (SITE NOTE: This should send red flags up everywhere as this was the rule implemented because the chaebols used the banks under their control to provide cross-assurances to sinking affiliates and subsidiary companies. The IMF Crisis was caused by the chaebols -- and now that they have bought themselves back into power and are waging a public opinion campaign to "save Korea for the Koreans" -- which is a bunch of hogwash. The end goal is to consolidate the chaebol's power again.)

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Korea's GNI Grows Slowest in Eight Years According to the Chosun Ilbo on 23 Mar, "Various economic indicators improved slightly last year, but people’s actual income remained flat, central bank figures show. The bank of Korea’s accounts for the year 2005 released Wednesday say the nation's gross national income (GNI) grew 0.5 percent on-year, recording the lowest growth since 1998, when GNI plummeted to minus 8.3 percent due to the financial crisis. That is far below last year’s overall economic growth rate, which stood at 4 percent. It shows that the nation's GNI growth has not been able to catch up with overall economic growth for 10 consecutive years."

The Korea Institute of Finance reduced export earnings due to a steep increase in international oil prices and a falling U.S. dollar while the cost of import rose. The economy grew in terms of size, but its real purchasing power, which takes inflation into consideration, barely improved. Gross domestic product (GDP) growth has been below potential growth for three years now. Last year's GDP growth stood at 4 percent, 0.7 percentage points down from the previous year.

The BOK says the growth rate puts the country at the bottom among its major competitors in Asia. The Chinese and Indian economy grew 9.9 percent and 8 percent respectively last year, and Hong Kong and Singapore also showed strong growth of 7.3 percent and 6.4 percent. Despite this, the Bank of Korea said the Korean economy has begun to improve ... which they've been saying for the past three years.

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EU Demand Scrapping of Trade Barriers (Mar 2006) The EU Chamber of Commerce in Korea (EUCCK) on 23 Mar 2006 called on the Korean government to “boldly” scrap trade barriers for members’ goods and services. The EUCCK complained that Korean trade barriers are depriving consumers of the right to choose better products at lower prices. In protection of its legal service market, they claimed South Korea was “worse than North Korea.” The EU has emerged as the nation's second largest export market, overtaking the U.S. last year, and also the largest investor in the nation with $35.47 billion of accumulated foreign direct investment since 1962. However, the reciprocal arrangement has been strained due to the "protectionist" practices that remain disguised as "special tariffs" or "inspection requirements."

BMW Korea president and chairman of the chamber’s automotive committee Kim Hyo-joon cited safe-driving technology as an example of useful goods that fall victim to excessive regulations. Headlights that give drivers a wider view on curved roads at night and active cruise control -- which can prevent accidents by automatically calculating the distance to the car ahead - are not being imported because of government regulations, he said. “For the sake of drivers’ safety, such unnecessary regulations should be abolished,” Kim added.

Klaus Fassbender, the CEO of L'Oreal Korea and the head of the cosmetics committee, said screening procedures and a welter of regulations here deny customers access to “safe quality cosmetics products.” Screening of imported cosmetics only is unfair, he said, while consumers should be given greater “access” to research results on functional cosmetics.

Legal services committee head John Kwon said “even North Korea” allows overseas law firms to operate in its territory. “South Korea is one of a few countries in the world that has not opened its legal services market in the least,” he said. “But if it wants to be a financial hub in Northeast Asia, it is critical that it opens the market.”

Only in the field of intellectual property did EUCCK vice president Peter Thewlis demand more regulations. Thewlis claimed the production and distribution of fake drugs “is a dangerous criminal activity” capable of harming life. The Korean government should implement stronger regulations and hire more personnel to crack down on such activities. (Source: Chosun Ilbo.)

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South Korean financier Kim Jae-rok Scandal On 24 Mar a South Korean financier, Kim Jae-rok, was arrested on suspicion of taking at least 1.4 billion won (US$1.4 million) in kickbacks from corporate raiders seeking to take over financial firms here. The arrest of Kim Jae-rok, former president of Investus Global, a Seoul-based corporate finance company, could grow into a larger scandal and drag in some financial regulators, policymakers and high-profile figures in the finance industry who had close, personal ties with Kim.

The prosecution is investigating allegations that Kim Jae-rok received bribes while negotiating takeover deals between companies from 2000 to 2001. According to Prosecution sources, the case may develop into a national scandal, with authorities suspecting a larger number of cases in which the veteran merger and acquisition (M&A) broker, a confident of former President Kim Dae-jung, used his ties with politicians and high-profile businessmen for influence-peddling.

The Supreme Public Prosecutors’ Office is seeking an arrest warrant for Kim Jae-rok, 49, founder of the Seoul-based business consulting unit, Investus Global, for receiving 1 billon won ($1 million) between 2000 to 2001 from the head of a local firm that sought to takeover a bankrupt insurance company. In exchange for the money, Kim allegedly lobbied a senior government official to give the businessman an inside track in buying the troubled insurance company. Kim is also accused of receiving 2 billion won from the owner of a shopping mall in Puchon, Kyonggi Province, for conciliating a loan of 25 billion won from a local bank.

The Kim Dae-jung government from 1998 to 2003 had spent about 145 trillion won under a state restructuring program to improve the finances of bankrupt businesses, and help them be sold to other companies here and abroad. The restructuring effort came in the aftermath of the 1997-1998 Asian financial crisis.

The program affected 26 of the country's 30 conglomerates, and pushed 16 of them from the market -- most notably the Daewoo Group, Kia Motors and Hanbo -- and broke 10 others apart. The aggressive restructuring policy triggered speculations that policymakers forced a fire sale of Korean blue-chip companies under pressure by the International Monetary Fund (IMF), which had provided South Korea a $58-billion rescue package in 1997. The IMF had been demanding changes in South Korea’s economic policies, including the privatization of state-owned enterprises, the restructuring of companies and the liberalization of the corporate market.

Kim, who joined campaigns for former President Kim in the 1997 election, was an influential lobbyist in the financial sector during the previous government. After the inauguration of the Kim Dae-jung administration, Kim was named head of the Korean branch of U.S.-based consulting firm, Arthur Anderson.

Kim established Investus Global in 2002 and the company consulted in several merger and acquisition deals involving large Korean companies, including the sales of Daewoo Motors and the restructuring of Ssangyong Motors. He resigned as president of Investus Global earlier this month as law-enforcement authorities pushed ahead their criminal investigation on him. (Source: Korea Times.)

(SITE NOTE: This is all part of the xenophobic business culture that is forming under the Roh administration -- but under the guise of the fight to combat corruption which is a Roh campaign promise. There is a fine line between "consultation fees" and "kickbacks" in the high finance area. The current trend is to view the takeovers of domestic companies by foreign investment funds as somehow being "anti-Korean" -- and lobbying as equated to "corruption." Though the companies affected are domestic companies, the scope may broaden.

Yoon Sang-lim has been detained by the prosecution since November unveiling dealings with prosecutors, lawyers, judges, police officers, senior government officials, construction companies and lawmakers. (See Broker Yoon Sang-lim Scandal Expands (Jan-Feb 2006).) The prosecution has been questioning Mr. Yoon since he was arrested in November on charges of blackmailing a construction firm. Yoon is indicted on several accounts of bribery and blackmail. Yoon is NOT cooperating and has remained silent on questions. He was initially charged with taking 900 million won in kickbacks from a construction company by using his influence with police to start a corruption probe into a rival firm. Mr. Yoon, 54, established close relationships with military officials by making contributions to military morale funds in the 1980s. With some generals' support, Mr. Yoon allegedly had a hand in military supply contracts and construction bids and eventually broadened his personal ties. Prosecutors said that one motivation for Mr. Yoon's alleged shady dealings was an addiction to gambling. They said he lost a total of 3.9 billion won ($4 million) during 1,200 visits to a Korean casino from 2003 to 2005.)

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April 2006

The Exodus Begins: Slow Departure of companies from Korea (April 2006) According to the Joongang Ilbo on 21 April 2006 two more foreign manufacturing companies were removing factories from Korea or cutting back production. The reasons cited are similar to those given by Korean manufacturers looking abroad: high labor costs, especially compared to countries like China, and now the rising value of the Korean won. They join Pfizer, SC Johnson, Lego and other companies in moving production facilities elsewhere. Nokia, the world's largest cell phone manufacturer, said that it planned to cut back its production in Korea. "Our headquarters decided that of the 50 million handsets we make annually in Korea, 15 million lower-end camera phones will be produced in China and India," said a spokesperson for Nokia TMC, the Finnish company's Korea office. Five hundred of the 1,700 workers at Nokia TMC's production division will be dismissed. Its plant is located here, produces only for export and had sales valued at 2.9 trillion won ($3.1 billion) last year. The company is the largest wholly foreign-owned investor in Korea.

In the second half of this year Sony Electronics Korea, a production arm of Japan's Sony Corp., will close a factory here that produces audio CD and DVD accessories, one of two plants it operates in Korea. High unit costs because of wage levels, the company said, have already forced a move of some production to Malaysia, and the rest will soon follow. On March 31, about 450 of the 1,800 workers there resigned voluntarily rather than waiting for pink slips. Orders from its headquarters had been declining steadily over the past four years, the local company said; sales from the Korea plants dropped from 1.2 trillion won in 2001 to about 700 billion won last year.

Interestingly, few recent departures from Korea by foreign investors have been blamed on labor unrest; macroeconomic forces have triggered them. Labor costs are higher here than in China, India or Southeast Asia, and the won's appreciation has added to the problem of producing at a globally competitive price. Sony had struck a deal with its workers for a two-year wage freeze, but that was not enough to make the company's low-end production competitive. (SITE NOTE: We believe this is the tip of the iceberg. The three year recession, falling dollar:won exchange rates and high oil prices coupled with the xenophobic policies of the Roh administration are starting to take its toll in Korea. Expect to see more announcements as the time goes on.)



Carrefour Pulls Out of Korea (Apr-Sep 2006) and then Walmart (May 2006) On 13 Apr 2006, Carrefour sold its South Korean stores for $1.85 billion to local fashion retailer E-Land Ltd. in a surprise deal that left favourite Lotte Shopping Co. and Britain's Tesco Plc. empty-handed. E-Land, with financial help from two leading local banks, is buying 32 South Korean outlets from the French retail giant, giving it a foothold in a $22 billion discount store market. Carrefour -- which got a good price, according to one analyst -- is selling out of a market where it has underperformed so that it can move resources to China's $240 billion retail industry, Asia's largest retail market after Japan. It is the latest in stores pulling out of Korea.

The news sent shares in top South Korean retailer Lotte, which had sought Carrefour assets to expand its weak discount store business, down as much as 5.3 percent. Shares in another bidder, Shinsegae Co. Ltd., rose as it looked set to maintain its status as South Korean discount retail market leader. The agreed purchase by unlisted E-Land is South Korea's second-largest takeover deal this year after top South Korean lender Kookmin Bank agreed in March to buy Korea Exchange Bank for $6.6 billion. Kookmin and Woori Bank, the banking arm of third-ranked Woori Financial Group. will provide about 1.4 trillion won for the deal, an E-Land spokesman told Reuters.

Carrefour, the world's second-largest retailer behind Wal-Mart Stores Inc. said the deal was worth 1.75 trillion won ($1.85 billion). The French firm, fourth in South Korea's discount store industry with a market share of 7 percent, has invested about $1.1 billion since it entered Asia's fourth-largest economy in 1996. "It looks like a good price for Carrefour, given that its Korean operations have a book value of 1.6 trillion won," said Na Hong-suk, an analyst at Goodmorning Shinhan Securities. "With a latecomer taking the fourth-spot in South Korea, I don't think there will be any major change to the country's retail market."

Lotte already runs South Korea's largest department store chain and third-biggest discount store chain. Samsung Tesco, a unit of Britain's Tesco was another bidder. "This is a surprise," said Min Young-sang, analyst at CJ Investment & Securities, referring to E-Land's small size relative to other bidders. "But E-land is already in the retail business, so this is not that huge a transition for them." Analysts warn E-Land will have to make hefty investments to remodel struggling Carrefour stores, whose warehouse style have failed to lure South Koreans who prefer department store-like interiors and tend to go shopping every few days. E-Land runs nearly 3,000 fashion retail shops across South Korea, where private consumption generates more than half of annual gross domestic product. It also operates 10 discount-store shops and small department stores mainly around the capital Seoul, home to around a quarter of the country's nearly 50 million population. South Korean retailers are seeking scale to win greater negotiating power over suppliers as they battle margin-crushing competition in the $120 billion retail industry. South Korea's discount store sector has been growing at about 17 percent a year over the past five years as leading retailers sideline smaller firms. Shares in Lotte, which was considered the favourite to buy Carrefour Korea, closed down 2.8 percent to 394,000 won against the wider market's 2.26 percent fall. Shares in Shinsegae, which controls 30 percent of the nation's discount store market with its "E-Mart" brand, closed up 0.2 percent at 461,000 won.

From its South Korean outlets, Carrefour posted a 6.9 billion won profit on sales of 1.67 trillion won in 2005. The planned sale also follows Carrefour's exit from Japan in March last year, when it sold its eight stores to top Asian retailer Aeon Co. due to weak consumer spending and stiff competition. (Source: Reuters.)

To add to the xenophobic business hysteria, the NIS targeted Carrefour. A team of investigators were sent on 28 Apr to the southwestern Seoul headquarters of Korea’s fourth largest retail network and confiscated 2.5 tons of documents for a review. ``Documents on our operations and those related to the sale of our operations were hauled away,’’ Yonhap News Agency quoted a Carrefour official. According to industry sources, the tax collectors focusssed on securing evidence supporting allegations Carrefour received goods free of charge from subcontractors, avoiding taxes.

On 28 Apr, dozens of investigators from Korea's National Tax Service suddenly showed up at the headquarters of Carrefour Korea, demanding records concerning the company's agreement to sell out to Eland, a Korean retailer. The unannounced call resulted in four hours of rummaging through Carrefour's files, and came only two hours after the company had announced the deal with Eland, worth 1.75 trillion won ($1.85 billion). Eland is purchasing all of the French discount chain's 32 Korean outlets. Financing is being provided by partners; Eland will own 50 percent of the former Carrefour assets and manage the operations of the business.

The aggressiveness is in stark contrast with past tax investigations on foreign companies, such as Lone Star Funds' purchase and later sale of an office building in southern Seoul and Newbridge Capital's acquisition and resale of Korea First Bank to Standard Chartered. Checks on those transactions waited until the sale was complete and the companies had reported them to the authorities here. The raid appears to signal a change in the treatment of foreign companies: Strike first and get the documents and records of sales before the companies get the money and sever their connections with Korea.

Carrefour's Korean unit was not the first foreign firm to face such pre-emptive tax investigations -- the Lone Star sale of KEB to Kookmin Bank is the model partly because of public outrage about the ability of foreign companies to exploit Korea's double taxation agreements.

"It is quite hard to collect taxes from foreign companies or fund managers after they wrap up their business activities here and leave the nation," one tax agency official said. "Obtaining sufficient information in advance is essential in order to stave off tax evasion."

