BUSINESS RESEARCH MS 108 nd MBA 2 Semester (2012-13)

ASSIGNMENT Business Research On the Issue of

Collapse of DAEWOO Group

Submitted By: Manisha Gupta (026) Anu Gupta (037) Rahul Sarin (067) Rohit Gupta (070)

Submitted To: Dr. D.N. Dwivedi Maharaja Agrasen Institute of Technology MAIT, Sector-22, Rohini, Delhi-110086 Affiliated to GGS IP University, Delhi
-1-

Table of Contents
1. Introduction .......3 1.1. The Making of the Great Universe.......5 1.2. Daewoo Motors in India ..........................................................8 2. Issues faced by Daewoo motors................11 3. Vital Statistics; Comparison.............20 3.1 Profit & Loss Statement................................................................................20 3.2 Cash flow Statement.....................................................................................21 3.3 Balance sheet.................................................................................................22 4. Research Analysis..................................................................................24 5. Research Methodology..........33 6. Present status.............................................................34 7. Recommendation...............................................................................................36 8. Conclusion .........................................38

-2-

1. Introduction
At the end of 1999, one of the largest conglomerates in the world, the Daewoo Group, collapsed in spectacular fashion. During its peak, Daewoo was a sprawling enterprise with over 320,000 employees in 500 domestic and foreign companies that operated in over 110 countries. Its management received widespread praise and academic recognition for its success. Yet, when the financial crisis hit, it managed to commit 22.9 trillion won ($15.3 billion) in deception that was termed the biggest accounting fraud in history. Years later, inner-workings of the conglomerate are finally coming to light. After hiding as a fugitive overseas for over six years, Daewoos chairman, Woo Choong Kim, returned to Korea in June 2005 to face criminal charges. In 2006, he was sentenced to eight and a half years in prison and disgorgement of a staggering 17.9 trillion won ($ 17.9 billion). This juncture serves as an opportune time to assess the ramifications of the Daewoo debacle. The companys revenues had dropped by 94% since 1999. The loss reported was also three times higher than that reported in 1999, and was ranked as South Koreas largest ever corporate loss. In addition, the companys domestic marketshare fell from 33% in 1998 to just 23% in 2000. According to analysts, Daewoos borrowings for its expansion programs were responsible for its losses. The companys domestic and foreign debt amounted to more than $16.06 billion in December 1999. Moreover, its expansion into risky and uncertain markets like Vietnam and its decision to sell products at very low prices to gain marketshare had negatively affected its financial condition. Labor unrest was also one of the reasons cited by market observers for Daewoos poor financial performance. The workers at many of its plants went on strike protesting against low wages, layoffs, and lack of job security. The Southeast Asian Financial Crisis of 1997-98 further deepened Daewoos problems. The companys creditors started demanding repayments. However, some analysts felt that the primary reason for Daewoos problems was mismanagement and the corrupt corporate governance practices adopted by Kim Woo Choong (Kim), the founder of the Daewoo Group. An analyst commented, The ill management and -3-

inability

of

Daewoo

companies

resulted

in

bankruptcy.

The

run-away

irresponsible previous owner, Kim is now hiding somewhere in the world. Analysts commented that because of his financial mismanagement, not only Daewoo but also the entire Daewoo Group was deep in debt. In November 2000, the Korean government officially announced Daewoos bankruptcy and its assets were put on sale. Amid controversies and almost a year of negotiations with the Korean government, GM signed a preliminary agreement in September 2001 to buy Daewoos assets for $1.2 billion. However, this agreement ran into problems when GM reported a discrepancy in Daewoos overseas accounts. With so many skeletons in Daewoos closet, market observers wondered when the company would find a buyer and when its problems would be solved. Finally, General Motors was the one who bought Daewoo Motor's assets. In 2002 Daewoo Commercial Vehicle Co. Ltd was spun off from parent Daewoo Motor Co. Ltd. In 2004 it was acquired by Tata Motors, India's largest passenger automobile and commercial vehicle manufacturing company.

-4-

1.1 The Making of the Great Universe

In 1967, 31-year-old Woo Choong Kim founded Daewoo Industrial, a textile exporter, with just five employees and $10,000. The two Chinese characters for Daewoo meant Great Universe, true to the ambitions of the young entrepreneur. From its humble beginnin gs, business expanded rapidly and, by 1972, it became the second largest exporter in Korea. Daewoo played a major role in Koreas economic success when the country achieved the Miracle of the Han River and transformed itself from an underdeveloped backwater into a developed nation in the span of forty years. Under Kims guidance, by 1996, Daewoo became the worlds largest transnational entity among developing countries, surpassing such companies as Xerox, Amoco, Volvo, Fujitsu and Glaxo Wellcome. Daewoo excelled at acquiring distressed companies, mostly from the government and then turning them around. In 1976, for instance, Daewoo assumed control over Hankook Machinery Ltd., a manufacturer of industrial machinery, rolling stock and diesel engines that had not shown a profit for thirty-eight years. Senior executives had opposed the acquisition, but Woo Choong Kims prevailed upon them. After changing its name to Daewoo Heavy Industries, the company started generating profits in its first year. In another fabled example, in 1978, Daewoo acquired Okpo Shipping Company, a company teetering on bankruptcy. Merged into Daewoo Heavy Industries, Kim guided the shipyard to positive returns by 1983. Daewoos mode of acquisition, turn around and expansion became a trademark of the conglomerate. Moreover, major companies were not established by Daewoo but obtained through mergers or acquisitions. Another cornerstone of Daewoos business strategy was its orientation toward exports. Unlike other chaebol (conglomeration), Daewoo championed an international focus from its beginning. The group prided itself on its ability to spearhead the opening of new markets overseas. By 1979, it became the largest exporter in Korea, following the governments economic development plans of export-led growth. Daewoo launched a Global Management Strategy in 1993 to further expand its operations across the world. By 1998, they established over 500 subsidiaries. Over 320,000 employees worked worldwide in 110 countries, from South America to Africa and Eastern Europe. Despite security risks, Daewoo was even among the first to try to develop business with North Korea. Critics claimed that Daewoo succeeded because of its ability to extract support from the -5-

government through rent-seeking while leveraging itself that it had become too important to be allowed to falter. In 1988, for example, they faced disaster when Daewoo Shipbuilding and Heavy Machinery verged on collapse due to a crushing 1.2 trillion won ($1.8 billion) in debt following deteriorating market conditions. Amid criticism that the company should have undergone insolvency proceedings according to market principles, the government bailed it out with a 400 billion won ($600 million) restructuring package in 1989. The generous rescue package reasserted Daewoos lobbying ability while confirming the governments inability to take decisive action. This fueled the myth that Daewoo and other chaebol had become too big to fail. Chaebol engaged in increasingly riskier behavior in the belief that they could rely upon government intervention when in jeopardy. In 1978, Daewoo embarked on its tragic foray into the automobile industry through a 50 percent acquisition of Saehan Motor in a joint venture with GM Korea. What later became Daewoo Motor met both the strategy of turning around distressed companies and expanding through exports. The company sought growth and market share instead of focusing on profitability and research and development. After first buying out GMs remaining 50 percent stake in 1991, a series of entries into foreign automobile markets followed. In 1994, they acquired the British International Automotive Design (Worthing Technical Centre) and entered into an automobile joint venture with Rodae in Romania for $300 million. In 1996, they entered the Polish automobile market with the $1.1 billion acquisition of FSO. They bought a southern Poland truck factory for $700 million, Czech Republics Avia truck manufacturer for $200 million, Uzbekistans Uz car plant and teamed up with other carmakers from Ukraine and India. The acquisition spree led to 14 new vehicle plants in 13 countries that culminated with the purchase of a 51.98% stake in Ssangyong Motor in January 1998 at the height of the financial crisis. Reckless expansion into the automobile business overwhelmed the conglomerate. Meanwhile, Daewoos financial structure precariously relied upon debt. While debt -to-equity ratios for chaebol exceeded 400 percent, Daewoo surpassed everyone in its over-reliance on debt. As early as 1988, with over $11.2 billion in borrowings, Daewoo stood as Koreas most indebted conglomerate. Its debt gearing allegedly reached as high as 2,000 percent. In fact, for foreign investment projects, Daewoo followed a one-hundredth strategy. They boasted that they only required one percent of the total capital needed for a project because they could finance the rest through preferential loans from foreign countrys banks, inter -subsidiary debt payment -6-

