By Nam Sang-hyun SEOUL, - A bold decision by South Korea's Daewoo Group to sell off the profitable shipbuilding unit, which highlighted the group's sweeping restructuring plan announced Monday, means that the third largest conglomerate will concentrate on building up its automobile business.
The move to sell off the shipyard, central to the operations in Daewoo Heavy Industry (KSE: 00200), also illustrates the extent to which Daewoo was pressured to improve its capital structure by the government and creditors.
Daewoo Heavy Industry has remained a cash cow for the group with a net profit of 160 billion won (US$132.34 million) from a turnover of 6.2 trillion won last year.
A successful implementation of its restructuring plan will allow Daewoo to revamp its direction as an eight-affiliate group specializing in auto operations.
Pressured by the government and creditors to clean up its balance sheet, the group submitted a plan March 31 to main creditor Korea First Bank calling for the repayment of 29 trillion won in liabilities. Creditors have pointed a finger to the group's debt-to-equity ratio of 354 percent as of April 1.
Skeptical of the plan's viability, the government and creditors pressed the group to come up with additional measures, including disposal of core operations. They also tightened pressure on Daewoo with proposals of conversion of loans to stakes and application of corporate workout programs.
The group's bid to form a $7.5 billion strategic alliance with General Motors fell through because of a change in the U.S. carmaker's strategy.
A series of outside pressure caused the group to take more of a hands-on approach to trim its liabilities. On Sunday, Daewoo Group Chairman Kim Woo-choong decided to raise an additional 9 trillion won from asset sales of the group's profitable units, including that of shipbuilding.
Kim, concurrently chairman of the Federation of Korean Industries (FKI), may have thought that a lukewarm approach to corporate restructuring would have a negative impact on the country's credit rating.
A rumored plan by Daewoo's creditors to hold a meeting Thursday on punitive action for the group was reportedly seen to urge Daewoo into finalizing its restructuring plan.
Industry sources say the group's departure from shipbuilding was based on forecasts that the sector will likely see a transfer of the world's production hub from South Korea to China by 2010. The shift to China stems from South Korea's backward industry, which has engaged in labor-intensive production rather than that of high-end and value-added, they added.
In a stark contrast, Daewoo's presence in auto production worldwide, coupled with its edge in the subcompact sector, has reinforced its confidence that its auto operations should lead the group for the future. Daewoo Motors runs 12 overseas auto plants in 11 countries and has surpassed leading world automakers in Eastern Europe and developing countries.
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