Korea's Finance Ministry also stepped up its efforts to establish more of a legal basis to charge local taxes on foreign companies. Kim Yong-min, the ministry's director of tax regulations, told lawmakers yesterday that the ministry is negotiating with several other countries to amend bilateral tax treaties to allow for taxation here. Korea has 62 such treaties, including with the United States and the current bete noir, Belgium, which has frequently been called a "tax haven" in the Korean press. Mr. Kim said that two-thirds of Korea's treaties allow cross-border investors to pay taxes in the country where their headquarters are located. The ministry wants that practice ended, at least in some cases, and the treaties rewritten to allow Korea to tax capital gains on the sales of assets here if the investor has more than a 25-percent interest in the assets in question. The ministry is apparently seeking agreements, but not considering abrogating any existing treaties.

Carrefour is headquartered in France and the Netherlands, both of which have double taxation prevention agreements with Korea, meaning proceeds from its sale to E.Land will not be taxed. (Source: Joongang Ilbo.)

FTC fines Carrefour for unfair business practices The Fair Trade Commission (FTC) said on 4 Jul 2006 that it levied 1.38 billion won (US$1.46 million) in fines on retailer Carrefour Korea for unfair business practices. The FTC cited Carrefour for unilaterally forcing manufacturers to cut prices on products they sell to Carrefour stores, returning products without due cause and intentionally delaying the signing of contracts with suppliers.

(SITE NOTE: This appears to be directly connected with the NIS raid of the Carrefour offices on 28 Apr 2006. The impacts of this decision are not known as it is hard to collect taxes and penalties once a company has left the country. However, the ROK still considered Carrefour as operating as a retailer in the country as of Jul 2006. This also appears to be a move to bypass the dual-taxation issue because of the treaties involved. This deals with a penalty for unfair business penalty -- not a tax on income. However, it definitely has gotten the attention of any company that has even thought of investing in Korea -- and explains why the Free Economic Zones of Korea area a failure as compared to Dubai and Pudong, China. Only 20 companies have invested, but six dealt with developing the infrastructure of the FEZ -- thus only 14 companies have been attracted. Pudong has 250-300 major companies, and Dubai in the thousands.)

On 28 Sep 2006, South Korea's E.Land Corp. signed a formal agreement with Carrefour SA to acquire the French retailer's South Korean unit for 1.48 trillion won (US$1.57 billion), a lower price than was initially agreed upon. Carrefour selected E.Land, a clothing company, as the buyer of Carrefour Korea Ltd., the nation's No. 4 discount store chain, in April. E.Land Group accepted the Fair Trade Commission's ruling to sell three stores to complete its acquisition of Carrefour SA's Korean unit. Kwon Soon-moon, CEO of E.Land Development Ltd., an affiliate responsible for mergers and acquisitions, construction and development projects, said the company decided to sell three overlapping stores in the Anyang-Gunpo, Seongnam-Yongin and Suncheon areas.

Walmart Sells Out to Shinsaegae (May 2006) On 22 May 2006, it was reported that the Korean retail giant Shinsegae was to take over Wal-Mart’s Korean operation, the troubled no. 5 in the domestic superstore business. Shinsegae will buy a 100 percent stake in the U.S. chain’s 16 outlets here for W825 billion (US $825 million) and operate them under the umbrella of its E-Mart retail chain, the company announced Monday. The deal makes Wal Mart, America’s biggest retailer, the second global company to beat a retreat after French retail giant Carrefour sold its 32 South Korean stores in late April to local fashion retailer E-Land. That leaves Tesco (Home Plus), a partnership between the British retailer and its Korean partner run by a Korean CEO, as the only foreign retailer operating in the country. Wal-Mart has some 6,100 stores around the world which produce W323 trillion in sales. It entered the Korean market in 1998 but has had a difficult time finding a foothold and posted W9.9 trillion of losses last year.

Negotiations with Wal-Mart had been going on since March. Supposedly, Walmart was more interested in assuring the continued employment of its employees and retention of contracts with suppliers rather than concerns about price. The two companies sealed the agreement in negotiations in Japan. With the acquisition, E-Mart will have 95 outlets, cementing its market-leading position and its already-dominant 30-percent market share here. E-mart also has seven markets in China, its only foreign presence. Wal-Mart would continue to operate its global procurement office here to buy products for its other outlets. (SITE NOTE: It is yet to be seen whether the NTS will treat Walmart the same as it has Carrefour. On 24 Sep 2006, South Korea's corporate regulator conditionally approved Shinsegae Co.'s purchase of local Wal-Mart's operations. The decision by the Fair Trade Commission's (FTC) nine-member committee calls for Shinsegae to sell 4-5 stores in four cities including Incheon and Pohang to negate concerns of excessive market concentration.)

Tesco of Great Britain is now the only major foreign retailer operating in Korea. It has a joint venture with the Samsung Group. Tesco advanced into the Korean market in 1999 and joined hands with Samsung Corporation. ``At the time of the negotiations, Samsung proposed to Tesco that the joint chains be operated exactly like a Korean home-grown retailer,'' said Seul Do-won, executive director of Samsung Tesco. ``The British officials immediately agreed to that as they saw it necessary in order to win Korean consumers' hearts with the help of Samsung's strong image.'' Thus, officials from Korea and England decided to name their joint venture Samsung Tesco Home Plus instead of Tesco Samsung. The venture, which is 89 percent owned by the British retail giant and 11 percent by Samsung Corporation, currently ranks No. 2 after E-Mart in the local discount store market with a share of 19 percent. Samsung Tesco currently has 43 Home Plus stores in Korea. It plans to open 16 additional chain stores by the year's end, according to Samsung Tesco Home Plus.

Wal-Mart and Carrefour tended to display products in racks 3 to 5 meters (16 feet) high; Korean retailers generally erect displays only to about 1.8 meters. Consumers also preferred to purchase in small quantities while Carrefour and Walmart sold in bulk quantitities. Korean retailers also generally add extra services such as cultural centers to their outlets. But Wal-Mart also failed, other analysts said, because its relatively small number of outlets did not allow it to achieve economies of scale that would have allowed it to undersell its Korean competitors. Kim Jin-hyuk, a researcher at Samsung Economic Research Institute, noted that small scale and said, "Therefore Wal-Mart had to pay higher prices in purchasing products from suppliers compared to E-Mart." In addition, the outlets were in the wrong locations. "When it first entered Korea, the American retailer opened up its outlets on the outskirts of cities like it does in the United States," he said. "Because of traffic problems, many of the customers sought out E-Mart and Lotte Mart, which were in the inner part of the cities and were more convenient to visit." (Source: Joongang Ilbo.)

But the saga isn't over. The NTS stated that it was looking into the Shinsaegae operations for possible violations of tax laws and inheritance tax violations. It appears the NTS is interested in the transfer of wealth from the founder to his son. However, it also seems suspicious as Shinsaegae is also 50 percent owner of Starbucks Korea -- a 50 percent owned foreign company.

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May 2006

Hyundai Motor's Chung Mong-Koo to be tried for graft (May 2006) SEE HYUNDAI MOTORS SCANDAL

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Korea signs FTA with ASEAN -- minus Thailand (May 2006) On May 16, Korea concluded free trade agreements with nine of the 10 members of the Association of Southeast Asian Nations (ASEAN) on manufactured and agricultural goods in Manila, the Philippines. Some agricultural and marine products including rice, beef, chicken, garlic, chili peppers and onions were put on a reserved list. Only Thailand declined to sign. Korea and ASEAN reached an agreement on the modality for freeing their goods, a core part of a free trade agreement (FTA). Under the agreement, the goods produced in North Korea’s Gaesong industrial complex will be recognized as Korean if the products meet certain terms. Similar agreements were made in previous free trade accords with Singapore and with four members of the European Fair Trade Association or EFTA, which has nine European countries in its membership. The announcement that Korea would start free trade negotiations with the Asean members was made in November 2004. The negotiations began in February 2005.

The Korean Trade Ministry said with competitors such as China and Japan aggressively pursuing free trade accords with members of the Asean group, if Korea was left out, it would lose a lot of ground in the market, whose economic growth has been continuous. The Asean members earlier signed a free trade accord with China but the pact has not taken effect. Japan has been pursuing free trade deals with several Asean members. Korea now has signed free trade pacts with 15 countries, the first being with Chile in February 2003. Singapore signed a free trade deal with Korea in December last year. The small Southeast Asian country also participated in yesterday's agreement as a member of Asean.

According to the free trade accord, both Korea and the Asean member nations will lift customs duties on 90 percent of traded products by 2010. In addition, a further 7 percent will see tariffs lowered to 5 percent or less by 2016. In the automobile industry, Indonesia, Malaysia and Philippines will abolish customs duties on Korean automobiles exported through the knockdown system. Although it differs between countries, the Asean members have either agreed to completely wipe off tariffs on imported automobiles by 2010 or lower the tariff to less than 5 percent by 2016. Automobiles currently have a high tariff levied. In Malaysia the custom on imported vehicles is 60 to 130 percent. In Indonesia it is 25 to 80 percent while Vietnam has a 30- to 100-percent tariff on imported cars.

The tax on imported steel is also high in Southeast Asia. Malaysia has a 50-percent custom on imported steel while Indonesia and Philippine both levy a 15-percent tariff. Vietnam levies 20 to 40 percent on imported steel. With the new accord, the tariffs on steel will either be lifted completely by 2010 or lowered to less than 5 percent by 2016. Each country, however, can protect up to 22.8 percent of its sensitive steel products.

Forty-five sensitive agricultural products such as rice, beef, poultry and garlic that may affect the livelihoods of Korean farmers were excluded from products to be opened to the free market.

The Korean government plans to ask the National Assembly to ratify the agreement in the regular session in September so that it can take effect within this year.

ASEAN, Korea's fourth largest export market, is the third to treat goods produced at the joint-Korean Kaesong Industrial Complex in the North as made-in-South Korea, after Singapore and the European Free Trade Association (EFTA) in 2004 and 2005 respectively. But that will cover only some 100 items such as clothes produced in the complex when the final FTA with the Southeast Asian bloc is signed. The FTA negotiations with ASEAN were not easy because member countries thought their products were in direct competition with goods produced in the complex, most of which are low-priced manufactured goods. The details of how much will be levied and when it will go into effect is still under negotiation.

Only 100 items out of the products made in Gaesong industrial complex will be recognized as “Made in Korea,” as long as more than 60 percent of the materials from which they are made are of South Korean origin or if the added value of South Korean materials put in the product is more than 40 percent. Kim Han-soo, FTA bureau chief, said, “If needed, Korea can make a request for a change in the items recognized as Korean made.” (SITE NOTE: This is the World Trade Organization (WTO) standard for the "Made in Korea" stamp -- the same as Korean products assembled in Mexico or Guatemala to take advantage of the cheap labor and FTA agreements with the US on those countries products. It is also the formula agreed to by the EFTA. Though Korea has made it a priority to expand the "made in Korea" criteria, it conflicts with World Trade Organization regulations on tariff exemptions on goods produced in third countries. However, some ASEAN members in negotiations agreed to make an exception for at least one item produced in the complex as a symbolic gesture, even if it goes against WTO regulations.)

According to the agreement, Korea and ASEAN are bound to remove tariffs on 90 percent of the number of import items and of the import amount respectively by 2010. Tariffs on “sensitive items” including squid, mushroom, and pumpkin will be lowered to 0 ~ 5 percent by 2016. “Highly sensitive items” will be excluded from the market opening and be protected by means of a limited level of tariff cut by 2016 or a tariff rate quota. Forty-five items such as rice, chicken meat, live or frozen fish, and most fruits are protected from the opening. The Office of Minister for Trade said, “This is the first FTA which Korea signed with the fifth largest export market.” And it also predicted, “In the mid to long term, the FTA with ASEAN is expected to increase Korean exports to the ASEAN region by $10 billion and trade surplus by about $6 billion annually.”

The Kaesong Complex looms as an obstacle in future FTA negotiations. Canada, with which Korea started FTA negotiations last July, and especially the U.S., with which negotiations are to start next month, are unwilling to make an exception. The U.S. is very sensitive about the issue because of its nuclear dispute with North Korea. (SITE NOTE: This item may turn into the biggest political problem dealing with the ROK-US FTA negotiations which will probably see no concessions on this issue. Because of the time constraints involved with the US-ROK FTA negotiaions, there is a potential that this may have to be conceded -- however, there is also growing objections in Korea over the US-ROK FTA.)

Korea is also embarking on preliminary FTA negotiations with the European Union (EU). The 25-member EU is the nation’s third largest export market with US$43.7 billion worth of exports in 2005, after China and the U.S. The EU-ROK FTA is tipped to have a substantial impact on the domestic industry as a whole, particularly the manufacturing, agricultural and service industry. If negotiations progress as planned, Korea will start official FTA negotiations with the EU within a year. (Source: Donga Ilbo; Joongang Ilbo; and Chosun Ilbo.)

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Warnings that Apartment Bubble (May 2006) Government officials warned that the country’s real estate bubble could burst. That could theoretically cause a full-fledged economic crisis including a sharp decline in personal and corporate asset value, insolvency of financial institutions, plunging private consumption and private and corporate bankruptcies.

Presidential economic policy adviser Chung Moon-Soo’s warned on May 4 that “the time has come” to worry about a real estate bubble. “When we look at apartment prices in the affluent Gangnam area” south of the Han River in Seoul, “they are almost as high as those in Japan just before the real estate bubble there burst, and they have certainly reached a point where they cannot be regarded as normal,” Finance Minister Han Duck-soo told reporters. “Apartment prices in three Gangnam areas have increased to some 18.9 times the annual average income a worker earns, very close to the 21.7 times mark where Japan’s real estate bubble burst at the end of 90s.”

Bae Sang-geun, a researcher with the Korea Economic Research Institute (KERI), warns of a “serious blow to our economy” if the government approaches the matter by trying to burst the bubble rather than solving the problem with the principles of demand and supply, especially given a situation where “many economic factors are working against the national economy.” (Source: Chosun Ilbo.)

Though the experts agree that there are signs that there is a bubble, most state that even if the bubble bursts it will be isolated to the Seoul area and not impact the housing throughout the nation. (SITE NOTE: We remind the "experts" that the "bubble" in Tokyo is what slam-dunked Japan's economy for a decade -- it was not isolated. In turn, the Hawaii "bubble" based on Tokyo investment also burst plunging their economy into the doldrums as well. A bubble bursting in Seoul will affect all of Korea -- and all the words to calm the people will not chase those facts away.)

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New 10,000 won Note (May 2006) The background image is a traditional Korean drawing of the sun, moon and five mountain peaks with pine trees and waterfalls believed to underscore the authority of the king. Some of the lyrics from "Yong-bi-eo-cheon-ga (Songs of Dragons Flying to Heaven)" are shown atop the window pattern background. On the back is a Chosun Dynasty map of the heavens (National Treasure no. 228) with a device for charting the night sky called a "Honcheonui."