guarantees, joint investment from local investors and other sources. Another notable feature was that the de facto holding company, the Daewoo Corp., was not the profit center of the conglomerate. Daewoo Corp. primarily acted as a trading and financial company for products and services. In difficult times, therefore, it did not have capacity to provide financial support to weaker affiliates. Instead, it later served as the groups nerve center that directed the use of offshore entities as conduits for the accounting fraud. Unsurprisingly, Daewoo received the lowest market valuations and had to pay the highest interest rates among the chaebol. Capital markets long discounted Daewoo companies. As of April 1997, for example, Daewoo had a 1.1 price-to-book ratio, the lowest among leading conglomerates, which averaged more than two. Daewoos actual interest rates were 2.6 percent higher than the average among the top-five chaebol in 1997. The spread between Daewoo bonds and other chaebol was already one percent in 1998, but increased to two to three percent by early 1999. The discounts and spreads reflected the markets uncertainty over Daewoos earnings prospects relative to its risks. Of course, even these discounts were far too generous, considering what was concealed through the accounting and loan fraud. Nevertheless, the valuations reflect the degree of knowledge that market participants, particularly sophisticated domestic and foreign ones, held of the risk in dealing with the conglomerate. Notwithstanding, the sustainability of the Daewoo brand name is evident in the fact that its brand image and brand recognition still remain strong in the international marketplace. After the conglomerates collapse nearly a dozen companies continue to operate under the Daewoo brand name. Leading Daewoo companies even retain the same senior management. Yet, the success of the companies in many ways demonstrates the importance of corporate governance; they have only managed to become competitive enterprises after they unshackled themselves from the collective burdens of the conglomerate. As independent companies, they can now operate for their own benefit without regard for the welfare of other affiliates.

-7-

1.2 Daewoo Motors in India Daewoo was known world over as an aggressive company and it started its operation in the same way in India. Since the company was unknown in this part of the world it launched a big campaign to showcase its strength and create a strong brand in India. While the others players were still working out on the details Daewoo had started series of promotional activities.

Daewoos first vehicle, the 1500 cc Cielo was launched in three versions (Cielo, Cielo GLX and Cielo GLE) with great features which were never heard before like Power windows, Power Steering, Auto transmission and priced the product very competitively. The features it had, was showcased in the TVC it ran.

The aggressive campaign helped Daewoo to create the right impact and costumers rushed to book the car when bookings were opened in July 1995. It received a tremendous response and the company clocked a record booking of 114,000 in a short span of time.

The company started manufacturing cars on a war footing and soon was ready to ship the cars to various dealers across India. The market leader was not yet ready to give up its position so easily as a result it is alleged that Daewoo which needed the cars to be transported across different cities could not find carriers to carry the product. This resulted in massive delay in delivery of the cars resulting in creating negative effect in the consumers mind. It resulted in a massive 70,0000 cancellations against the earlier order. By the time Daewoo motors was able to shop its cars the demand had subsided.

-8-

The other problem which was faced by the consumers was high fuel consumption, and an under power product. This let to further decline in the interest for the product.

Daewoo which had predicted an annual turnover of over Rs 10 billion and sales of 20,000 cars by March 1996 managed to record a turnover of Rs 6.05 billion and sales of only 9,044 cars.

During April-December 1996, only 13,776 Cielos were sold against the targeted 52,000. During April 1997-February 1998, 9006 Cielos were sold, a decline of 41% from the corresponding period previous year. In 1998-99, 5500 Cielos were sold, a fall of nearly 50% over the previous year. The entry of competition in form of General Motors and Ford in 1996 and the general downturn in the mid-size car segment added to the companys problems.

Left with a huge inventory and no demand Daewoo motors slashed the price of Cielo as the management was planning to bring in never product recently launched in Korea (Daewoo Lanos) in India. This move back-fired as consumers totally lost faith in the company resulting in further slump in the demand of cielo and was the product was out rightly rejected by the customers.

Daewoo recorded a loss of Rs 351.4 million in the six months ended March 1998 as sales declined to Rs 1.22 billion from Rs 2.7 billion in the corresponding period in the previous year. Daewoo was surprised to realize that its globally tried and trusted formula of providing excellent service with low prices had failed miserably in India Market. Daewoos miseries nevertheless did not come as a surprise to the industry watchers. When Daewoo had announced its targets at the time of Cielos launch, It was too ambitious and unrealistic by analysts.

To salvage its reputation in India Daewoo moved to the next segment by launching Daewoo Nubira in a segment above Astra & Escort but the product simply failed to ignite the market.

-9-

Daewoo was not prepared to let it go so easily. It decided to launch a fresh product out of its stable, which would compete with Tata much awaited car and Hyundai soon to be launched santro. This time Daewoo had really an exceptional product in form of Daewoo Matiz. Its launched a series of campaign to make it a popular. The MD of DMIL even announced that Matiz will be jeans among the cars. Daewoo again failed to understand the mood of the market and priced it above the competition. Tata Indica being made available in Diesel as well as King Khan endorsing Santro added to the woes of Daewoo which was already in bad shape due to the Asian crisis. Even when it could have capitalized on the fact that it was the only car in its segment with Euro 3 engine when Euro 2 engine norm was being enforced in India resulting in recall of Santro from the market to be refitted with emission complaint engines, Daewoo missed the bus and did not communicate it properly.

The ongoing crisis led to the top brass of DMIL leaving it and for a shorter duration operations was handled by senior management team directly from Korea who could not understand Indian Market, leaving DMIL in a bad shape and huge losses.

When General Motor brought the parent company in Korea it refused to buy the Indian subsidiary owning to the huge debt it had in calculated resulted in shutting down of Daewoo Motors India Limited forever.

Daewoo itself was responsible for the mess it had landed itself in and it provides a perfect example for never to under-estimate the market and a very important fact that a product needs to have good attributed for success. Promotion & aggressive pricing does not guarantee success in a longer run. One needs to understand market size and its dynamics to the micro level.