The new design is the same length as the controversial new W5,000 note but is 6 mm wider. It is green like the current bills but the color is brighter. A hologram shows different patterns -- a map of the Korean Peninsula, the Yin-Yang symbol, the I Ching trigrams found on the flag and the face value -- at different angles. (Source: Chosun Ilbo.)



The Korea Minting and Security Printing Corporation has already started delivering the new W1,000 banknotes to the BOK since May 19 and began printing the new W10,000 banknotes from July 7, to be supplied to the central bank soon. Counterfeiting of Korean currency has increased in the first half of 2006. As a result, the 10,000 won note will be releaced in Jan 2007.

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MOFE Foreign Exchange Liberalization Package (May 2006) On 17 May the Finance Ministry announced a foreign exchange liberalization package to rein in the rise of the won and stabilize the foreign currency market. Parts of the plan are to be implemented as early as May 22 after the relevant regulations have been revised.

To make better use of the country's huge foreign exchange reserves of $200 billion, the ministry plans to soften the rules on investment in offshore properties within the year. Local investors and corporations will be allowed to invest up to $1 million for the purchase of real estate abroad, and the limit will be revised up even further in the coming years. As part of the plan, individuals and businesses will be allowed to buy US$1 million worth of real estate overseas for investment purposes. So far, they have only been permitted to do so for residential purposes. Individual investors in Korea will be allowed to buy overseas real estate within a limit of $1 million from May 22. Until now, individual Koreans could not purchase property overseas except for the purpose of residence. According to the measures, individual investors will be allowed to buy houses overseas such as in the U.S., China, Thailand and Australia regardless of the number of transactions if the total amount of remitted money does not exceed $1 million. As the limit on the amount of remittance is not by household but by individual, if a household has more than two persons who have means to buy property, the remittance limit can exceed one million dollars per household. The ceiling will be lifted in 2008 or 2009. Those who bought overseas property will be required to submit documents verifying ownership every two years after acquisition of the property. This is to prevent tax evasion of property owners through giving the property to their children living overseas. When selling the property, the owners must report it to corresponding banks, and they must transfer the money back to Korea. (SITE NOTE: It was suspicious that the timing of this proposal came at the same time the Finance Ministry started issuing warnings of the housing "bubble" ready to burst in the overheated Seoul upscale apartments. It almost appears that the government is encouraging the people to remove their real estate investments from Seoul's affluent areas and move them to off-shore residential investments.)

The ministry also decided to extend the current loan limit for foreigners in domestic banks from 1.0 billion to 10 billion won from May 22 in an effort to make the Korean won an international currency. In order to attract more foreign investment in domestic bonds marked in Korean won, the government plans to lower the withholding tax rate of bond interest income from the current 25 to 14 percent during the second half of the year. (SITE NOTE: Given the volatile nature of the Korean stock market and higher coupon rates in other countries, this probably will not do anything in attracting foreign investors to invest in Korean products tied to the won.)

Another plan is to have won-dollar currency futures listed on the Chicago Board of Trade during the second half of the year to boost the status of the won in the international currency market. (Source: Chosun Ilbo and Donga Ilbo.)

The government is speeding up deregulation of the local currency market by further globalizing trade in the Korean won. As part of efforts to stabilize fluctuations in the local currency and establish an efficient foreign exchange market, the Finance Ministry said it would advance its foreign exchange deregulation scheme by two years to 2009. "Despite some recent measures (to boost overseas investment and won trading), our foreign exchange regime still falls behind in consideration of the size of the Korean economy," Finance Minister Han Duck-soo said during a press conference. The rescheduled plan includes raising the limit on local currency lending to foreigners to 10 billion won ($10.5 million) from 1 billion won this year, aiming to boost demand for the local currency in the market.

Korea's financial industry is also expected to further expand its presence in the fast-growing foreign exchange market. With Seoul's new scheme implemented, domestic banks and other finance firms will be allowed to hold up to half of their net assets in foreign currencies from the current 30 percent. "The mitigated restrictions are expected to give more room for banks to manage their own capital. This will help us tap fresh revenue resources," said a bank official who declined to be identified. "But it does not mean we have more benefits just because of the new rules. Without proper risk management of foreign exchange, even a couple of dealers could bankrupt the entire bank as shown in some foreign cases." (SITE NOTE: Korea is not known to have a strong "risk management" ethic in its financial institutions as shown by the 1997 IMF Crisis that nearly brought the country to its knees. Ongoing scandals by chaebols such as Samsung and Hyundai continue. The dire warning that unscrupulous dealings could collapse the financial industry is falling on deaf ears.)

The government's stronger efforts to liberalize currency trading come against a backdrop of the fast-appreciating Korean won and growing needs to globalize the finance sector. In the wake of the 1997 Asian financial crisis, Seoul has lifted several bans on foreign investment here to draw in offshore capital, but the restrictions on overseas investment by local residents remained largely unchanged. As the unbalanced regulative regime led to a glut of U.S. dollars in the local currency market in recent years, the Korean won rapidly gained value against the greenback. "We have suffered many difficulties in carrying out foreign exchange policies due to the oversupply of dollars which was induced by a surplus in the current and capital account balance," Han said.

Given anxieties that the strong won will hurt exports from Asia's third largest economy, exporters and some critics have called for measures to arrest the won's rapid rise. Korea's relatively weak presence in the international currency market also prompted the government to accelerate its plans. Its daily foreign exchange trade of some $30 billion still falls far behind other Asian financial hubs such as Hong Kong with $113 billion and Singapore with $133 billion as of 2004. (Source: Korea Herald.) (SITE NOTE: In our opinion, this "plan" is nothing more than the bureaucracy appearing to do "something" in a situation they have no control over.)

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Seoul States "Equal Treatment for Foreign Investors" (May 2006) South Korea will provide equal opportunities to foreign investors and guarantee their profits earned legally here, the country's vice finance minister said on 24 May. "Our government stands firm in providing equal chances to all market players regardless of their nationalities and guarantees that they can earn profits here in a legal manner," Chin Dong-soo said. (SITE NOTE: We could not but choke when we noticed the xenophobic business environment the Roh administration has created using the FTC and NTS as his weapons. FDI (Foreign Domestic Investment) was down and companies are pulling out of Korea -- supposedly because of falling profits. The general attitude seems to be if a foreign company makes a profit in Korea -- they did it illegally. Even though the companies made "forced donations" to the nation, the government still pursued them.)

Chin's remarks came one day after U.S. buyout company Lone Star Funds denounced ongoing investigations by South Korean prosecutors into its investment in Korea Exchange Bank (KEB), the country's fifth-largest lender, as "ludicrous." The Board of Audit and Inspection (BAI), the country's audit agency, has been examining Lone Star's purchase of KEB in 2003 after some legislators raised suspicions that KEB shares were sold too cheaply. (SITE NOTE: This is just NOT one instance as the media wants to paint it, but a string of unending instances. The only difference from now and in the past is that the instances are so close together that the pattern is undeniable. See Xenophobic Korean Business Environment, Hostile Takeovers and Shareholders' Rights (Feb-May 2006) for the sad saga of Sovereign, KT&G, Lone Star, and a whole group more. The frustration of dealing with the "old boy" network in Korea backed by government pressure makes doing business in Korea untenable for many. Companies have been pulling out of Korea ever since Roh took over starting with Nestles and a tumbling effect.)

South Korea's top lender Kookmin Bank was named the preferred bidder to buy up to 70.87 percent of KEB, and Lone Star is expected to reap more than 4 trillion won in gains from the deal. But the Dallas-based fund drew criticism here since it will not have to pay taxes on the transaction in South Korea, because the fund purchased the KEB stake through its unit based in a tax haven overseas. Since February, the country's prosecution has been investigating allegations that KEB's capital adequacy ratio, a barometer of a financial institution's financial soundness, was intentionally lowered enough to help Lone Star acquire the lender. South Korea's tax authorities have shown a "strong willingness" to impose taxes on the fund's profit from its sale of the stake in KEB. (Source: Yonhap News.)

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Signs that Economic Recovery Over (May 2006) There are signs that suggest the economy may turn to downward. On top of worsening external factors such as soaring oil prices, a stronger local currency and moves for a global tightening, the rate of domestic consumption and facility investment has also declined, turning the possibility of a slowing economy into reality. According to the April Industrial Activity Trend report that the National Statistical Office released on May 29, the economic outlook indicator for the economy in five to 12 months has been declining for three consecutive months. The coincident index's cycle variation value, which best shows the current economic situation, was 0.5 point lower than March.

Negative economic indicators have followed one after another, after the Bank of Korea announced on May 26 that April’s on-month current account deficit reached its greatest amount in nine years, at 1.53 billion dollars. After hitting 100.8 in January, the coincident index’s cycle variation value has shown a clear downtrend with numbers slipping to 100.5 (-0.3) in February, 100.5 (0) in March and 100.00 (-0.5) in April. This is because the industrial production index in April dropped 1.5% from March due to a decline in car, mobile phone and ship production, as well as the fact that the average working ratio of factories also fell to 79.1% in April, 2.4% points lower than the previous month.

But what is more concerning is the leading economic indicator, which showed a sharpening downtrend in the last three months, with numbers falling 0.4% in February, 0.5% in March and 0.7% in April. “If the leading indicator declines for about 3 months, there is more than a 50% chance of the actual economy turning to the downside,” said Oh Mun-seok, an economic research group leader at LG Economic Research Institute. “The economy’s upward trend is coming to an early finish,” he added.

The economic recovery which started in May last year came to an end in January this year, lasting just eight months. The economic upward trend in July of 2001 lasted 17 months to December of 2002, while the upturn that started in July of 2003 lasted seven months until February of 2004. Private economic research institutes such as Samsung, LG and Hyundai have all set an outlook that, after reaching its peak, the economic growth rate will fall to about 3% level in the fourth quarter (October to December). The Ministry of Finance and Economy revealed that its top priority is to keep the consumer consumption level as stable as possible to continue economic recovery, but even that does not look easy. (Source: Donga Ilbo.)

According to the Chosun Ilbo on 31 May the second half of the year will see growing dangers for the economy as factors like oil prices, interest rates and the exchange rate are showing no signs of improvement. “The Korean economy is in a virtual emergency, with all the negative factors aggravating the economy and no positive signs in sight,” a pundit says. “After the May local elections and the World Cup, the public will have to face the reality.”

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Daewoo founder Jail Sentence over fraud (May 2006) Daewoo Group founder Kim Woo-choong was sentenced to a heavy jail term for massive fraud at a Seoul district court on 30 May. The Seoul Central District Court Tuesday sentenced Kim Woo-choong, founder of the now-defunct Daewoo Group, to 10 years in jail and 21.4 trillion won ($22.6 billion) in fines for accounting fraud and other financial irregularities. But the court acquitted him of charges of bribing politicians and other influential figures to bail out his troubled conglomerate following the 1997-98 Asian financial crisis.

The court did not order Kim to be sent back to prison. He has been hospitalized at Yongdong Severance Hospital in southern Seoul due to heart and other medical problems. During the trial, Kim looked pathetically haggard as he sat in a wheelchair hooked up to IV drips. The Seoul Central District Court put off Kim's imprisonment until July 28 considering his age (70) and frail health. Kim's attorneys expressed disappointment at the ruling, saying they will appeal the case. The lawyers had insisted that Kim should not be held solely responsible for Daewoo's demise, since it was also a product of the government's poor economic policies that brought upon the currency crisis in the late 1990s.

The prosecution had sought a 15-year prison sentence against Kim and forfeiture of 23.3 trillion won (US$24.9 billion) on charges of masterminding accounting fraud worth 41 trillion won, illegally borrowing 9.8 trillion won and smuggling $3.2 billion out of the country. He was also suspected of embezzling about 20 trillion won and violating the foreign currency law by smuggling the money out of the country. Investigators brought additional charges against Kim for embezzling 114 billion won and accused him of using $6.26 million to buy artwork and $2.73 million for home purchases and other family living expenses.

Prosecutors argued that he caused strains to the economy through the company's unreasonable expansion and irresponsible management, which cost 30 trillion won in public funds. Once Korea's second-largest industrial group, Daewoo collapsed in July 1999 under the weight of $80-billion debts and was placed under a government-led restructuring program. After Daewoo's collapse, the government spent around 30 trillion won in public funds to bail out Daewoo units, including Daewoo Engineering & Construction.

Last April, the Supreme Court sentenced seven former Daewoo executives to up to five years in prison and fined them a total of 23 trillion won for accounting fraud and embezzlement. Chung returned to Korea from Vietnam in June 2005 after a nearly six-year self-imposed exile abroad to face criminal charges and was arrested upon his arrival at Incheon International Airport. In July 2005, prosecutors indicted Kim on charges of orchestrating accounting fraud by inflating the assets of four Daewoo subsidiaries by 20 trillion won to borrow some 10 trillion won in loans between 1997 and 1998. (Source: Korea Times.)

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JUNE 2006

Business Confidence Deteriorating (June 2006) Business confidence among Korean companies is deteriorating due to the stronger local currency and rising oil prices, raising concerns that the much-awaited economic recovery might be delayed further according to data released on 1 June. The central Bank of Korea said the business survey index, or BSI, declined to 86 for June, marking the second straight decrease. The figures for May and April were 94 and 97, respectively. A reading below 100 means that pessimists outnumber optimists over the country's economic outlook.

The Federation of Korean Industries, a business lobbying group, said the BSI for June went down to 98.6, registering the first decline below the 100 level in 10 months. The Korea Chamber of Commerce and Industry also reported that the BSI for the third quarter tumbled to 94, a marked decline from 116 in the second quarter. All the three indexes are widely watched for gauging the business trend in Korea, and the latest figures suggest the negative factors such as surging oil prices and the strength of the Korean won against the U.S. dollar is having a palpable impact on local businesses. Despite government officials' repeated assurances that the economy is on track for a recovery, the sentiment among Korean manufacturers and other businesses shows no sign of a quick rebound. "A string of business sentiment and leading indicator figures are turning negative, which means the overall economy might suffer a serious blow unless countermeasures are in place," the KCCI said. (Source: Korea Herald.)

Manufacturers cited the appreciation of the Korean won, higher raw material costs and sluggish domestic demand as the main obstacles in May. The negative pressure on manufacturers is feared to trigger a drastic slowdown in exports that could threaten the beginning signs of recovery in Korea which started a year ago. Some warning signals already emerged that higher oil prices and the won's strength are hurting Korea's exports, while retail data also pointed to a flattening in growth in private consumption. (See MAY 2006: Signs that Economic Recovery Over.)

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Xenophobia Continues: NTS Eyes Foreign Car Importers -- and the BUYERS (June 2006) The National Tax Service has written to car importers asking them to submit their sales records for the last three-and-a-half-years as well as personal information of buyers, hinting at a massive tax investigation. The Korea Automobile Importers and Distributors Association (KAMA) has objected and vowed to take action. "We have been asked to submit business performance documents for tax investigation before, but it's usually been sales records for one year," a car importer said. "Asking for all documents for three-and-a-half years is excessive."(SITE NOTE: This is a favored technique of the Roh administration -- suspected to be brought about by the complaints of domestic automakers but cannot be proven -- to slow down foreign auto sales. In recent months, the domestic sales of foreign autos increased by 25 percent over last year. Also note that the NTS asked for information on the BUYERS. In the past, this type of probe scared away wealthy buyers who feared an NTS audit. However, it should be noted that the NTS has not asked for similar information about buyers of the high-end Korean autos intended for domestic sales. Supposedly the tax investigation is tipped to come up in negotiations for a free trade agreement between Korea and the U.S. starting on June 5 in New York since tariffs on U.S. cars, a key export item, are on the agenda. The NTS action smacks of protectionism.)

"In the letter obtained by the Chosun Ilbo on Thursday, the Jungbu Regional Tax Office last month asked 82 car importers and distributors including Pyeonghwa Motors, Hansung Motors and Deutsch Motors to submit their sales records from July 1, 2002 until Dec. 31, 2005. It also asked them to submit relevant documents recording details of buyers such as corporate registration numbers -- or names and identification numbers for individual buyers -- models, copies of receipt and records concerning the special excise tax." (Source: Chosun Ilbo.)

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JULY 2006

Hynix Fine Halved -- BUT 32 States Sue Seven Companies for Price Fixing -- AND Wiretaps of Companies Legal under Patriot Act Hynix Semiconductor, facing a lawsuit by a U.S. chip design company Rambus over breach of patents, is expecting the fines it has to fork over will be reduced by some US$200 million. The U.S. court for the Northern District of California ruled Tuesday that the Korean chip maker should pay US$133.4 million in penalties for breaching patents of Rambus on the SDRAM and DDR SDRAM, two types of memory chips widely used in personal computers and other electronic applications, Bloomberg reported on 17 Jul. Rambus has a month to decide whether to accept the reduced penalty or appeal. The jury had ruled that Hynix pay US$307 million in fines to Rambus last April. But district court Judge Ronald Whyte said in his ruling that a reduced penalty was in order because the jury had relied only on the testimonies offered by Rambus’ witnesses and had reached an exaggerated verdict for the Korean chip maker.

32 States Allege Memory Chip Price Fixing NEC Electronics America Inc. is among seven computer memory chip manufacturers who face a lawsuit in 33 states. They alleged Thursday the firms violated antitrust laws "and harmed consumers and governmental agencies by conspiring to fix prices they charged for widely used dynamic random access memory chips."

California State Attorney General Lockyer will file the antitrust complaint in U.S. District Court for the Northern District of California. The complaint alleges the defendants violated state and federal antitrust laws from 1998 through June 2002 to fix DRAM chip prices, artificially restrain supply, allocate among themselves the production of DRAM chips and markets for the chips, and rig bids for DRAM chip contracts. New York state attorneys charged seven semiconductor firms, including Samsung Electronics, for price collusion.

The defendants include the following parent companies: Infineon Technologies AG; Hynix Semiconductor Inc.; Micron Technology Inc.; Mosel Vitelic Inc.; Nanya Technology Corp.; Elpida Memory Inc.; and NEC Electronics America Inc. The companies' subsidiaries that sold and distributed DRAM chips in the United States also are defendants. Infineon, Hynix, Micron, along with Samsung, control roughly 70 percent of the U.S. market.

The lawsuit grows out of a criminal antitrust case brought by the U.S. Department of Justice against what officials called "one of the largest cartels ever discovered." After DOJ launched its investigation in June 2002, Micron agreed to cooperate with investigators in exchange for amnesty from federal criminal charges. Subsequently, Samsung, Hynix, Infineon, Elpida, along with 12 individuals, pled guilty to criminal price-fixing and collectively paid more than $730 million in fines.

DRAM chips are semiconductors that hold temporary instructions and data, making it available for quick access when computers, or other electronic devices such as servers or workstations, are in use. As described in the complaint, the defendants started discussing and coordinating the prices they charged to large computer manufacturers in 1998, at a time when the DRAM market had excess supply. The computer manufacturers included Apple Computer Inc., Compaq Computer Corp., Dell Inc., Gateway Inc., Hewlett-Packard Co., and IBM. (SITE NOTE: It was reported that under the extention of the US Patriot Act in Mar 2006, it was legal to wire tap foreign companies doing business in America and for the FBI and CIA to follow up on contacts between companies to gather evidence of suspicion of price fixing.)

"The manufacturers did not limit this pricing coordination to isolated or occasional conversations," the complaint alleges. "On the contrary, during a roughly four-year period, there were frequent pricing communications among the conspiring manufacturers, exchanges that intensified in the days immediately preceding the dates on which they submitted bids to supply DRAM to the (computer makers), their largest and most important customers.

In 2001, according to the complaint, the defendants "agreed to reduce supply in order to artificially raise prices." The complaint cites a fall 2001 meeting of DRAM manufacturers during which a Mosel Vitelic executive said "a basis for understanding had been reached ... to "trim some production starting in September." In the case, the State Attorney Generals represent their state governmental entities and individual consumers who purchased computers affected by the alleged DRAM chip price-fixing conspiracy. As part of the complaint, they are also bringing class action claims on behalf of local governments and school districts. (Source: Yahoo News.)

Patriot Act Permits Wire Taps It has been found that when amending the Patriot Act this past March, the U.S. government added a clause permitting wiretaps and bugs for investigation of suspected antitrust law violations, such as price fixing. The revised law may cause significant damage to major Korean companies, the bulk of whose exports go to the U.S., as they could come under investigation on breaking antitrust laws by just making contact with competing firms.

The Dong-A Ilbo confirmed the legislation data disclosed by the U.S. administration which shows that Section 113 of the Patriot Act amendments, passed by the U.S. Congress on March 7, now includes illegal monopolizing in trade and commerce, as stipulated in Sherman Anti-trust Act, in the list of crimes that fall under the Patriot Act. The amendments took effect two days later on March 9 with the signature by U.S. President George W. Bush. The revision, however, has not been advertised much in either the U.S. or Korea, so large Korean corporations have been unable to equip themselves for the change.

The altered Patriot Act allows FBI or CIA agents to use any antitrust law violation charges, which they find while wiretapping for general intelligence-gathering, for their investigations. Moreover, the U.S. has a broad definition of trust activities, to include not only fixing prices or rigging bids but also ordinary data-collecting when the employees of one company exchange phone calls or emails with those in a competing company for information. (Source: Donga Ilbo).

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Gallup Korea Poll: Foreigners Find Korea Tough Place to Invest More than four in five multinational foreign executives in Korea said they wouldn’t consider setting up regional headquarters in Korea for a wide range of reasons including labor inflexibility, language barriers through to costs of living. The labor environment topped their list of concerns with only 18.6 percent saying it was OK. These and other findings came up in a recent poll by Gallup Korea of 280 foreign investors on Korea’s business environment. National investment promotion agency KOTRA-Invest Korea was the commissioner of the survey.

• The survey showed that 82.5 percent are against setting up their Asian headquarters in Korea.
  
  
• About language barriers, only 40 percent of respondents said that communication has become easier nowadays with more Koreans speaking English and foreigners willing to learn Korean.
  
  
• About 58 percent said labor costs are too high, while 53 percent picked cost of living as their concern.
  
  
• The high cost of living in Seoul was highlighted in a recent survey by the Economic Intelligence Unit, a Hong Kong-based newsletter that ranked Seoul as eighth highest in terms of living costs. It was the first time that the Korean capital entered the top 10 list. The highest was Oslo, Norway.
  
  
• Fifty-eight percent said that labor costs are too high, while 53 percent pointed out the high cost of living. About 40 percent said logistic expenses are a major issue that will have them think twice of Korea as their regional hub.
  
  
• About 21 percent also took issue with lack of consistency in government’s business policy.
  
  
• One in five cited wage levels for their source of concern.

Despite there being room for improvement, 72 percent said that they are highly satisfied of doing business. About 30 percent complimented the country’s research and development conditions. (Source: Korea Times.)

Foreign business investment static Foreign businesses are not following through on initial plans to invest in Korea's free economic zones, a report by the National Assembly Budget Office said 30 July. The findings showed that of the 31 cases that could have brought in $27.8 billion worth of overseas investment from 2004 onwards, there were instead only 18 investments worth a combined $17.2 billion. "The total actual investment that took place stood at about 58 percent of what should have arrived, while in monetary terms it reached 62 percent of the expected amount," said a budget office official.

Korea wants to induce foreign investment in the free economic zones of Incheon, Busan and Gwangyang. The special areas aim to help create more jobs and business. The latest report also revealed that most foreign investment coming into the zones were focused on building logistical and port facilities, which does not conform to a key goal of attracting foreign companies to generate high-quality jobs.

The report said there were almost no cases involving investment in state-of-the-art projects. There has been no headway on a new port in Songdo, within the Incheon free economic zone, or construction of a Chinatown in the same region. And plans to attract 20 trillion won worth of foreign investment in a joint venture by Posco, Korea's top steelmaker, and U.S. real estate developer Gale International, is drawing little interest from outside the country. Slowing large-scale investment are concerns over labor-management strife, lack of infrastructure, the relatively small domestic market and red tape. (Source: Joongang Ilbo.)

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Bankruptcies Soar (July 2006) According to the Donga Ilbo on 31 Jul 206, Korea has seen the largest expansion of people listed in bankruptcy in the first half of 2006, which is from January to June. Low income problems and unemployment issues are not getting better while interest rates and prices are increasing. Many households are suffering from financial problems.

According to the Supreme Court and Bank of Korea (BOK), 49,581 people petitioned for bankruptcy for the first half of this year, which adds more than 10,000 people to last year’s amount standing at 38,773, which was the biggest when measured by an annual standard. When the figure is compared to the same period last year, which stands at 13,931, it is up by 255.9 percent or 35,650. In January, 5,383 subscribed for bankruptcy. However, monthly average of bankruptcy petitioner surpassed 10,000 since April when the number escalated to 10,247.

There is an increase in people who are borrowing money from loan sharks and private loans. According to research held by the Financial Supervisory Service (FSS) on 5,113 borrowers of private loans, 36 percent answered that they used the service “because of living expenses including housing expenditures and doctor bills.” The percentage was 20 percent last year.

Other indicators show that the economy will not be rosy for the working class in the second half of the year. In the second quarter of 2006, from April to June, the GDP grew by a mere 0.8 percent rating, the lowest increase in five quarters. Escalating interest rate and inflation are also putting pressures on households. The average annual interest rate of loans in household sector was 5.72 percent in June, which is the highest in 23 months. The government is considering raising the railroad fee by 7.2 percent, and cross-country and express buses fee by 18 percent and 8 percent, respectively, in the second half.

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August 2006

Rumor: Philips to Sell $4 Billion Stake in LG.Philips (Aug 2006) The seven-year-old partnership of LG Electronics and Royal Philips in LG.Philips LCD is likely to end as early as next year, with the latter having the opportunity of hitting a 3-trillion-won jackpot in capital gains. Officials at LG.Philips and Philips' branch in Korea Monday confirmed the Dutch electronics giant's plan to pull out of the partnership.

Last week Philips announced that it intends to exit from its participations in LG.Philips LCD in ``a responsible manner,'' which means the selling of all or part of its 32.9 percent shares starting next year. According to their mutual agreement, Philips is bound to keep more than 30 percent of LG.Philips shares until July 2007, and is free to sell them thereafter.

If everything goes according to plan, the Dutch firm will be able to make over 3.7 trillion won in capital gains. In 1999, it spent only 725 billion won to purchase a 50 percent share in the joint venture. After selling some of them, the remaining 117,625,000 shares are worth more than 4.3 trillion won ($4.5 billion) as of 10 Aug market price.

On the other hand, the departure of Philips will deal a painful blow to the world's second-largest liquefied crystal display panel manufacturer, which has been suffering from sluggish sales this year. It reported a record loss of 322 billion won in the second quarter. It also postponed investment in the next-generation production line indefinitely due to financial pressure.

The company was set up by LG and started manufacturing LCD panels in 1999. It changed its name from LG LCD to LG.Philips LCD when Philips bought 50 percent of the shares in August 1999. In only a couple of years, it has become one of the two major LCD panel makers in the world along with Samsung Electronics.

Philips' Korean branch said it is clear that its headquarters wants to come out of the LCD component business, as shown in the decision to change its name from Royal Philips Electronics to Royal Philips. ``The announcement means that Philips is going to reduce its investment from cyclical tech industries such as components and semiconductors, where earnings are volatile and associated with market conditions,'' said Park Yong-beom, a public relations official at Philips Korea. ``The company plans to shift the R&D investment to healthcare and lifestyle businesses.'' LG Electronics, the No.1 shareholder which holds 37.9 percent in LG.Philips, said there was no talk between it and Philips about the possible sales. (SITE NOTE: In Dec 2005, it wrote off its loses in the CRT businesses in Europe indicating its shift out of the electronics market. However, the sales with its "windfall profits" may end up with it being a target by the Roh administration that has pursued any company -- besides Korean -- which makes a profit in Korea.)

However, on 8 Aug, Yonhap News reported that LG.Philips LCD. Co. confirmed in a regulatory filing that it has not been notified of a possible sale of a stake held by its Dutch partner in the world's second-largest flat panel manufacturer. The confirmation comes after the nation's stock market operator asked LG.Philips LCD to clarify rumors that Royal Philips Electronics NV is seeking to sell its stake in the South Korea-based company.

Philips May Face Massive Tax bill if it sells shares Dutch electronics firm Philips may face hundreds of billions of won in tax in South Korea as it plans to sell shares worth 4.3 trillion won in LG.Philips LCD as early as next year. The National Tax Service said yesterday that Philips possibly will have to pay tax on capital gains, depending on the roles of Dutch employees in LG.Philips, a joint venture of LG Electronics and Philips.

``It will be possible (to impose tax on Philips) if it is shown that Philips had active representatives in Korea who received its instructions,’’ said Kim Ki-young, an official of the International Tax Resource Management Division. ``To do that, we must find out what roles the Dutch people in LG.Philips LCD would have played for Philips headquarters.’’ There are only two top-ranking executives in LG.Philips LCD who came from Philips _ CFO Ron Wirahadiraksa and CTO Budi Sastra. Wirahadiraksa was in charge when the company listed its shares in Korean and U.S. stock markets in 2004.

According to Korean tax law, foreign investors have to pay the smaller amount between the 10 percent of the total stock value or 25 percent of capital gains, when they sell shares of a listed company. In the case of Philips, this will be around 430 billion won _ 10 percent of the stock value. But under a double-taxation avoidance pack, Dutch firms are allowed to pay taxes to their own government when they have capital gains in South Korea. (SITE NOTE: The ROK has broached the question of "renegotiating" the tax treaties -- but all countries approached have not responded. It is apparent that the Roh administration is a lameduck presidency with less than two years left in office. The countires will NOT even consider renegotiating -- assuming that the next administration will be conservative and more business friendly.)