- 10 -

2. Issues Faced by Daewoo Motors

As financial contagion swept across Asia, Daewoo made grave misjudgments, condoned by the government, which sealed its fate. First, it pursued a counterstrategy of expansion with particular focus on the automobile industry that proved too ambitious. Daewoo then over-leveraged itself with $ 20 billion in debt to try to meet its financial burdens during the crisis. They did not appreciate the seriousness of the situation, offering restructuring plans to resurrect the conglomerate when it was too late. In the end, over a two-year period, everyone stood-by as Daewoo transformed into a financial black hole. Daewoo might have weathered the storm had it restructured from the onset in early 1998. Rejecting a contractionary approach, Woo Choong Kim instinctively pursued aggressive growth, particularly in the automobile industry. He declared that Daewoo will overcome the crisis through expansionist measures (like in the past), because given the opportunity [w]e cannot embrace the future if we flinch at a time of recession. Returning to his roots, he viewed the crisis as a chance for Daewoo to acquire distressed companies and turn them around. One commentator noted that Daewoos response to the crisis came straight out of its old playbook: cooperate with the government, acquire failed companies to expand and continue to borrow.

Some of the major issues that led to financial losses were: 1. Business and government relations Daewoo specialized in buying distressed companies from the government, extracting concessions in the process and then successfully restructuring and turning around these entities. Daewoo rapidly expanded into a conglomerate through this mode of acquisition as most of its major companies were procured in this manner under Koreas industrial policy during the 1960s and 1970s. In these early years, Daewoo apparently benefited from the personal relationship between its Chairman, Woo Choong Kim, and President Chung Hee Park. Largely through these connections, Kim obtained critical incentives from

the government when taking over troubled companies. In 1976, for example, when Daewoo acquired Hankook Machinery, a manufacturer of industrial machinery, rolling stock and diesel engines that had not shown a profit for most of its history, the government provided generous

- 11 -

financing and debt forgiveness to make the deal attractive. Under the new name, Daewoo Heavy Industries, Daewoo returned the company to profitability in its first year. Other distressed companies that the conglomerate acquired included Daewoo Motor, and parts of Daewoo Electronics and Daewoo Securities. During these transitions, requirements or conditions concerning corporate governance did not enter the dialogue. Daewoo, therefore, largely succeeded in turning around these troubled companies through their rent-seeking ability. Chairman Kim would continue to rely upon his political acumen to extract these generous incentives from the government and to steer Daewoo out of difficulties. In 1988, for example, Daewoo faced its first serious crisis when Daewoo Shipbuilding and Heavy Machinery underwent a severe liquidity emergency due to suddenly deteriorating market conditions. The company employed over 14,000 workers and thousands more when suppliers and other downstream and upstream industries were included. The political economy consequences of allowing the company to collapse were enormous. The government thus reluctantly decided to bail out the company through an 840 billion won rescue plan despite heavy criticism that it should have been dissolved. The governments inability to deal decisively at the time convinced many that major conglomerates such as Daewoo had indeed become too big to fail. Everyone involved with large conglomerates such as Daewoo became more and more dependent upon this government-guaranteed social safety net, contributing to a dangerous moral hazard. Banks, investors, creditors, accounting firms and other stakeholders blindly followed this myth that the Daewoos in Korea would not be allowed to collapse. When the financial crisis hit, everyone naturally presumed that the government bureaucracy and Kims political clout would rescue the conglomerate.. At best, government technocrats used the states control and industrial policy to control the excesses of businesses. Large conglomerates such as Daewoo designed their business plans according to the governments policies and credit control. The potential incentives included preferential financing, subsidies, tax benefits, tariff protection and even bailouts if serious trouble arose. Disincentives included targeted administrative fines, tax audits, criminal investigations and prosecutions.

- 12 -

Daewoo therefore closely followed the government industrial policy concerning export-led growth to develop the economy. Through policy loans, export guarantees, export insurance, tariff protections, subsidies and other financial incentives, Daewoo became one of the leading conglomerates in the development of new trading markets around the world. By 1979, Daewoo became Koreas largest exporter. Starting from 1993, to further its overseas commitment, Daewoo launched its Global Management Strategy. By 1998, the Daewoo Empire consisted of over 590 subsidiaries and over 250,000 employees worldwide across all the major continents. While becoming a global conglomerate many latent problems emerged. Throughout the industrialization process, conglomerates with close government ties reaped enormous windfalls. In the worst cases, government and business collusion, led to clientelism, cronyism and corruption. Bureaucratic and political interests engaged in predation vis--vis their relationship with large conglomerates. The notorious slush funds scandal in the 1990s revealed that two former Korean Presidents solicited a combined total of over 39 billion won ($ 50 million) from Daewoo alone. In the end, dozens

of government officials and politicians were convicted for receiving bribes from Daewoo in return for their support. State-oriented corporate governance remained a defining feature of conglomerates such as Daewoo. The government controlled the primary modes of financing, regulatory landscape, and determined the major business direction. The government in turn acted as the primary monitor with regards to the operations of the board and potential excesses of the controlling shareholders. With the privatization of financial institutions, the expansion of equity markets and the decline of the state influence, however, the states ability to act as a monitor weakened. This left a vacuum in terms of the checks and balances and general oversight of the controlling shareholder and the board of directors. 2. Ownership structure Korean conglomerates generally shared similar ownership structures based upon family-control. From generation to generation, family-control has been a defining characteristic among Korean conglomerates. Initially maintaining high ownership concentration, as common in most Asian

- 13 -

countries, families secured control through a vast web of, interlocking share ownership between affiliates. The ownership structure of Korean conglomerates gradually began to differ from other Asian conglomerates starting in the early 1970s. In the 1970s, the government decided to compel conglomerates to list their companies on the stock exchange. Policymakers intended for conglomerates to disperse their ownership as a means to return their earnings back to society since they were the primary beneficiaries of industrial policy. The fledgling securities market also desperately needed the liquidity that public offerings from these large conglomerates could offer. Controlling families in turn feared that such dispersion could threaten their controlling interests and invite excessive scrutiny. Furthermore, given the generous indirect financing from state-controlled banks, they believed that their companies did not need to tap into capital markets for additional equity financing. To persuade these controlling families to list their companys shares, therefore, the government designed the legal and regulatory system to protect their interests. Any potential threats to their ownership control and potential interference were thus obstructed. Institutional investors had to shadow vote their shares, unfriendly mergers and acquisitions were curbed, disclosure standards remained minimal, and minority shareholder rights such as shareholder proposals, inspection rights and derivative litigation faced high ownership requirements. Boards of directors, statutory auditors, external auditors, shareholders, employees, and other stakeholders all were relegated to weak positions through formal and informal restraints in exercising their rights. This protection from outside scrutiny and challenges to corporate control had the negative side effect of weakening market discipline and oversight. Controlling shareholders gradually lowered their ownership stakes and remitted their shares because they were satisfied that they could withstand threats of control. While helping the development of Koreas capital markets, this ownership dispersion policy led to a gradual misalignment between the interests of controlling shareholders and other minority shareholders. Korean controlling families developed much higher disparities between cash flow rights and controls rights than their counterparts in other Asian conglomerates. Furthermore, unlike in many common law countries, the dispersed weak ownership was not matched with correspondingly stronger shareholder protections. This created an anomalous situation that left conglomerates increasingly vulnerable to expropriation - 14 -