However, an anti-speculation watchdog contended on 10 Aug that Philips should be subject to the Korean taxation system if it has its representatives within LG.Philips LCD. ``Even if there is no separate agent office here, the office rooms of the two LG.Philips executives should be regarded as liaison offices of Philips,’’ said Chung Jong-nam, coordinator at Spec Watch Korea, a civil group that monitors foreign investors’ activities. Kim of the national tax agency said that it will require a lot of time and efforts to prove whether the two executives _ CFO Wirahadiraksa and CTO Sastra _ will work as agents for Philips in the upcoming stock sales process. (SITE NOTE: This is one reason that foreign companies are becoming very wary of investments in Korea. If they should make profits, the Roh administration has made it a policy to attack these companies creating a xenophobic business atmosphere.)

LG.Philips on 8 Aug said that it had received no formal notice from the Netherlands. The LCD manufacturer has operated separately from Philips’ Korean branch that sells medical equipment and healthcare and household appliances. (Source: Korea Times.)

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LG Card Bidding Illustrates Leariness by Foreign Bidders Creditors of LG Card on 10 Aug received only three bidding applications from prospective buyers for their controlling shares at the country’s second-largest credit card issuer: (1) Shinhan Financial Group, (2) the National Agricultural Cooperative Federation, or Nonghyop, and (3) a consortium of Hana Financial Group and MBK Partners submitted their bids as expected, according to the Korea Development Bank (KDB), the card firm’s largest shareholder. KDB officials said creditors will select a preferred bidder as early as this month after reviewing the bid offers and other conditions, but the selection process may drag on if the deal becomes too close to call.

Standard Chartered, a U.K.-based lender, initially joined the race to take over the card firm, but has dropped its bid.

Analysts said the sale of the firm will raise 6-7 trillion won, and will be a two-way competition between Shinhan and Nonghyop. KDB said it may take months for creditors to negotiate sales conditions with a preferred bidder. The negotiations may continue until early next year.

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September 2006

Investors Bailing Out of Korea in Droves (Sep 2006) On 4 Sep it was reported according to Korea Exchange statistics, foreign investors kept bailing out of the Korean market in massive droves, selling nearly a net 8 trillion won in the first eight months of this year Funds based in the United States, the United Kingdom and Singapore reduced their shareholdings here amid forecasts of an economic downturn. In June, the analsysts thought the foreign investors were done selling, instead the foreign selling is expected to continue indefinitely on worries over economic slowdowns in both Korea and the United States. Market experts say foreign investors are likely to continue discarding Korean equities amid concerns over a slowing local economy and less than stellar earnings performance by the nation's leading exporters. From the May to August period alone, foreigners unloaded 10.24 trillion won worth of shares. The total net selling, after purchase and changing of hands, amounted to 7.96 trillion won from the January to August period.

Blue-chip companies have seen their foreign shareholdings drop this year. Foreigners sold Samsung Electronics Co. shares worth 2.79 trillion won most heavily. The leading exporter accounts for nearly 10 percent of the Seoul bourse's market capitalization. POSCO was the next most heavily discarded share at 1.25 trillion won. Others included KT&G Corp. (835.5 billion won), Hyundai Motor Co. (612.4 billion won) and Woori Financial Group (542 billion won).

Foreign capitals based in Britain, the United States and Singapore withdrew most heavily, with British and American investors cashing out 4 trillion won and 3 trillion won each. The U.S. withdrawal - by those classified as "long-term investors" - lessened in July to 515.3 billion won from 1.9 trillion won from 1.5 trillion won in May and June. In contrast, local institutional investors led the market on its seven-month purchasing spree since February, buying a total of 6.93 trillion won since then. Foreigners were responsible for 28.27 percent of the daily average trading volume in August, down from 32.44 percent in June.

Amid dwindling foreign influence on Korean stocks, the stock market is expected to withstand foreign sell-offs as institutional investors are increasing their role. Orders made by local institutional investors accounted for 23.35 percent of the average daily trading volume in August, up from 14.46 percent in January. Retail investors, usually the ones most responsible for changing of hands on the exchange, were less active; retail orders took up 44.42 percent of the total trading last month, significantly down from 65.55 percent earlier this year in January. Retail investors net-sold 2.39 trillion won worth of shares this year.



Employment and wage figures are not looking good. Consumer sentiment and household budget surplus are looking limp. Goldman Sachs recently downgraded its forecast of next year’s Korean economic growth from 4.75 percent to 4 percent and this year’s growth from 5.25 percent to 4.8 percent. The outlook is in line with growth forecasts by Korean private institutes, but the Bank of Korea is still confident that economic growth will reach its potential of 5 percent this year.

Foreigners sold shares worth 1.21 trillion won, and retail investors 3.5 billion won. Institutional investors bought 1.02 trillion won, singularly holding up the market. The Korea Exchange said given the lack of attractive corporate earnings growth and valuations, foreign investors may reduce their stakes in Korean equities further. (Source: Korea Herald and Korea Times.)

Following our predictions for the past years, the foreign investment community is starting to view Korea as a hostile environment to hedge funds. With the latest development of the transfer of wartime control, the idea of a "safe investment environment" is starting to look cloudy. The decline in Korea's economic growth for the fourth straight year has undermined confidence in the country's economic policies -- despite its balance of trade gains from exports. The following is from the on 30 Sep 2006:

Korea to Combat Capital Flight

The government is seeking to prevent massive capital flight led by U.K. and U.S. investors. In all, US$9.264 billion foreign investors had in stocks, bonds and dividends here left the country between the beginning of this year and Aug. 11, the most since the stock market was opened to foreign investors in 1992.

This is especially worrisome as the foreign funds are fleeing the country for good without re-investing here after they sell stocks and deposit the profits in domestic banks. Korea experienced a net outflow of $830 million in foreign capital in 2002 and $2.43 million in 2005, but this year the situation is precarious.

The government sent delegates to the U.S. to drum up investment in Korea, holding an investment blitz in Boston and New York on Friday and Saturday. The government will reportedly give its reading of the North Korean nuclear problem and other negative factors foreign investors consider the greatest risk to putting their money into the nation.

“The capital flight we are facing is too large in scale and too fast to believe that foreign investors are simply moving their investment after earning profits here,” a government official said. “We are closely watching the situation to see whether there are other reasons behind the phenomenon.” The government worries that if the trend goes unchecked, Korea will suffer an outflow of more than $10 billion of foreign investment this year.

The capital flight is led by funds from the U.K. and the U.S., who are sensitive about Korean distrust of offshore hedge funds and changes in the Korea-U.S. alliance. Between the beginning of this year and August 11, $4.958 billion from the U.K. and $3.176 billion from the U.S. fled Korea, accounting for 87.8 percent of the total. As for the U.K., net outflow was $2.47 billion last year. Among the $2.43 billion net outflow of U.S. funds last year, $1.8 billion or 74 percent took flight in the fourth quarter, after the National Tax Service published the result of its tax probes into six foreign funds operating here and the prosecution’s interest in the offshore investment firm Lone Star.

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October 2006

Equal Treatment Pledged for Foreign Investors The nation’s financial regulator reaffirmed on 11 Oct that it will not discriminate against foreign investors or favor domestic players when enforcing regulations. ``We will guarantee a virtual level-playing field for both foreign and domestic investors through deregulation,’’ said Yoon Jeung-hyun, governor of the Financial Supervisory Service (FSS). He also reiterated that the regulatory body will take stern action against those who violate rules, regardless of their nationality. (Source: Korea Times.) (SITE NOTE: With the falling FDI and capital flight, no one really believes the FSS.)

The Ministry of Commerce, Industry and Energy said on 11 Oct that it would step up efforts to improve the environment and incentives for offshore investors, a departure from its more inward approach to attracting investments. The ministry's mid to long-term FDI vision and strategies, jointly planned with the Korea Institute for Industrial Economics and Trade, underlined that the government's aim is to broaden its perspective, which until now has been narrowly focused on securing FDI. New efforts will entail improving economic policies to better accommodate foreign companies and help them heighten management efficiency, which would benefit the local economy. (Source: Korea Times.) (SITE NOTE: With all the bad press and companies simply refusing to come to Korea -- stating infrastructure, education, etc. etc. etc. -- these fancy plans won't help a bit. It's been said before -- after the IMF Crisis to attract investment and then the xenophobic persecution of companies who made a profit. It will take more than fancy pipe-dream plans to attract investors -- it will take a complete rebuilding of trust in the government's ability to keep its promises.)

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Samsung Suspected by US of S-Ram Price Fixing (Oct 2006) The Samsung Electronics is in a panic. Earlier this year, the U.S. department handed out huge fines to memory chip makers including Samsung, Hynix Semiconductor and Infineon Technologies for their role in an international conspiracy to fix D-Ram prices after three years of investigation. Four Hynix and four Samsung Electronics executives pleaded guilty in the case and agreed to fines and jail terms ranging from five to eight months. The DRAM price-fixing conspiracy, which also involved Infineon Technologies and Micron Technology, saw 16 indicted and a total of US$731 million fines imposed on them and their employers as of Oct 2006.

The U.S. government has embarked on an investigation of suspected price-fixing in the static random access memory market, raising alarms for world memory chip makers that already suffered heavy fines in a previous anti-trust probe. S-Rams are faster and more expansive than dynamic random access memory, or DRAM, with the market estimated at US$2.9 billion. Samsung Electronics, NEC, Cypress Semiconductor and Toshiba are the main players.

The U.S. Department of Justice announced on 12 Oct that it has started the antitrust investigation. The world’s largest memory chip maker Samsung Electronics admitted it has been asked to submit related documents and pledged a full cooperation with the probe.

On 18 Oct it was reported that two Samsung Electronics executives and an American executive with a Hynix Semiconductor U.S. subsidiary have been indicted on charges of fixing semiconductor prices in 2001 and 2002. In a statement, the Justice department said a federal grand jury in San Francisco has indicted the former vice presidents of Samsung's semiconductor business Kim Il-ung and Rha Young-bae and former senior vice president of memory sales and marketing for Hynix America Gary Swanson for conspiracy to fix prices for DRAM chips used in personal computers, servers, mobile phones and cameras. (Source: Chosun Ilbo.)

November 2006

KEB Files Complaint over NTS $185 million Levy in Back Taxes Korea Exchange Bank (KEB) filed a complaint with the National Tax Service (NTS) about the agency’s decision to levy about 174 billion won ($185 million) in back taxes for the alleged understatement of its taxable income when it merged with its credit card unit more than two years ago. The decision came a week after the tax agency notified the country’s fifth-largest lender of its intent to impose back taxes, accusing the bank of reducing its taxable income when it acquired KEB Credit Service. In March 2004, KEB took over its money-losing credit card affiliate, which was grappling with surging delinquency ratios and heavy loan loss provisions.

KEB requested the tax agency to review its decision. Upon receiving complaints, the agency is required to decide and notify companies or individuals of whether to impose taxes or not within 30 days. If the NTS continues with its position, the KEB stated it would appeal the decision to the National Tax Tribunal. If there were no satisfactory results from the tribunal, it would go to court to settle the case.

The tax agency believes KEB was wrongly exempt from a large amount of corporate tax as the bank reduced its taxable income when it acquired its card unit. KEB recorded 520 billion won in net profit in 2004, but reported around 1.14 trillion won in losses in its 2004 tax statement, because 1.4 trillion won of bad debt expenses and other costs incurred from the KEB Card takeover are reflected. But the agency has contended that the bank should have included about 780 billion won, not 1.4 trillion won, as the maximum allowance for bad debts according to the rules set by the Financial Supervisory Service (FSS). It said that since the corporate tax rate is 27.5 percent, KEB did not pay some 174 billion won in corporate taxes on about 620 billion won in income. However, the KEB has been arguing that it abided by the regulatory rules in calculating the maximum allowance for bad debts arising from the acquisition of the card unit.

In July, the tax office asked the Ministry of Finance and Economy to make an authoritative interpretation whether it is okay to levy back taxes on KEB’s untaxed corporate income. The NTS decided to impose back taxes on KEB late last month even though the ministry had not yet reached a conclusion on the matter.

In the meantime, KEB announced yesterday that its net profit fell more than 90 percent in the third quarter from a year earlier as it set aside part of its profits to cover potential back taxes. Its net profit reached 51.8 billion won in the July-September period. The bank said it has set aside 247.2 billion won in bad debt expenses after notification that it plans to levy 174 billion won in back taxes. It said that if the bank does not pay taxes, its profits would increase based on the retrieved bad debt expenses. (Source: Korea Times.)

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November 2006

Big 3 Automakers Ask Bush for Help in Opening Korea The troubled Big Three U.S. automakers are leaning on the U.S. government to help them by pushing for a greater opening of Korea's car market. General Motors chairman Rick Wagoner, Chrysler Group president Tom LaSorda and Ford CEO Alan Mulally met with President George W. Bush and Vice President Dick Cheney at the White House on 14 Nov to voice industry concerns and call for measures to address them.

Among reasons for their poor performance they cited structural problems that prevent greater access to the Korean car market. Others were the rise of imports of cars from Asian countries headed by Japan's Toyota, and a rising financial burden due to healthcare costs for workers. They asked Bush to help open the Korean car market and curb a further fall of the Japanese yen, which they say is undervalued. "We found a lot in common," Bush said after the meeting. "One of the issues I'll be talking about with our partners in APEC is free trade but fair trade. And my message to our trading partners is just treat us the way we treat you. Our markets are open for your products, and we expect your markets to be open for ours, including our automobiles."

The demands have a direct bearing on ongoing free trade agreement negotiations between the two countries and will likely become a bone of contention in the fifth round in the U.S. next month. If Washington sees through its demands, Korea will see car imports from the U.S. rise slightly, but domestic consumers in Korea will benefit from falling prices of both imported and domestic cars.

(SITE NOTE: Seoul supposedly accommodated all the preconditions the U.S. had set, including a delay in emission limits for U.S.-made cars for the FTA.)

The U.S. car industry is peeved that U.S. cars are not selling as well in Korea as their German and Japanese rivals'. Ford's vice president of corporate affairs Ziad Ojakli said, "We basically sell more cars out at Jerry's Ford in Northern Virginia than we do in all of Korea, and that's because Korea is a closed market to all imports, not just U.S. autos...The statistic is less than 3 percent market penetration for foreign product." That is why Democrats for the state of Michigan, the home to the Big Three, have warned that if such fears are not properly addressed, they could refuse to ratify the FTA with Korea. But the main reason the U.S. car industry is pressuring the White House is that their cars are not selling particularly well in the North American market either, and they blame the Japanese and Korean competition. Japanese and Korean automakers saw sales there rise significantly thanks to the fuel-efficiency of their cars amid sky-high oil prices, but U.S. car makers charged blindly ahead with the development of big gas guzzlers and paid the price.

(SITE NOTE: The comment by the Korean reporter of the US makers gas-guzzlers is partially true. The Koreans also committed to the "gas-guzzler" models in Korea and amounts to most of the models on the streets being SUVs. However, the SUVs in Korea come in LPG, deisel and gas models -- but most SUVs are deisel. Because of the relative sparcity of deisel and LPG stations in America, most of the American models are gas.

Chief U.S. negotiator Wendy Cutler said that there is a great imbalance in the automobile sector between the two countries, as Korea exports about 800,000 cars to the U.S. versus about 4,000 U.S. imports to Korea annually. Experts state the local automobile sector would benefit less than expected from an FTA with the US. An FTA would provide better price competitiveness to Washington by eliminating an 8-percent tariff on American cars in the local market, while the 2.6 percent U.S. tariff on Korean cars would not lead to a significant increase in exports to the United States.)

Specifically, the U.S. car industry wants Korea change its taxation system, which is based on engine displacement, to one based on price. They say it would be more reasonable if owners of more expensive cars pay more taxes and those with cheaper ones pay less. They believe that is the reason their cars are not selling as well in Korea as German and Japanese ones. Some 90 percent of the U.S. autos here are large cars with more than 2,000 cc engine displacement, which is reflected in high taxes. The U.S. carmakers complain it is unfair that their Korean customers should pay the same tax as those with German or Japanese cars that are twice as expensive, just because their engine displacement is the same.

They also demand that the Korean government streamlines import procedures. A staffer with Ford Korea said the U.S. government "recognizes the result of tests that Korean carmakers like Hyundai conduct here, but the Korean government only recognizes those carried out in Korea." And while exporters go only through the U.S. Environmental Protection Agency to have their cars certified for sale there, foreign carmakers have to go through three ministries here: construction and transportation, environment, and commerce, industry and energy.

If the demands succeed and Korea really starts taxing cars on price, Koreans who buy U.S. cars will see their taxes reduced because they are cheaper than German and Japanese ones. Customers of affordable domestic medium-size and compact cars will also benefit from a reduction -- a boon for domestic carmakers and consumers. By contrast, luxury cars will get more expensive. (Source: Chosun Ilbo.)

Korea Response: 'Poor Quality, not Tax to Blame for Poor Sales of U.S. Cars' Domestic automobile experts say poor U.S. car sales here are due to their poor value compared to locally-made cars and not because of the government's taxation system, which imposes higher taxes on vehicles with larger engine displacement, as the U.S. Big Three General Motors, Ford and Chrysler claim.

(SITE NOTE: This whole row over the size of the engines started when the ROK was faced with an automotive explosion in the early 1990s. Suddenly the new found wealth of Koreans as their wages rose founded a middle class. People accepted the idea a middle class family had to have a car. Suddenly the demand for gas skyrocketed, but Korea had not fully developed its petrochemical industry. Suddenly every chaebol wanted in on the gold mine, but the problem was that it would take a few years before the petrochemical plants could be built. The ROK faced a shortage of fuel as they imported the crude oil. Thus the size of engines were originally taxed to reduce the oil consumption -- thus the 1600cc engines for the Korean mid-size and 2000cc for expensive Grandeurs. HOWEVER, the reason the magic number of 2000cc was settled on was because all the foreign cars were above the 2.0 liter size.)

An official with the Korea Automobile Manufacturers Association said, "U.S. cars' market share here is low because their European and Japanese counterparts are better in marketing and product quality and not because of the taxation system here." Some feel that U.S. cars are worse than their Korean counterparts in terms of product quality measured against price, design and fuel efficiency and this is why they are not doing well here. Hyundai Motor replaced Toyota in third place in the J.D. Power and Associates' Initial Quality Study in 2006, with GM, Chrysler and Ford coming in ninth, 11th and 15th respectively, way behind Hyundai Motor.

(SITE NOTE: There is very little marketing of foreign cars in Korea -- and for good reason. There is no market!!! The market for foreign cars is a niche market made up of upper-class or upper-middle class. These individuals are purchasing these cars as status symbols. As such, there is no need to advertise on TV or on billboards. Advertising is limited to business periodicals where the potential market of upper-middle class businessmen is. To put it simply, a top-of-the-line BMW or Lexus has considerably more status than a low-end Ford Neon. The American cars are NOT really a part of this market. The Americans want to compete head-to-head with the domestic auto companies in the mid-range auto market -- not the top end.

The top-of-the-line Japanese and German models cost twice as much as the mid-level American models, but the 8 percent tariff is the same on them because of their engine size. The Americans want the tariff based on cost -- not engine size. With such a structure, the Americans could compete directly with the Korean domestic automotive models which are in the same quality range.)

Imported cars with more than 3,000 cc engine displacement already account for 48 percent of the domestic market, and experts say the Big Three are unjustified in their claim that large U.S. cars are discriminated against in the Korean car market.

Bok Deuk-kyu, a senior researcher in charge of car issues at the Samsung Economic Research Institute said, "Until U.S. carmakers offer more attractive and quality products in the domestic market, a change in the taxation system will not help them increase their sales here." (Source: Chosun Ilbo.)

(SITE NOTE: We do not agree with the above analysis. If the American sub-compacts are compared with the Korean domestic models and given the same price footing, the Koreans will choose an American model over the Korean because of the additional status of owning a foreign car like the "rich people." The problem is that with the current 8 percent tariff, it will never be on an equal footing price-wise.

During the 15 Mar USFTR hearings in the US, a union official with the United Auto Workers (UAW), Steve Beckman claimed the Korean government had harassed buyers of imported cars with tax audits, which was why Korean consumers remained reluctant to buy foreign cars. This is a fact as those with "luxury cars" were targeted with tax audits under the pretext that they were spending lavishly. The "luxury cars" happened to be foreign cars due to the high tariffs. However, in the past few years foreign car sales have been increasing as a percentage share of market -- though still relatively small.

The representatives also did not fail to mention "in-phase import tariffs" that are levied on imported automobiles, which have often caused trade disputes between the U.S. and Korea. An official from the automobile industry said, "Korea's automobile taxation system needs to go through an overall reform, and Korea needs to understand the safety and exhaust standards (of U.S. automobiles)." The U.S. made clear in an annual trade report that it will watch closely whether the Korean government carries out its promise to gradually reduce various taxes on cars. In the report, USTR stressed that revising the tax code on cars is tough even for the Korean government but is a necessary measure for achieving the U.S. goal.

Washington has urged Seoul to revise this tax system and eliminate the 8 percent tariff on car imports, so that U.S. automakers can have a fair chance on the Korean market. Chief U.S. negotiator Wendy Cutler said that there is a great imbalance in the automobile sector between the two countries, as Korea exports about 800,000 cars to the U.S. versus about 4,000 U.S. imports to Korea annually. Experts state the local automobile sector would benefit less than expected from an FTA with the US. An FTA would provide better price competitiveness to Washington by eliminating an 8-percent tariff on American cars in the local market, while the 2.6 percent U.S. tariff on Korean cars would not lead to a significant increase in exports to the United States.

In response, the FTA Ambassador Kim Jong-hoon stated during the first round of the FTA talks in June, "The United States has argued for a long time that Korea discriminates between import and domestic manufacturers by levying taxes based on engine capacity." Mr. Kim said, "We will not yield." ``We're going to refuse the demand in the first round of negotiations,'' Kim said, noting that car taxes are a major source of income for local governments.

Korea has engaged in protectionism from the start to protect its growing automotive industry. Some US companies attempted to bypass this barrier by forming joint ventures. Early on there were disputes -- such as the GM - Daewoo tiff over the manufacturing of the sub-sub compact Tico for export. The Tico would not qualify for US market so that was a major stumbling block. In the end, the GM pulled out of the partnership. Times have changed and again the US companies have entered into joint-ventures with the Korean companies as some of their low-end models are made in Korea. The protectionism is still in place. When the tariffs were forced down by WTO action, the ROK stated that it would do tax audits on anyone who was able to afford these "luxury" cars. At every turn, the US and European manufacturers have faced road blocks.

In June 2006, the National Tax Service wrote to car importers asking them to submit their sales records for the last three-and-a-half-years as well as personal information of buyers, hinting at a massive tax investigation. The Korea Automobile Importers and Distributors Association (KAMA) objected and vowed to take action. "We have been asked to submit business performance documents for tax investigation before, but it's usually been sales records for one year," a car importer said. "Asking for all documents for three-and-a-half years is excessive." This is a favored technique of the Roh administration -- suspected to be brought about by the complaints of domestic automakers but cannot be proven -- to slow down foreign auto sales.

In recent months, the domestic sales of foreign autos increased by 25 percent over last year. Also note that the NTS asked for information on the BUYERS. In the past, this type of probe scared away wealthy buyers who feared an NTS audit. However, it should be noted that the NTS has not asked for similar information about buyers of the high-end Korean autos intended for domestic sales. Supposedly the tax investigation is tipped to come up in negotiations for a free trade agreement between Korea and the U.S. starting on June 5 in New York since tariffs on U.S. cars, a key export item, are on the agenda.

This is a fact as those with "luxury cars" were targeted with tax audits under the pretext that they were spending lavishly. The "luxury cars" happened to be foreign cars due to the high tariffs. However, in the past few years foreign car sales have been increasing as a percentage share of market -- though still relatively small.)

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Personal bankruptcy filings nearly quadruple (Nov 2006) The number of new personal bankruptcy filings nearly quadrupled in the first nine months of the year, reflecting the economic slowdown, financial sources and the country's most senior court said on 19 Nov. The number of new personal bankruptcies stood at 85,455 through September this year, compared with 23,708 in the corresponding period of last year. The nine-month figure is also more than double last year's total cases of 38,773, according to the sources and the Supreme Court.

This year's bankruptcy filings may top 100,000 or 110,000, experts said. The number of personal bankruptcy filings reached 3,856 in 2003, then 14,921 in 2004. Experts blamed the increase on the years-long economic slump and widening income gap. The South Korean economy, Asia's fourth-largest, grew 4.6 percent annually in the third quarter of the year, slowing from a 5.8 percent annual gain the previous quarter, and is expected to fall further in the last three months of the year on a slump in private spending. Next year, economic growth is widely expected to slow to a mid-4-percent rate following this year's 5 percent expansion. "Decreased job offerings and household incomes should be blamed for the increase in personal bankruptcies," said Bae Sang-keun, a senior researcher at Korea Economic Research Institute. (Source: Yonhap News.)

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HYUNDAI MOTORS SCANDAL

2005 for Chung Mong-Koo Looked Bright Few gave Chung Mong Koo much of a chance when he took the helm of South Korea's largest carmaker, Hyundai Motor Co., in 1999. After all, in his 24 years running Hyundai's after-sales service unit, the bland son of founder Chung Ju Yung didn't express any grand vision for the auto business. Turns out, he had been trained to deliver what the company needed most: better quality.

In 2004, Chung, 66, made good on his promise to boost Hyundai's quality to "Toyota levels." J.D. Power & Associates' 2004 survey of initial quality -- which counts complaints in the first 90 days of ownership -- showed the Korean auto maker had virtually caught up with Toyota Motor Corp. And Hyundai's Sonata was the top-ranked car in the "entry midsize" category.

Hyundai was on a roll. Despite a slump in Korean consumer spending that led to a 10% drop in domestic sales, the company expected a 2004 operating profit of some $2.4 billion, up 17% from 2003, on sales of $25.2 billion, up 8%. In China, Hyundai is expected to have sold 150,000 cars in 2004 -- triple its 2003 sales there.

In 2005, Hyundai started building a revamped Sonata for the U.S. market to challenge Toyota's popular Camry. The new Sonata and Tucson sport-utility vehicle were also key in efforts to expand in Europe, China, and smaller markets. With Chung at the helm, Hyundai now stands a chance of racing past its rivals. (Source: Business Week.)

Background on Chung Mong-koo:

• 19 March 1938: Born in Seoul
• 1967: Graduates with engineering degree from Hanyang University, a smallish, middle-ranked private institution in Seoul. Joins Hyundai soon after graduation
• 1974: Named CEO of Hyundai Motor Service, which launches a new career phase that will be marked by the steady accumulation of responsibilities as CEO of second-tier Hyundai business units, almost all of which have virtual monopolies in South Korea
• 1977: CEO of Hyundai Precision & Industry, which is later the unit producing autos
• 1978: In 1978, Chung Mong Koo and his father, the late Hyundai founder Chung Ju Yung, were questioned on allegations the group awarded purchasing rights on apartments to members of the media and government officials. Both were cleared. Still, Chung Mong Koo was arrested and incarcerated for 75 days for breaking construction regulations before paying a 5 million won fine to secure his release.
• 1981: CEO of steel pipe maker Hyundai Pipe
• 1986: CEO of Inchon Iron & Steel and CEOof apartment builder Hyundai Industrial Development & Construction
• 1991: Informally merges the above companies into a smallish group within Hyundai called "MK Group"
• 1991: Signs license with Mitsubishi to produce the 4-wheel-drive Pajero in Korea under the Galloper model name. Though still in production, the car never takes off in the smallish market
• 1996: Succeeds his uncle, Chung Se Yung, as chairman of Hyundai Group. Although nominally the top spot, father Chung Ju Yung remains honorary chairman and actually controls the group
• 1998: Becomes Hyundai Motor CEO
• 2000: He attracted widespread attention in 2000 when he defied his father Chung Ju-yung's order to step down.(See Drive.com.)
• 2004: He was named by BusinessWeek as one of the top managers for 2004.
• 2006: He and his family were targeted by the Seoul Supreme Public Prosecutor's Office as part of an investigation into slush funds at Hyundai. [2]
• 2006: Despite a travel ban, Chung left South Korea in April 2006.

On 25 April 2005, TIME Asia said:

Chung, 67, has spent six years hammering this zero-defects message into the heads of Hyundai's employees—and the result has been one of the most surprising turnabouts in automotive history. A few years ago, Hyundai, South Korea's largest car manufacturer, was a synonym for "shoddy." Seoul was the only place in the world where you were likely to see large numbers of its cars on the street. Today, the company's line of pleasantly stylish, relatively inexpensive and certifiably reliable sedans and sport-utility vehicles is tailgating the industry's best-known brands in several prime markets. In the U.S., where the Sonata offers a lower-priced alternative to Toyota's Camry and Honda's Accord, Hyundai's sales reached 419,000 cars last year—up 360% since 1998. In Europe, sales spurted 21% in 2004. In India, Hyundai's 17% share of the passenger-car market makes it the largest foreign automaker and the second biggest car company overall behind Maruti, a Suzuki subsidiary. Hyundai is beating competitors by modifying its small cars with ingenious features designed for Indian customers, such as elevated rooflines to provide more headroom for turban-wearing motorists.

Perhaps most surprising: in China's hotly contested emerging car market, Hyundai's joint venture with Beijing Automotive sold more cars than any other automaker in the first two months of this year. In fact, with a compounded annual revenue growth of 20% over the past five years, Hyundai has been the world's fastest-growing major automaker since 1999, according to Lehman Bros. Hyundai is "putting pressure on everybody," says Rob Hinchliffe, an auto analyst at UBS. Indeed, even Toyota vice chairman Fujio Cho has acknowledged the blur that is getting bigger in his rearview mirror. "Hyundai has quality and prices that have caught customers' attention, not to mention ours," he said at an auto conference in August.