because weak controlling shareholder ruled in an environment of weak minority shareholder rights. Daewoos controlling shareholders, Woo Choong Kim and his family, followed this ownership structure and they controlled the group through a severely distorted ownership pattern. They did not hold a high cash-flow position of any of the Daewoo companies they controlled. As of 1998, for instance, Woo Choong Kim and his family members owned non-negligible stakes in only 4 companies. Among the 10 largest companies, they owned on average only 0.7 % of the total shares. In fact, one reason that Daewoo did not seek equity financing when the financial crisis struck was due to concerns that Kims weak ownership position would be further diluted. Daewoo-affiliated companies, of course, owned another 33.87% of each other and treasury shares accounted for 0.93%. Combined together, this created a 41.02% block of ownership for Kim to control the Daewoo companies. Daewoos low stock prices also reflected not only its lack of profitability, but also its complicated and unaccountable ownership structure. As the market feared, in the end, this interlocking ownership structure forced stronger companies such as Daewoo Corp. to subsidize struggling affiliates such as Daewoo Motor. It also allowed Kim to dominate all decision-making without any appropriate oversight. 3. Accounting fraud and loan fraud Daewoos accounting problems represent the most serious part of its breakdown in corporate governance. Large conglomerates throughout Asia utilized their vast networks of companies to shift losses and gains, particularly because combined financial statements were not required. In Korea, historically, the government tacitly held a generous attitude with regard to accounting opacity. Deceptive accounting became a standardized practice for many companies that relied upon debt financing from banks. State-controlled banks in turn obliged by basing their lending decisions on the size of revenues, sales volume and assets instead of the amount profits and cash flow. This emphasis on size in particular allowed conglomerates to obtain international financing. Companies would overstate their financial figures to obtain as much commercial loans as needed. Meanwhile, the banks themselves followed weak corporate governance, and lending decisions were complicated because they were in turn susceptible to political pressure.

- 15 -

When the financial crisis hit, Daewoo could no longer sustain its accounting and loan fraud. But instead of engaging in painful restructuring by reducing their business plans or downsizing their work force, Daewoo chose to overcome its financial difficulties through expansion. This bold choice could only be supported by even more daring and purposeful deceit. The overseas BFC accounts were employed to manipulate financial figures and conceal losses. Internal and external corporate governance failed to detect or prevent any of this fraud. According to the governments final report, Daewoo inflated its financials by a total of 22.9 trillion won. In 1997 and 1998, to conceal 21 trillion won in impaired capital, for example, Daewoo Corp. overstated its assets by 10.9 trillion won, deflated its debt by 38.3 trillion won and overstated its capital by 26.9 trillion won. The most serious part of the accounting and loan fraud was committed over this two-year period. At the same time, the conglomerate was hemorrhaging under operating debt of 11.8 trillion won in 1997 and 12.1 trillion won in 1998. Daewoo committed the accounting fraud in several ways. Most of the misinformation involved the use of affiliates and overseas accounts to reduce debts and manipulate export returns. The regulators ultimately discovered 15 trillion won in off-balance sheet liabilities, 4 trillion won in non-performing loans, 3 trillion won in false inventories and 1 trillion won in false research and development expenses. Financial accounting fraud involved asset swaps between sister companies at excessively discounted or inflated values. To provide funds to support a weaker company, for example, stronger affiliates would purchase the assets of the weaker company at above-market prices. These transactions would then be concealed because of the lack of consolidated accounting statements. In a similar fashion, Daewoo used international financial institutions in various schemes. Overseas financial institutions, for example, would technically acquire newly issued stocks of Daewoo affiliates with weak credit standing that Daewoo would then record as equity investments. These investments had guarantees or put options by Daewoo affiliates that in effect made them concealed loans that should have been treated as debt. Investigations later revealed that the BFC in London functioned as the center for the groups accounting fraud. First opened in 1982, Daewoo used close to a dozen of different accounts to avoid the reporting requirements in the foreign exchange laws. Daewoos foreign operations, for instance, would transfer funds to the BFC that they received in payment for goods or services or that they borrowed from foreign - 16 -

banks.

By

1996,

annual

borrowings

from the BFC accounts apparently totaled between $6~7 billion. Reportedly, the accounts held over $7.5 billion by the end of August 1999. When the financial crisis hit, account receivables and payments for exported goods that should have been credited to domestic accounts in Korea were diverted to the BFC accounts to settle interest payments demands and maturing debt of troubled overseas operations. In its desperation, Daewoo focused on repaying its foreign obligations over its domestic ones, particularly since it held more clout over Korean creditors. During this period, Daewoo exhausted most of the capital in the BFC accounts to meet these interest payments. In 1999, for instance, interest payments to foreign financial institutions amounted to $2.49 billion. Daewoo also used BFC related paper companies to obtain fraudulent commercial invoices, bills of lading, and packing lists to defraud domestic banks with discounting bills of exchange when it could no longer sustain its foreign obligations. Daewoo deceptively mixed an enormous amount of real bills of exchanges that were discounted with fraudulent ones to deceive bank loan managers. Daewoo contravened various laws through the operation of the BFC accounts. Korean law prohibits the hiding of certain property overseas without appropriate disclosure. None of the BFC accounts activities was appropriately disclosed. The operation of the BFC accounts similarly violated Korea strict foreign currency laws and regulations that applied at the time. The Ministry of Finance and Economy (MOFE) did not grant permission for the transfer of funds out of the country to cover the debts of the BFC accounts. Daewoo instead fabricated documents to make these payment transfers appear as if they were in return for purchasing goods from an overseas company. Ultimately, from 1996 to 1999, Daewoo used the BFC to conceal approximately 5 to 8 trillion won a year of off-balance sheet liabilities that should have been recorded in Daewoos books in Korea. Overall, Daewoos breakdown in corporate governance system allowed it to perpetrate this vast accounting fraud and loan fraud, undetected and undeterred.

- 17 -

4. Financial structure From the start, Korean conglomerates grew under heavy state-supported debt financing. They operated under debt to equity ratios that exceeded 450 percent for the top four conglomerates in Korea at the time of the crisis in December 1997. Historically, state-controlled commercial banks provided policy loans at special interest rates to conglomerates as part of the countrys economic development strategy. The government believed that if they maintained control over financing, they could control these conglomerates, monitor any malfeasance, and could overcome any lack in corporate governance in the process. They believed they knew what was best for these conglomerates and that they were better monitors than any board of directors, accountants, investors or stakeholders. As a conglomerate, Daewoos financial structure had several distinguishing features. First, Daewoo had a long history of over-relying on debt gearing. In 1988, Daewoo already was among the most heavily indebted conglomerates in Korea with over $11.2 billion in borrowings. Daewoo, for instance, operated under an exceptionally high degree of debt financing, even when compared to other conglomerates. While the other top three conglomerates decreased their debt to equity ratios to 355 percent and 266 percent by December 1998 and June 1999, respectively, Daewoos instead increased to 527 percent and 588 percent respectively. Unlike other conglomerates, the holding company of the group, the Daewoo Corp., was not the main profit center. Daewoo Corp. acted as a trading company for the exports of Korean products. In difficult times, Daewoo Corp. could not provide sufficient financial support to sustain weaker affiliates. Instead, Daewoo Corp. became the center where overseas subsidiaries were used to create finance schemes that supported the enormous accounting fraud and loan fraud. Under the pressure of the financial crisis, the Daewoo Group could not sustain its delicate financial balancing act. When the exchange rate collapsed from 700~800 won to the U.S. dollar to 2000 won and then stabilized at around 1400 won, the conglomerates total foreign debt alone jumped from 26.3 trillion won to over 49 trillion won. Daewoo had $5.1 billion in foreign currency loans and $1.9 billion in foreign currency loans to various convertible bond owners. The sudden spike in interest rates that was mandated by the International Monetary Fund to stem capital flight also paralyzed the company. Daewoos financing costs jumped from 3 trillion won - 18 -