It should be easy enough for Cho to recognize the secret of Hyundai's success. The South Korean company is following much the same formula that Toyota used decades ago to overcome its "cheap Asian import" stigma and become one of the world's most respected brands. When Hyundai first entered the U.S. market in 1986, its Excel sedan—an econobox with a $4,995 price tag—was an instant hit with frugal buyers. But customers soon discovered they were getting what they paid for: Excels were prone to quality-control problems and frequently needed parts replaced. Sales tanked, and Hyundai became a laughingstock. In 1998, Late Show TV host David Letterman listed his "Top 10 Hilarious Mischief Night Pranks to Play in Space"; No. 8 read: "Paste a 'Hyundai' logo on the main control panel." Says Brandon Yea, director of Hyundai's marketing-strategy team: "The Hyundai brand was worse than nothing."

But like Toyota, which overcame consumer prejudice in part by inventing kaizen, a manufacturing process and corporate mantra translated as "continuous improvement," Hyundai has rapidly built up regard for its products through an almost fanatical attention to Getting It Right. Consumer Reports magazine recently named the Sonata the most reliable car in the U.S. And Hyundai rose to second place in J.D. Power and Associates' 2004 survey of initial car quality, tied with Honda and trailing only Toyota. Six years ago, Hyundai ranked among the worst in terms of initial defects. The comeback "is astounding," says Chance Parker, executive director at J.D. Power in Westlake Village, California. "We really haven't documented that level of turnaround in that period of time. They've adopted a quality mentality they didn't have before."

The architect of Hyundai's rise is Chung, who was named chairman in 1998. Although his father, Chung Ju Yung, founded Hyundai Motor in 1967, it was clear the son would not get a free ride. Shortly before his appointment, the Korean economy had been slammed by the 1997 Asian financial crisis and Hyundai was forced to lay off 25% of its staff. Complicating matters, Hyundai agreed in 1998 to acquire South Korean rival Kia Motors, which had to be assimilated. Chung had little experience with the automotive industry—he had spent most of his career managing a smorgasbord of affiliates in the Hyundai conglomerate, including a steel company, a pipemaker, a shipping-container manufacturer, and Hyundai Motor's service business. When Chung began broadcasting his intention to turn Hyundai into a top-five automaker, few outside the company took him seriously. Hyundai, like many family-controlled Korean companies, was ultra-hierarchical and slow to change. Managers rarely cooperated with one another and division chiefs ran their operations as personal fiefdoms. "When a problem occurred, each division would blame other divisions," says Lee Hyun Soon, a senior executive in research and development.

But Chung was quietly engineering a revolution. Revered by the staff as a member of the founding clan, he was able to gather information quickly and impose his will on the organization. After years managing the after-sales service operation, he concluded that quality problems were the crux of the company's ills. Suh Byung Kee, Hyundai's president, recalls Chung bursting into his office five years ago and saying: "Quality is crucial to our survival. We have to get it right no matter what the cost!"

Though Chung's revelation might seem obvious, it wasn't to Hyundai's staff. A premium had always been placed on making cars quickly and cheaply. Even Suh, who is in charge of Hyundai's quality-improvement efforts, admits, "When I first came to Hyundai, I, too, didn't think quality cars were important." But the new chairman made blemish-free manufacturing the top priority. To break down interdivisional barriers, Chung forced designers, engineers and factory managers to work as a team by creating joint committees to examine blueprints of new models and weed out potential defects. Twice a month, Chung summons senior managers of Hyundai and Kia into a conference room at his Seoul headquarters to analyze reliability issues, sometimes bringing in a whole car and lifting it up on a hydraulic platform to get a firsthand look. Likewise, the company's 68,000 workers are encouraged to make suggestions for improving quality in regular factory-floor meetings. Late last year, Yu Seung Byul, a quality inspector on the assembly line in Hyundai's Asan factory in Korea, invented an improved method for detecting missing bolts and brackets in hard-to-see nooks inside the car frame. He and his managers spent weeks debating how to solve the problem, with no results. Then, says Yu, "I woke up one morning, looked in the bathroom mirror, and realized 'That's it!'" He simply installed a row of mirrors above part of the assembly line to gain a better view of the car's innards.

In the short run, Chung's obsession with quality can be costly. Last year, he delayed the launch of a new Sonata in Korea for two months while engineers cleaned up 50 minor defects. In 2003, he asked Lee, the senior R&D executive, to get rid of an annoying noise made by grinding gears in the transmissions of Kia Amanti sedans. Lee worried that he'd have to shut down production entirely to work on the problem. "I told him that we'd lose two months of sales," he recalls. "The chairman said: 'If it's for quality, it's O.K.'"

Of course, quality isn't everything. Chung has also ramped up efforts to ensure Hyundai is competitive with Japanese benchmarks in technology and styling. Hyundai's R&D budget has expanded 110% since 1999, to $1.6 billion this year. Hyundai invested $200 million to open or expand research-and-design centers in California, Michigan, and near Frankfurt, Germany; a $60 million proving ground in California's Mojave Desert opened in January. In South Korea, Chung expanded his R&D headquarters, adding a new design center last year complete with a 3-D cinema for viewing virtual models of new cars. Lee says Chung visited his office recently and asked: "Do you have enough money?" Lee, with a wry smile, says he told his boss he didn't. Chung immediately offered several hundred million dollars. "I have an unlimited account," Lee says.

Meanwhile, Hyundai has also needed to be innovative to woo reluctant customers back to its dealerships. In 1999, the company began offering a 10-year warranty, at the time the best in the industry, to rebuild confidence in its cars. And to compete with bigger brands, Hyundai has loaded up its models with special features that many of its rivals sell only as expensive extras. A 2006 Sonata for the U.S. market will come with six air bags (most competitors offer only four as the standard), a six-speaker CD and MP3 player, and an advanced antilock-braking system—all for less than $20,000.

With some of its biggest rivals in disarray, Hyundai sees an enticing opportunity to build on its progress overseas. Slammed by rising costs and slumping sales, General Motors recently shocked investors by predicting a first-quarter loss, and Ford followed this month by downgrading its 2005 profit forecast. Chung is determined to keep the pressure on. He's moving Hyundai's product line away from its traditional small cars into larger, higher-profit vehicles. In October, Hyundai unveiled a small sport-utility vehicle, the Tucson, and later this year, the company will launch a new high-end sedan for the U.S. market, the Azera. Down the road Hyundai plans to roll out a larger SUV and its first hybrid gas-electric vehicle. In addition, the company is opening manufacturing plants around the world that should help it penetrate key markets. Hyundai is investing $600 million in a factory in the southern Indian city of Madras; due to open in 2007, the plant will be Hyundai's second in the country. And in April, Hyundai opened its first U.S. factory. The $1.2 billion plant in Montgomery, Alabama, will produce 150,000 upgraded Sonatas this year, and next year will likely start making the Santa Fe, Hyundai's popular SUV. The highly automated factory, Hyundai's most modern, is a sea of frenetic welding and painting robots. Components are shuttled about by unmanned vehicles guided by electronic sensors in the floor. Chung says the factory gives Hyundai "firm ground as a global leader in the auto industry."

Even with its recent success, Hyundai's market position remains insecure. The next few months will be especially challenging. With a host of new models coming out and its U.S. plant just revving up, Hyundai may have a harder time maintaining quality. "They're not out of the woods yet," says J.D. Power's Parker. Dwindling profit margins are another problem. The average Hyundai car retails for 10-15% less than a comparable Toyota or Honda in the U.S., but with rising labor costs and a weaker dollar, Hyundai must persuade customers to pay more so that profits keep growing. Last year, Hyundai's earnings edged up a mere 2%, while sales grew 10%. Zayong Koo, an auto analyst at Lehman Bros. in Seoul, says it could take several years before Hyundai achieves this crucial pricing power: "They need to show a track record of good-quality cars in order for them to take that next step and raise pricing."

After all, Hyundai's road trip is really just beginning. Despite its impressive winning streak, the company is still only the world's seventh largest carmaker, with 3.3 million vehicles sold globally—and that includes sales by its Kia subsidiary. But Chung has grand ambitions. "We will make ourselves an invincible competitor," he says. Hyundai's larger rivals should mark those words whenever they check their rearview mirrors for overtaking traffic. (Source: TIME Asia.)

Hyundai case widens with Logistic CEO Charged with Embezzlement (Mar 2006) An investigation that began because of suspicions about illegal lobbying is fast developing into a tumult about large amounts of money cached for political purposes by the Hyundai Automotive Group, the country's second largest conglomerate. At the end of Mar 2006, it appeared that it could also involve key political and economic figures. Prosecutors said they found circumstantial evidence suggesting that the Hyundai Automotive Group amassed the slush fund through its affiliates Glovis Co. and Hyundai Autonet, and gave Kim Jae-rok the job of spreading the cash around, both to advance Hyundai's business interests and to solidify the control of the Chung family, the group's owners.

Mr. Kim, prosecutors said, was suspected of using the funds for bribery. Once the head of a consulting group, Investus Global, he was prominent in arranging some of the bailouts and restructuring that resulted from the 1997-98 financial crisis. Although the investigators said he was the primary target of their work right now, eyebrows were raised over the extraordinary Sunday raid on Hyundai. Prosecutors would not confirm it, but speculation is growing that Mr. Kim is being viewed as a conduit for bigger problems at the group.

Prosecutors kept up the fast pace of their investigation, making a warantless arrest of Lee Ju-eun, the chief executive officer of Glovis Co., a logistics affiliate of the automotive group. Mr. Lee is also the chief manager of the finances of Chung Mong-koo, the Hyundai Motor Co. chairman. Prosecutors said they had questioned Mr. Lee about the corporate funds, in particular why several billion won (several million dollars) was passed to Kim Jae-rok. The prosecution has applied for a warrant to continue to detain Mr. Lee, telling a court that it intends to charge him with embezzling corporate funds.

Prosecutors also said another affiliate, Hyundai Autonet, was involved in amassing the secret fund. Chae Dong-wook, the lead prosecutor in the matter, said, "Only after we confirm the total size of the slush fund, which we suspect will reach several tens of billions of won, we can trace the funds handed over to the lobbyist Mr. Kim and find out whom he lobbied." Mr. Chae added, "It is our principle to investigate the targets of Mr. Kim's influence peddling in the political, bureaucratic and financial sectors."

Korea has no lobbying industry per se, and Koreans tend to use the word "lobby" to mean bribery. The prosecution also slapped foreign travel bans on at least 10 director-level managers at the group. Included in the ban is Chung Eui-sun, 36, the head of Kia Motors and the only son of the Hyundai Motor chairman Chung Mong-koo. The junior Mr. Chung is the biggest shareholder of Glovis Co., holding about 32 percent. His father owns another 28 percent. Founded in 2001, Glovis Co. grew quickly with support from the Hyundai Automotive Group. It is the group's sole source for logistics services, and its revenues ballooned to 1.5 trillion won after only four years in business. Mr. Chae, the lead prosecutor, said it was too early to ask if his team planned to widen its investigation to the two men. (Source: Joongang Ilbo<;/a>.)

First Company to Declare Emergency (Mar 2006) The Hyundai Automotive Group has set up an emergency management team under the leadership of its chairman Chung Mong-koo to combat unfavorable business conditions led by the falling dollar and rising oil and raw materials prices. According to Hyundai, "The dollar has fallen below W1,000 since the beginning of the year and oil prices have risen above US$60 per barrel, so we need to declare an emergency." Hyundai is the first Korean firm to declare an emergency over the exchange rate. Any W100 drop in the greenback's value causes the company losses of W1.65 trillion in revenues and W800 billion in operating profit, based on last year's figures. Meanwhile, Hyundai Motor announced its overall business results were worse in 2005 than the year before. Sales fell 0.3 percent to W27.384 trillion and operating profit plunged 30.1 percent to W1.384 trillion. However, net profit rose a whopping 32.6 percent to W2.315 trillion. In Feb 2006, Hyundai Motors announced that its senior executives will undergo a pay freeze due to the crisis.

The nation's biggest automaker Hyundai Motor in March was to start producing the upgraded Santa Fe SUV at its Alabama, U.S. factory, which has so far been dedicated to making the Sonata sedan, expanding the plant's capacity to 270,000 units. The firm also says it needs to produce more overseas to cope with the falling dollar. In Apr the ground breaking was indefinitely postponed due to the widening scandal. However, in May Hyundai Motor Co., South Korea's top automaker, said its net profit for the first quarter dropped 37.5 percent from a year ago to 318.8 billion won.)

End of a Stellar Run The Korean stock market may be close to the end of a stellar run since exporters' profits are falling, Bloomberg speculated on 12 Feb 2006. The financial news agency cited a stronger won as the cause why "the rally that made Korean stocks last year's best performers in Asia may be over." "The won has risen 4.4 percent against the dollar this year, the third-largest increase among 15 Asia-Pacific currencies," it said. "Every 1 percent gain in the won against the dollar will reduce this year's earning per share by 2 percent at Hyundai Motor, the country's largest automaker, according to a Merrill Lynch & Co estimate."

It quoted Christopher Wood, a global strategist at CLSA, as pointing to problems for Korean exporters from the won's climb against the dollar and yen. Meanwhile, the Korea Composite Stock Price Index closed down 14.44 points or 1.08 percent at 1,320.79 points on 12 Feb, and the tech-heavy Kosdaq slid 2.4 points to 653.21 points. The dollar gained W9 from the previous session to W976.80.

Hyundai Files Charges Against Union (Mar 2006) The KCTU said some 150,000 workers (50,000 according to estimates by the Labor Ministry) -- including those with Hyundai Motor and Kia Motors who took part in the strike for a four-hour period. The KTCU rallied nationwide to denounce the bill on 1 Mar and resumed the general strike on 2 Mar. (Source: Chosun Ilbo.)

Hyundai Motor Corp. filed complaints naming six union leaders with the police on 6 Mar, saying the six had been the instigators of an illegal strike on 1 Mar. The company said it also planned to ask for compensation from the union for losses it suffered during the strike, which was part of a job action called by the KCTU. Kia Motors, a Hyundai Motor subsidiary, also filed a complaint with the police against its union chief and other leaders for a walkout there. (Source: Joongang Ilbo.)

The union struck the two automakers for four hours on 28 Feb and six hours on 1 Mar, at the instructions of the KCTU. "The strike was an illegal political strike that had nothing to do with working conditions at our factories," a Hyundai official said. "We cannot stand by and watch these strikes, which are repeated year after year. Our losses because of this strike were 30 billion won ($31 million)." Hwang Yong-yeon at the Korea Employers Federation praised the companies' swift action to seek punishment of the strike leaders immediately after the job action. "The measure was one taken to settle labor and management relations based on the law and principles," he said. Na Seong-lin, a professor at Hanyang University, said Hyundai's decision might be a turning point in labor-management relations here. "In the past, companies had a custom of pretending to be blind to illegal job actions, but Hyundai's case shows that companies will now follow the law," he said.