to 6 trillion won over the span of several months. Even with operating profits remaining similar, Daewoos net profits collapsed. In 1998, Daewoo issued a staggering 19.7 trillion won in corporate bonds and commercial paper at interest rates that averaged 15 percent and reached as high as 25 percent to try to meet its financing needs. In July 1999, the end came for Daewoo when over 19.2 trillion won in commercial paper came due. In return for 1.3 trillion won in Woo Choong Kims equity holdings in Daewoo companies, on July 26, 1999, the financial regulators approved the rollover of 6 trillion won of short-term commercial paper for six months and 4 trillion won in additional funding. Daewoo thus received over 10 trillion won in support, in a final effort to rescue the group. These funds were woefully inadequate and, instead of being injected into new business activities, Daewoo allegedly used them to compensate unpaid wages. For over a year since the government began its close supervision of the group to curtail its crisis, Daewoo had already issued 19.7 trillion won in bonds and commercial paper. Then, on August 26, 1999, only a month later, the conglomerate folded when 12 of Daewoos primary companies proceeded into court receivership workout procedures. Daewoos corporate governance shared much common vulnerability with other Asian conglomerates. In particular, the weaknesses in its monitoring system, internal controls, ownership structure, accounting transparency and financial structure were fully exposed when the financial crisis hit. With all corporate governance systems in an inoperative state, it is not surprising that the accounting fraud and loan remained undetected until the end. The sheer scale of the accounting fraud serves as an indicator of how weak Daewoos internal and external corporate governance structures were at that time. Interestingly, after the conglomerate collapsed in 1999, most former Daewoo affiliates have regained their financial strength. Unshackled from the burdens of having to support weaker affiliates such as Daewoo Motor, these Daewoo affiliates have had little difficulties in restructuring themselves back to profitability. Many of these Daewoo companies have the same senior management with the major difference being their independence from the conglomerate. Effective corporate governance based upon checks and balances, transparency and accountability of each company proved to be of critical difference.

- 19 -

3. Vital statistics; Comparison

Following is the comparative study of the financial & the income position of the company along with the cash flow statement from the period Mar98 to Mar02. 3.1 Profit & Loss Statement

Profit & Loss - Daewoo Motors India Ltd.

Mar'02 12 Months Mar'01 12 Months Mar'00 12 Months Mar'99 12 Months Mar'98 12 Months INCOME: Sales Turnover Excise Duty NET SALES Other Income TOTAL INCOME 284.73 54.79 229.95 0.00 233.99 1,180.21 277.19 903.01 0.00 922.31 1,282.01 286.36 995.65 0.00 1,020.93 371.51 94.27 277.24 0.00 293.07 384.79 78.12 306.67 0.00 348.55

EXPENDITURE: Manufacturing Expenses Material Consumed Personal Expenses Selling Expenses Administrative Expenses Expenses Capitalised Provisions Made TOTAL EXPENDITURE Operating Profit EBITDA 6.81 182.40 42.59 18.05 29.18 0.00 0.00 279.03 -49.09 -45.04 15.11 585.16 55.92 83.15 28.68 0.00 0.00 768.02 135.00 154.30 16.31 628.71 60.40 47.43 87.52 0.00 0.00 840.37 155.28 180.56 11.86 170.88 49.80 38.91 47.67 -120.78 0.00 198.35 78.90 94.73 11.17 250.10 40.72 63.01 40.19 -83.48 0.00 321.72 -15.05 26.83

- 20 -

Depreciation Other Write-offs EBIT Interest EBT Taxes Profit and Loss for the Year Non Recurring Items Other Non Cash Adjustments Other Adjustments REPORTED PAT

91.73 7.24 -144.02 132.40 -276.42 0.00 -276.42 -54.88 6.11 -6.11 -331.30

199.98 14.64 -60.32 130.27 -190.60 0.00 -190.60 -15.37 9.55 -0.0 -196.49

209.24 7.92 -36.59 115.20 -151.79 0.00 -151.79 0.01 35.73 0.00 -116.05

18.17 22.31 54.25 21.55 32.70 0.00 32.70 -73.80 0.96 -0.9 -41.10

17.79 14.45 -5.41 3.81 -9.23 0.00 -9.23 -48.74 15.24 0.00 -42.73

3.2 Cash Flow Statment

Cash Flow Statement

Particulars Profit Before Tax Net Cash Flows from Operating Activity Net Cash Used in Investing Activity Net Cash Used in Financing Activity Net Inc/Dec in Cash and Cash Equivalent Cash and Cash Equivalent - Beginning of the Year Cash and Equivalent - End of the Year Mar'02 -325.19 146.75 5.99 -154.92 -2.18 -148.80 -150.98 Mar'01 -196.42 -73.44 22.18 -112.82 -164.07 15.27 -148.80 Mar'00 -116.05 262.96 -14.83 -180.61 67.52 -52.25 15.27

- 21 -

Balance Sheet - Daewoo Motors India Ltd.

Particulars Liabilities Share Capital Reserves & Surplus Net Worth Mar'02 12 Months 511.18 -434.11 77.06 Mar'01 12 Months 511.18 -108.93 402.25 2,857.48 601.27 3,861.00 Mar'00 12 Months 511.18 87.49 598.67 2,771.34 604.31 3,974.31 Mar'99 12 Months 511.18 203.54 714.72 2,826.33 865.23 4,406.27 Mar'98 12 Months 511.18 243.67 754.85 2,105.85 938.15 3,798.85 Assets Gross Block 4,153.06 (-) Acc. Depreciation Capital Work in Progress. Investments. Inventories Sundry Debtors Cash And Bank Loans And Advances Total Current Assets Current Liabilities Provisions Total Current Liabilities NET CURRENT ASSETS Misc. Expenses 558.45 4,067.99 478.46 3,589.52 5.67 19.94 195.75 172.09 21.57 32.82 422.23 190.92 2.55 193.46 228.76 17.10 3,861.00 4,051.32 285.99 3,765.33 5.29 23.14 268.36 78.22 97.62 63.96 508.16 356.95 2.07 359.02 149.14 31.41 3,974.31 3,943.34 81.54 3,861.80 16.46 8.42 394.40 77.91 48.93 190.65 711.90 247.74 1.37 249.12 462.78 56.82 4,406.27 318.66 60.05 258.62 2,936.50 6.98 408.45 121.25 57.75 178.60 766.05 210.85 1.10 211.95 554.10 42.66 3,798.85

Secured Loans 3,106.87 Unsecured Loans 502.55 TOTAL 3,686.48 LIABILITIES

Net Block 3,594.61 0.00 21.35 120.50 18.45 2.45 29.96 171.37 107.65 3.07 110.71 60.65 9.86

TOTAL ASSETS 3,686.48 (A+B+C+D+E)

- 22 -

It can be analysed from the above provided data that the company had been running into constant losses without any scope of recovery.

It became weaker and weaker financially, even the surplus turned into deficits. The company didnt even have enough funds to payback for its debts and that to not just in the Indian subcontinent but in most of the countries it operated.

The Daewoo group began to collapse under its enormous debts; some parts were broken up, some parts sold. On November 2000, the dream was finally shattered when the group's flagship, Daewoo Motor, was forced into bankruptcy.

- 23 -

4. Research Analysis
Management can accomplish the organizational goals by performing four essential managerial functions: planning, organizing, leading, and controlling. Managers are responsible for performing these four functions. How well managers perform these functions determines how efficient and effective their organizations are. Well-performed management leads the organization to the prosperity and growth. On the other hand, Mismanagement leads the organization to the ill-profitability and bankruptcy. For Daewoo Motors, the mismanagement was the cause of its bankruptcy. Now we will analyze the mismanagement of Daewoo Motors which led to its 1999-collapse in terms of four essential functions: 1) Daewoos Planning : Unfit Strategy Reckless Global Expansion Strategy Planning is setting goals and deciding on courses of action, developing rules and procedures, developing plans, and forecasting. To go through the severe competition, the organization must choose the constructive and suitable plans. The organization cannot survive with the pursuit of the goals and actions putting the organization in trouble. For Daewoo Motors, it had chosen the dangerous strategy global expansion strategy in 1990s. Its original objectives had been to expand its profit bases and realize its economies of scale. It had planned to enter into one of the ten global car makers in 2000. Daewoo had invested in even 5 billion $ in 134 items overseas up to its bankruptcy from 1994. Large investment in short time might not lead to early realization of profits. Unavoidable continuous investments might aggravate foreign financial burden. Large foreign debts might entrap the corporate into bankruptcy. Any serious insufficient forecasting could lead to a dragons collapse. At the first time of Daewoo Group, the management (its controlling shareholder and chairman: Kim Woo Choong) started its business in 1967. Founded in 1967 as a small textile-trading company by Kim Woo Choong, the management had expanded its business areas continuously and enjoyed its group growth into various businesses, including car manufacturing (Daewoo Motors) in 1978. In 1990s, it had grown into the nations No. 2 industrial giant group under the government economic protection and financial aid, and almost unlimited bank credit. With 33 domestic - 24 -

affiliates, 372 overseas subsidiaries and more than 320,000 employees, Korean government had encouraged Daewoo group to carry out mergers and make acquisitions many times during the past economic recessions and crises to handle trouble companies facing bankruptcy to the public. During its growth, Daewoo was once considered too big to fail. The management had been overconfident in their past successes. Finally, they had decided to expand their territories into overseas. It had continued expanding its territories towards East European countries (Poland, Romania, Ukraine, etc) and developing countries(India, China, etc) through joint investments with foreign partners. Many of the host countries had been the investment avoiding countries to the preceding global car makers. Its business style in 1990s was very aggressive and reckless. But, overseas businesses have been much different from domestic businesses. Daewoo had needed more foreign debts. Compared with its heavy foreign debts (1.5 billion $ in 1999, for group total, 5.0 billion $), overseas investment results in low profits because of host countries low demand and economic growth. Heavy foreign debts finally resulted in fatal financial blows at the time of foreign financial crisis. World car markets had been becoming oversupplied in 1990s. With the severe competition, global car industries had focused on technology development and new facilities investment to take precedence over markets. The severe competitions had made the group with weak financial bases worse. East European and developing nations had undergone the lower economic growth. Their car demands had been low. Daewoos investment had suffered the terrible result of incorrect forecasting of the market conditions. Daewoos capacity had been far beyond the real demands in host countries. Despite using discounts, it deepened the financial burden seriously. Korean government protections had not cover the foreign territories sufficiently in the case of Asian financial crisis. Daewoo had developed too great in size. Its domestic successes had been due to the government policy and domestic financial support. However, Korean government had not protected Daewoo in the face of the national insecurity because of financial crisis. Korean government could not help choosing the nation rather than Daewoo in the face of total crisis of national collapse. The management had chosen the risky strategy regardless of many barriers to success. And finally the group had gone to bankruptcy.

- 25 -

2) Daewoos Organizing: One Man (Chairman) Oriented Organization- Its structure, Culture and Humans for One Command in Chief Organizing is identifying jobs to be done, hiring people to do them, establishing departments, delegating or pushing authority down to subordinates, establishing a chain of command, and coordinating the work of subordinates. To perform the goals successfully, the organization must establish the effective organizational structure and its efficient authority division and coordination. The organization cannot survive without the organizational structure, culture and humans noticing the external and internal environmental change and having an ability to perform the management well. The organization of Daewoo Motors had not played any important role in preventing the corporate from going into bankruptcy. Its financial and planning departments had not worked well. The organization had only worked to dash forward as the implementation gadget for the very few top management, actually one-man (chairman, Kim Woo Choong) system. Its business style was very aggressive and unlimited. Daewoo had had various necessary structure units. Many competent youngsters had got into Daewoo as one the most promising corporations in Korea. But despite its good structure and competent employees, the management of its structure and employees had not been so competent at the time of financial crisis. Although the organizational hardware had been well established, the organizational management whose power focused only on few top management had not functioned well at the time of the need for the change of management and the advent of hostile and threatening environment. Other level management had only followed decisions of little top management. Daewoos financial weakness had been said for a long time. From 1993, its debt ratio had run around between 580 % and 740 %. Every time the past crises had come, the chairman had solved them with his abilities to persuade policy makers and financial institutions. The organization had only looked at him with respect and belief. Its organization also followed the chairman at the final moment of its collapse. But, the organization should have taken any necessary steps before the advent of the final crisis if it had been a living organism and wanted to preserve its brilliant reputation and enjoy a longer life as a successful business. From 1997 Asian financial crisis, its organization should have changed its practices as soon as possible. Even at that time, still there had been a little room for Daewoo to survive if it had chosen drastic changes in management, especially financial management. But it had failed. The previous sticky management practices and one-man system - 26 -

could not change easily. If the organization had wanted to be alive as an organism, it would have had to make any efforts to change the wrong directions with its structural function, authority and responsibility. It should have actualized its organizational development (innovation) even for the protection of the organization (structure, humans). Finally, foreign financial crisis did not forgive the Korean dragon with fatal financial weakness. Its organization did not survive under the greatly changed economic environment. Although Korean government urged the corporate to restructure radically with cutting unnecessary companies and workforces at the time of crisis, the organization had failed to change itself to survive. In this case, organizational principle and its independent functions did not function at all. The organization has not been an organism. The one-man dominant kingdom had collapsed because of its organizational and cultural inability of protecting itself from arbitrary control of few top management. The organization had not prevented the choice of the risky strategy and handled financial weakness. It had failed in organizational development. And finally the group had gone to bankruptcy. 3) Daewoos Leading: Monarchist Leadership One Man Autocratic Leadership for Both Organization and Personnel Leading means influencing other people to get the job done, maintaining morale, molding company culture, and managing conflicts and communication. In consideration of leaders real influence and vast authority, the organization must have a great leader with right leadership and wisdom, insight. The organization cannot survive with the leader wielding his power in the wrong direction, placing the organization into trouble. If the leader wields his power wrongfully without any interruption, he is kind of the autocratic king in the organization. The leader of Daewoo Motors, Kim Woo Choong, had been the head of the second largest group in Korea until its bankruptcy in 1999. Despite the organizational authority division and institutional supervision, he wielded his power autocratically. The board of directors and other control systems had been only the gadget of approval of his decision. Despite his past successes in audacious expansions of businesses, he had fell down because of 1997 financial crisis. His leadership did not work in the face of foreign financial crisis. His unlimited expansion without - 27 -

financial background had failed in the face of foreign financial crisis and different economic situations. The different environment did not allow the autocratic leadership to expand Daewoo towards foreign territories recklessly without its inner fundamental resources. His power-wielding leadership had been an example of the management of Korean Group, socalled Chaebol. Chaebols traditional behavior was like these : Reckless expansion and spreading product scope; Multiple affiliation (obscuring mounting debts and other obligations); Cross-subsidization of unprofitable subsidiaries by parent companies; Weak corporate governance (limited oversight by boards of directors, lack of outsiders, large size, no guidance on duties); Opaque auditing and Institutional investors influence corporate management accounting unable practices; to