An official at the Korean Confederation of Trade Unions criticized the two automakers, saying their attitude would only worsen labor-management relations. In light of the unfolding scandal at the time, this action against the unions appears to have been a strategic move to emphasize that Hyundai Motor Corp. was Korea's leading auto manufacturer -- and a challenge of Chung Mong-koo's power could result in the loss of jobs in the economy.

Hyundai Motor's Chung Mong-Koo to be tried for graft (May 2006) In Apr 2006, all hell broke loose for the Hyundai Group as the chairman was arrested for operating a slush fund by taping funds from a subsidiary group. On 28 Apri 2006 Associated Press reported that Korean prosecutors arrested Chung Mong-koo in an embezzlement and slush fund scandal that threatened to engulf South Korea's #1 automaker. Chung Mong-koo, 68, built Hyundai Motor from an exporter of low-quality cars into a global manufacturer that surpassed Honda Motor Co. as the world's seventh-biggest vehicle producer in 2004. As such there have been cries to be careful that the move to prosecute Chung might harm the economy of Korea. However, because of Roh's pledge to fight corruption, the case was forced to proceed due to the feared impacts in the 31 May local elections. The prosecution of Chung, head of South Korea's third-wealthiest family, is a test of President Roh Moo Hyun's pledge to get rid of corruption at the nation's biggest industrial groups. The case follows the conclusion of a six-year, 40 trillion won fraud investigation of the Daewoo Group's founder Kim Woo Choong. (See May 2006 of Kim Woo Choong's Sentence.

The imprisoned chairman of the Hyundai Motor Group, was allowed to oversee group management from behind bars. Chung was allowed to have extended, though not long, meetings with group executives for discussions on key management affairs. However, Chung could have visitors in his detention cell for only 15 minutes a day, which hampered decision-making. (SITE NOTE: Chung is known to have a micro-management style with all decisions made by him.) In May, Chung requested bail to oversee the affairs of his company.) At the end of May, there was no decision on Chung's bail request which was ultimately denied. Chung's lawyer Kim Jae Jin has said Chung needs to be released on bail to minimize damages and delays at the company and because of Chung's weakening health.

Chung's detention disrupted operations at the carmaker, including the start of construction of a $1 billion plant in the Czech Republic and the design of new models. Hyundai Motor postponed plans to build gasoline- electric hybrid cars until 2009 because Chung had not given final approval on funding. The company had originally planned to start making hybrids next year. The company's shares fell 24 percent this year compared with a 4.5 percent decline in the benchmark Kospi Index. Shares of affiliate Kia Motors Corp., run by Chung's 35-year-old son, are the worst performer among Korea's top 50 companies by market value, declining 39 percent. Hyundai Motor has also delayed mass production of its new Avante compact model and the September debut of its new sports utility vehicle. Hyundai Motor workers, suppliers, overseas vendors, members of the Korea Automobile Manufacturers' Association, and the Federation of Korean Industries have petitioned the prosecutors' office for Chung's release. Kia Motors, run by Chung Eui Sun, has also said it may delay construction of its first U.S. auto plant in West Point, Georgia. Chung Eui Sun is also under investigation by prosecutors. He had not been charged. Embezzlement and misappropriation of corporate funds each carry up to 10-year jail terms, according to South Korean law. (Source: Bloomberg.com.)

On 16 May Chung Mong Koo was indicted to stand trial on charges of embezzling funds from South Korea's largest carmaker to bribe bankers and government officials. In mid-May it was announced that Hyundai Motor Co Chairman Chung Mong Koo would stand trial on charges of embezzling funds from South Korea's largest carmaker to bribe bankers and government officials. Chung was charged with misusing 400 billion won ($422 million) of Hyundai Motor's money and embezzling 120 billion won to set up a slush fund. Chung was accused of embezzling about 100 billion won (US$106 million) in company money to create the slush fund and of breach of trust for allegedly incurring about 300 billion won (US$320 million) in damages to the company. Chung was aware of the fund but denies involvement in setting it up, according to his lawyer Kim Jae Jin.

Hyundai is suspected of using the slush fund, via at least two lobbyists, to seek favors from the government. The lobbyists have been arrested on charges of receiving money from Hyundai in exchange for promises to help it win construction approvals and permits, and other business favors. It is unclear whether the lobbyists bribed government officials. It is illegal in South Korea to accept money in return for exercising influence. Prosecutors adjusted the embezzlement amount after discovering some of them overlapped with each other. Chung, in jail since April 28, denies most of the allegations. According to prosecutors on Apr 25, Chung Mong Koo told investigators that he knew about Hyundai Motor's slush fund. Affiliates were forced to send monies directly to Chung to create the slush fund. Chung, in custody since April 28, denied most of the allegations.

If convicted, the charges against Chung -- embezzling $105 million and misappropriating $315 million -- "are enough to keep him in prison for the rest of his life" newspapers claimed. However, embezzlement and misappropriation of corporate funds each carry up to 10-year jail terms, according to South Korean law. Chung is suspected of masterminding the creation and use of slush funds to bribe officials for winning various business favors and approval for tax-free transfer of wealth and corporate control to his son. Asia Times stated on 12 May, "The notion, though, that Chung Mong-koo could actually do serious time appears far-fetched. A suspended sentence, probation and an unbelievably big fine appear as likely solutions - all quickly forgettable as the case fades from headlines. (Source: Asia Times, 12 May 2006.)

Investigators have placed travel bans on 10 Hyundai Motor executives including Chung and his son Chung Eui Sun, forcing the group to delay some of their overseas ventures. Prosecutors did not indict Kia's president Chung Eui Sun. Chung Eui-Sun, 35, and other Hyundai Motor executives involved will be indicted after prosecutors finish their ongoing investigations. Chung Mong Koo told investigators that he knew about Hyundai Motor's slush fund, prosecutors said on April 25.

Then the family started to squabble over the control of the Hyundai Group.

On 30 May it was reported that Hyundai Heavy Industries was likely to buy additional stakes in Hyundai Merchant Marine, the virtual holding firm of Hyundai Group. Stock analysts say the possibility of Hyundai Heavy's participation in the capital increase of Hyundai Merchant, the shipping unit of the Hyundai Group, is high as the share price of Hyundai Merchant has dropped to below the price the shipbuilder purchased in April. Its participation, or additional share purchase, means a continuation of power games between Hyundai Group chairwoman Hyun Jeong-eun and her brother-in-law Chung Mong-joon, the majority shareholder of Hyundai Heavy Industries.

The shipbuilder acquired Hyundai Merchant shares for 18,000 won per share but the price has dropped to below the 18,000 won mark after rising to 22,000 won in early May. Regardless of the power game over the management rights between Hyun and Chung, Hyundai Heavy could buy additional stocks at a lower price than the 18,000 won to compensate for the losses. Hyundai Group chairwoman Hyun has continued to demand the shipbuilder get its hands off her shipping unit. The group said it was an unveiled attempt to take away the group's control. Hyundai Heavy said its stake buying was aimed at helping the group from becoming a hostile takeover target among foreign investors. (Source: Korea Times.)

Even before Chung's arrest, Hyundai Motors was already in trouble. It was the first company to declare an emergency in Apr 2006 due to the rising oil prices and decreased sales -- announcing a pay freeze for senior executives. Overly optimistic overseas sales projections have left many cars unsold in America. Hyundai Motor's shares have fallen 16.4% this year, lagging behind the Kospi index's 1.2% rise and losing almost 3.5 trillion won in market value. Probes into the Seoul-based company and its affiliate Kia Motors Corp. have stymied expansion plans, hampering the group's ambition of overtaking DaimlerChrysler AG as the world's fifth-largest carmaker by 2010.

Hyundai Motor, the maker of the Sonata sedan, was to sign a contract on May 18 in Seoul with the Czech government to build a $1 billion car plant, after postponing it from April. However, the ground-breaking ceremony for the Czech operations will be indefinitely postponed, along with a similar ceremony for Kia's plant in West Point, Georgia due to the current crisis.

The Chung family in April 2006 donated a 60% stake in Hyundai Motor's logistics unit Glovis Co., as part of their public apology for the bribery scandal. The stock was worth 1 trillion won at the time. Though the donation was pledged, after Chung's arrest, there were questions whether the pledge would be honored. (Source: Financial Express.)

Prosecutors Refuse to Name Government Officials of Bribes until After 31 May Elections (May 2006) Prosecutors have yet to name the government officials who allegedly received bribes from Chung and Hyundai Motor. Chae Dong Wook, a prosecutor on Chung's case, has said the prosecutors would wait until after 31 May's regional elections, to avoid influencing the outcome.

Prosecutors said in May 2006 that Chung and his family tried to increase their stake in Hyundai Motor and other companies through the family's ownership of Glovis Co., a logistics affiliate of Hyundai Motor.

Could the whole edifice really be in danger now that Chung Mong-koo is in jail? His real offense is one with which any South Korean corporate titan would regard as only natural. He simply wanted to juice up the number and value of shares held by his only son, Chung Eui-son, and he had a sure-fire way of doing so. Why not set up a satellite company? Glovis, with an investment of $5 million, was made the logistics arm of the group, responsible for shipping the millions of cars spewed out every year by Hyundai and Kia. The idea was to watch its profits soar, float the shares at some incredible price and reap a windfall. Eui-son, already in training as president of Kia and waiting to take over the group from his father, now 68, already owned most of Glovis with which, in turn, he could ensure control over Hyundai Automotive's main companies, Hyundai Motor and Kia Motor. (Source: Asia Times, 12 May 2006.)

Hyundai Automotive has followed the lead of Samsung chief Lee Kun-hee's 800 billion won ($800 million) "contribution" as an apology. In trying to side track the investigation, Chung offered a huge "contribution to society" - a way of appeasing the anti-chaebol critics who wish to penalize the "royal families" -- such as Roh Moo-hyun. The Chung family said it would give its entire 60 percent stake in Glovis, valued at 1 trillion won, to charity. However, that offer was still on the table at the end of May, and had receded into the background as prosecutors followed through on their investigation.

Prosecutors have arrested the president of Glovis, a lobbyist and the head of an accounting firm in the probe. They also arrested on May 20 a former vice governor of Korea Development Bank and the head of one of its subsidiaries for receiving bribes.

Park Suk An, a former Seoul city official who had been director of the Housing Department, committed suicide on May 15 by jumping into a river, according to the police. Park had been answering prosecutors' questions on allegations that Hyundai Motor had bribed officials for a construction license for a building next to its headquarters in southern Seoul. Park denied the allegations in his will that he left at his house before taking his life, according to prosecutors. (Source: Bloomberg.com.)

Trial Begins (June 2006) In the first day of the trial on 1 June, Mr. Chung's attorneys told the court that their client is suffering from some 10 diseases including respiratory and heart problems and asked that he be granted bail. Chung has been in the hospital wing of the detention center because of a bronchial illness since he was jailed on 28 April. Judge Kim Dong-o told the lawyers that the court has been receiving too many petitions seeking leniency for Mr. Chung and that storing them was becoming a problem. He asked the attorneys to do something about it. The prosecution told the court on 31 May that Mr. Chung should remain in custody in order to lay bare how 120 billion won ($127 million) of his slush fund had been spent.

Asia Times 12 May article stated it best. "They're asking a court to sentence him to 15 years for ordering his minions to cook the books, claiming assets that did not exist, and for illegally borrowing hundreds of millions of dollars from banks. No doubt, Kim and Daewoo were the biggest losers of the economic crisis. Chung Mong-koo, however, has been a winner. His offense has been to think up ways to get richer. Roh Moo-hyun may be a leftist president, but the last thing he and his advisers want to do is bear responsibility for compromising the success of Hyundai Automotive - a pillar of the chaebol system that upholds the world's 10th-biggest economy." (Source: Asia Times, 12 May 2006.)

Kia Motors President's Indictment Suspended (June 2006) The Supreme Prosecutors’ Office is suspending the indictment of Kia Motors president Chung Eui-sun in connection with a massive corruption scandal in the Hyundai Automotive Group but indicted three Hyundai executives without arrest. Chung’s father and Hyundai Motor chairman Chung Mong-koo is in prison over the scandal. Chung junior is suspected of issuing new cut-price shares in Bontec, a one-time Kia affiliate taken over by Hyundai, and thereby causing losses to his firm. (SITE NOTE: This backing off of the investigation and prosecution of the Chung "dynasty" is prompted by the Roh administration's fear that it could upset the economic health of the country like a set of falling dominoes. The only thing that is supporting the country is the export figures and overseas sales -- as the country has returned to domestic flat-line growth.)

“We decided to suspend Chung Eui-sun’s indictment because we thought it is would be too harsh if he has to stand trial as well seeing that his father is already under arrest,” Senior prosecutor Chae Dong-wook said Friday. “We’re also concerned about a management vacuum in the group if Chung junior is arrested too.” The three Hyundai executives booked are the group’s vice chairman Kim Dong-jin for his role in creating slush funds of W100 billion (US$100 million) at the orders of the group chairman, chief financial officer Lee Jung-dae and procurement director Kim Seung-nyun. (Source: Chosun Ilbo.)

Hyundai's operations have been hamstrung since the scandal erupted, and the company's strategic plans have been put on the backburner, with groundbreaking opening ceremonies for new factories in the United States and Europe cancelled. The dynastic control of the firm is likely to end if Chung is found guilty of any wrongdoing, as plans to hand over to his son, Kia President Chung Eui-sun, will almost certainly be abandoned. Hyundai Motors is still in fundamentally good shape despite the scandal as vehicles of both the Hyundai and Kia brand continue to sell well in the global market. However, the scandal could effect the long-term strategy to expand the firm's global production capability and could see the end of Chung Mong-koo's successful reign and his family's control over the company. (Source: Global Sight.)

Chung Mong-koo Released on Bail (June-July 2006) Chung was released from prison in late June after putting up 1 billion won ($1 million) bail. Hyundai Automotive Group chairman Chung Mong-koo was expected to return to work about 15 July after an absence of about 80 days in prison awaiting trial on a bribery scandal and then hospitalization. His absence incurred concrete and potential losses to the group, including Hyundai Motor and Kia Motors. Now most employees are busying themselves in normalizing their work, with the incoming return of the owner.

Among lingering business is the building of auto plants in foreign countries. Kia Motors delayed the signing of several contracts concerned with the construction projects in Eastern Europe. Kia indefinitely postponed a groundbreaking ceremony for its first U.S. plant due in part to the bribery investigation into the group. The $1.2 billion plant is to be built in Georgia.

To make matters worse, the labor union of Hyundai Motor is on a strike, demanding a wage hike. Hyundai officials expect Chung will put priority on resolving the labor dispute as Hyundai Motor has suffered about 600 billion won in losses from the strike at its Ulsan plant over the last 17 days. The carmaker’s 44,000 unionized workers have staged a partial strike since June 26 demanding a 9.1 percent rise in basic salary and other incentives. The union voted last week to shift their organizational structure from an enterprise union to an industrial union. (Source: Korea Times.)