Kim had been driving the group into the second largest chaebol through 30 years or so years businesses. He had succeeded in normalizing the takeover companies many times with his prominent management and connections. He had overcome two times of financial crises in 1980 and 1985, through the help of the politically influential figures. He had made important decisions on his own with his professional business abilities. In the course of its continuous growth and expansion, Daewoo and its group had continuously faced the more need of financial resources. They had to overcome the problems. The above means were the Chaebols solutions. The leadership never expected its collapse. That was the problem. The leadership had to judge the external and internal environment and make plans to choose the best strategy and make predictions of the future environment. With so many competent staffs and watchful warnings, he failed to change his way into stable direction. Because of his failed leadership, a lot of employees had suffered the pains of unemployment. Leadership is personal right only for him? He had been lacking the procedural justice and integrity to success. With the heart of fraud, that will explode some time. Business always have

- 28 -

some risks, but Fraud will judge risks wrongly, reduce risks, and inflate its benefits. Leadership accordingly has to have integrity and ethics. At the time of 1997 financial crisis, Korean government had urged Kim to restructure Daewoo and its group and give the creditors trust on efforts and change. But, Kim did not show any change.He continued his old style. In January 1998, during the height of the financial crisis, Daewoo even acquired Ssangyong Motor and its more than 1.7 trillion won in debt. And it also established marketing corporations in USA, Japan, and other countries. That was very surprising. Even in the urgent crisis, he did not judge the terrible situations. We guess some leader does not change his style and try to change even in the face of immediate crisis. That was the kind of danger which the monarchistic management always has had. Nobody can challenge the authority of the autocratic chairman. Although there were some ways to save Daewoo and the group, they did not do anything. Is that the freedom of controlling shareholder? Of course that is delegated from the other shareholders. But, passive control did not prevent the failure of wielding leadership. That was the example of the problem of agency. How could the leader think that the large organization will be managed only by his autocratic leadership and his abilities? That was the arrogance and ignorance of leadership. He had also directed false accountings and illegal deposits in foreign banks. Nobody in the organization had not stopped his crimes. Nobody in the organization did not dare to block his autocratic leadership, finally even with fraud and crimes. That is the tragedy of Daewoo. Leadership should have shown the wisdom of overcoming the crisis with interpreting new environment and preparing new strategies and implementing with honesty and integrity. 4) Daewoos Controlling: Incompetent Control System Financial and Ethical Mismanagement Controlling is setting standards (such as financial standards), comparing actual performance with these standards, and then taking corrective action as required. Control is the task of ensuring that activities are providing the desired results. All control systems collect, store, and transmit information on profits, sales, or financial state. The goal of the control system is to have no unpleasant surprise in the future. If there are any faults in planning, organizing, or leading, the control system must take corrective actions. If the control system does not work and notice any dangerous symptoms and actions, the main functions of planning, organizing and leading may go wrong, even lead to the collapse of total system.

- 29 -

In the middle of 1997 foreign financial crisis, several prominent chaebols went bankrupt. Additionally, some of Koreas largest banks were threatened by bankruptcies among mid-sized chaebol (although in the event they were largely saved by government bailouts and nationalization). Business scandals dominated the media. The 1999 collapse of the then-second largest chaebol, Daewoo, with debts of 70 billion $, or almost 14 percent of Koreas gross domestic product, placed further burdens on banks and crippled financial markets. Daewoos debt problems were compounded by its accounting fraud. The rapid expansion of its business and the Southeast Asian financial crisis of 1997-1998 left the corporate financially vulnerable. By the late 1990s, Daewoo had approximately 14.5$ billion domestic and 1.5$ billion foreign currency debt. As Daewoos debts were huge, its creditors became concerned and started demanding repayment. The collapse finally came to Daewoos forehead. Despite several regulating frameworks, Daewoo had done the fraudulent businesses and finally ended up its businesses with its shareholders in despair. The ineffectiveness of frameworks in Daewoo case was particularly evident in the four areas of shareholders rights, disclosure and transparency, the execution of its responsibilities by the board of directors, and the prohibition of window dressing on financial reports. These failures were linked in various ways, perhaps most importantly through inadequate disclosure and transparency. Daewoo Group had one kind of its own funding rule. It thought that it could manage any project only with one one-hundred and fiftieth (1/150) of the total money needed. It had easily collected investment funds like those ways from ordinary and export banks. Investment funds had accumulated through stock-related bonds like CB (convertible bond), BW (bond with warrants), DR (depository receipt), EB (exchangeable bond), and so on. It had much management with experiences of financial institutions and experts good at international finance. It had enjoyed the maximum business effects with the minimum money. Daewoo group had mainly used five ways to do many irregularities; First, inflating the amount of foreign constructions ordered. It pretended that it had performed $1 billion of foreign constructions in 1997, including Indian automobile construction and others in 10 countries.

- 30 -

Second, forging factories with no more products as normally working factories. Daewoo Motors, leading company of the group, had invested $0.1 billion in Ukrainian motor factory but the factory had stopped. Despite that, it pretended that the factory had manufactured motors afterwards in Ukraine by bringing into Ukraine and reassembling parts of motors which had been already manufactured in Korea. Third, taking export revenue overseas without bringing into Korea. It had taken $1.5 billion of the money from motor sales into its London affiliate, without bringing into Korea. Fourth, sending foreign currencies overseas by false documents. It had sent $2.6 billion overseas making false documents pretending that it had imported goods from self-made bogus companies. These had been performed by direct orders of top management. Fifth, hiding liabilities and inflating assets. Core companies of the group had done window dressing of $34.2 billion in accounting reports. Daewoo Group had used the window dressing to attract investment funds. Window dressing means the deceptive practice of using accounting tricks to make a companys balance sheet and income statement appear better than they really are. Korean chaebols had been characterized by the concentration in decision-making power by the controlling shareholder (normally, chairman). As Daewoo group had grown in size and scope, the power of the founder, Kim Woo Choong had continued to become strong and expanded its scope not only to domestic but also to foreign markets. He had exercised an unchallenged and unaccountable control over a network of companies whose total asset was thirty or forty times the capital he had actually invested. His focus had not been on stakeholders and other investors benefits but on the group growth and his continuous power. Daewoos control system had not worked in the past and present crisis. The problem of Daewoos survival in 1997 crisis had been just in front of one man- chairman. The chairman had managed to survive with his own style. But, finally in the face of the chairmans failure, Daewoo collapsed under the abandonment of Korean government and financial institutions. Control system had not existed before the chairman. He controlled all control systems. That management led the survival of Daewoo to only the hands of the chairman. That had not been the control of the management. Corporate management is different from monarchist rule. There had been no sensing function for environment change, no stopping for - 31 -

making crimes, no blocking for excessive power of chairman, no recommendation for changing strategy, no protecting for other shareholders benefits, no protecting for other managers own judgment. Internal and external audit systems had not worked also. Auditors had only thought about continuous auditing fees. The members of the board of directors had only enjoyed their statuses and salaries. The government had not dared to damage the promising chairman for the national economy development. Financial institutions had to follow the government guide. The then-promising giant in Korean economy would survive and become a world giant if the control system had worked before the 1997 crisis, even in the early crisis stage. The inertia of the old practices continued. There had been no brakes to stop the road to the collapse of Daewoo.

- 32 -

5. Research Methodology
Our research methodology requires gathering relevant data from the varying documents and compiling it in order to analyze the material and arrive at a more complete understanding about the crisis in Daewoo motors.

Our research purpose was to study the details regarding the collapse of Daewoo industries with an objective of shedding a light on the issues resulted in collapse of the company and also to analyze the mismanagement in Daewoo industries.

We followed the descriptive research method for analysis as we have emphasized qualitative and quantitative information in context to collapse of Daewoo industries. We also used description as a tool of analysis in our research. This case study research involves an in-depth study of Daewoo industries.

- 33 -

6. Present status of Daewoo

There were about 20 divisions in the Daewoo Group, which, before the crisis, but now the group was reorganized into three separate parts: Daewoo Corporation, Daewoo Engineering & Construction and Daewoo International Corporation. They are active in many markets, most significantly in steel processing, ship building and financial services. The corporate entity known as "Daewoo Corporation" is now known as "Daewoo Electronics" and is focused solely on manufacturing electronics. Daewoo Electronics survives to this day, despite bankruptcy, with a new brand logo "DE", but many of the other subsidiaries and divisions have become independent or simply perished under the "reorganization" by the Korean government under Kim Dae Jung. Daewoo was forced to sell off its automotive arm, Daewoo Motor, to General Motors (GM) in 2001. Since then, GM has rebadged Daewoo-manufactured cars as models of many GM brands, including Chevrolet, Buick, Pontiac, and Holden. In 2004, General Motors pulled

the Daewoo brand of vehicles out of Australia and New Zealand, citing irreparable brand damage. Later that same year, GM announced that Daewoo Motors in Europe would change its name to Chevrolet on 1 January 2005. In 2005, it was announced that Daewoo cars would have a Holden badge in Australia and New Zealand. In South Africa, Thailand, and the Middle East, Daewoo models were already branded Chevrolet. In South Korea, Daewoo was renamed GM Korea. After a protracted bidding and re-bidding exercise, and much speculation subsequently, GM India (GMI) has finally emerged as the buyer of the erstwhile Daewoo Motor India's car assembly assets. The acquisition of Daewoo's Indian car assembly assets will be the best fit for GM in more ways. There are considerable synergies that GMI will get from this, which was not available at the time that Korean car manufacturer's global operations were being offered to GM in 2001. The first, obvious benefit that GM will get from the acquisition of the Daewoo car assembly at Surajpur, near Delhi, is the ability to hasten its plans for launching a small (sub-compact) car for the Indian market. As part of its India plans, GM was intending to launch the Chevrolet Spark - 34 -

(erstwhile Daewoo Matiz). The Spark's platform and model specifications come from the Daewoo Matiz, after GM acquired Daewoo Motor, Korea. As part of the company reorganization, the content and the structure of its brand portfolio (its brand architecture) was reorganized. In 2011, GM discontinued the Daewoo brand name in South Korea and replaced it with the Chevrolet brand. The Daewoo commercial vehicle manufacturer was taken over by Tata Motors the world's 5th largest medium and heavy commercial vehicle manufacturer. After the birth of Tata Daewoo Commercial Vehicle (hereafter Tata Daewoo), the new company was back on track to roll to victory, calming the jitters of its Korean workers. Over the four years from 2004, exports jumped about five times to 4,280 units from 874 units, revenues more than doubled to 673.1 billion won from 292.3 billion won and operating profit grew more than eight times to 59.2 billion won from 7 billion won. Tata Daewoo exports trucks to more than 40 countries including the UAE, Algeria and South Africa, as well as domestic sales in India. In 2006, it was honored with a government award to celebrate $100 million in exports of heavy-duty trucks. In 2008, it achieved a $200 million milestone in exports. Employees grew to 1,281 from the 806 registered at the start of the new company. Tata Daewoo is the only one showing a stable and steady growth among the three business arms that Daewoo Motor Co. sold. GM Daewoo is facing a liquidity crisis after it posted billions of dollars in losses, and Daewoo Bus is reportedly in management trouble.

- 35 -

7. Recommendations
Daewoo, as a very promising and enterprising corporation, collapsed in 1999 in the face of foreign financial crisis. That was great damage to Korean industry in terms of its great growth potential. Not to repeat the same sufferings, we can propose some recommendations for Daewoo, reflecting its previous mismanagement. The recommendations can be inferred from the mismanagement analysis. 1. Setting the Practical and Feasible Strategy The results of important strategy determine the success or failure of the corporation. So the important strategy must be set, based on realistic and accurate forecasting for demands and economies. If possible, the risky strategy tries to be objectively assessed to minimize the mistakes. In the case of preparing for the global strategy, the corporation must have sufficient thoroughness and necessary internal financial resources. And the corporation must note the technology and internal substantiality rather than external vacant growth. 2. Activating the Organizational Authority and Personnel It is irrational to expect only one almighty leader for vast corporation with complex environment. Only one almighty leader cannot manage such a large organization. The management must utilize its organization sufficiently to achieve its goals. Top management must confirm the organizational authority and encourage performing its authority and make sure its personnel have their own right to do their own work with their own authority and responsibility. And top management must train its personnel in that they should obey rational ness and legitimacy following the formal rules rather than personal authority. Top management must try to encourage forming the living organization and culture 3. Forming the rational and responsive leadership There is no more need for one-man dominant leadership for the complex environment. The leader must be able to gather and integrate ideas from organizational structure. The leader must respect others opinion in the organization. There must be a reasonable distribution of decisionmaking power between the board of directors and the chairman. To balance the power of - 36 -

chairman, members of board of directors must be diversified and the competent and fair outside directors must be appointed. Modern leadership must realize that the management need sincerity and ethics for management of large organization. 4. Establishing the Effective and Corrective Control System Control system must have the authority to check the wrong and illegal practice and take corrective actions to the organization and personnel including top management. So top management must confirm the authority of internal audit. Supervisory agent must emphasize the legal responsibility of external audit. Top management must pay attention to the exact financial situation for the profit and debt and be able to judge its ability to repay the debt. To encourage ethical behavior and regain shareholders trust, the management must establish the ethical code and emphasize the ethical management, establish the disclosure and transparency of information important for shareholders interest. The management must inform the organization and its personnel that corporations have social responsibilities.

- 37 -

8. Conclusions
All of the above factors contributed to Daewoos failures. The onset of the financial crisis then fully exposed Daewoos vulnerabilities as a conglomerate. Ineffective corporate governance led to poor business decisions and eventually malfeasance during the crisis. The lack of proper checks and balances against the controlling shareholder in particular led to the unprecedented accounting and loan fraud. Therefore, the controlling shareholder, Woo Choong Kim, ultimately deserves the most responsibility for Daewoos failure. Korea has henceforth undergone an unprecedented degree of corporate governance reforms. It has moved to strengthen oversight through checks and balances at all level of the corporate structure. General public awareness of the significance of proper corporate governance has substantially improved. Nevertheless, concerns persist that many of Koreas leading companies still remain vulnerable to the excessive concentration of power of controlling shareholders and their families. Korea must continue to persevere to enhance transparency and accountability if it wants to prevent another debacle such as Daewoo and in the hope that it can provide valuable policy lessons for other emerging markets in Asia.

- 38 -