The Kia standard

WHEN its two months of bankruptcy protection expires on September 29th, Kia, South Korea's third-largest car maker, is unlikely to emerge much healthier from the experience, despite pressure from its creditor banks to restructure. The banks' inability to force changes on firms that have fallen victim to South Korea's economic downturn has now provoked them to add disciplinary procedures to government-backed bailouts.

On September 1st, the country's 35 banks declared that from now on any cash-strapped company hoping to be rescued will have to earn their help. In exchange for up to two months of debt relief, the chief executive must promise to quit, or the owner to give up the firm, if the business is not turned around by a set deadline. Companies must also pledge drastic economies, such as cutting their workforces and selling property. If bosses will not accept these terms their firms will be allowed to go bust.

The move by the banks, which is believed to be backed by Kang Kyong Shik, the finance minister, is the direct result of Kia's inaction. When the company nearly went bust in July, its bankers froze its loan repayments in order to give the car maker a chance to restructure. Yet Kim Sun Hong, Kia's chairman, has achieved little. Now Mr Kim is refusing to promise anything because he appears to believe that the banks' demands are part of a scheme by the government, and the finance minister in particular. He suspects politicians want Kia to be taken over by Samsung, one of the country's conglomerates, or chaebol, the four largest of which—Samsung, Hyundai, Daewoo and LG—generate total sales equivalent to three-quarters of South Korea's GDP.

Samsung decided to enter the car business only in 1994, opening a car plant at Pusan in the south of the country, which happens to be Mr Kang's constituency. It is now in the midst of a $5 billion expansion there. Although Mr Kang denies he is trying to steer Kia into Samsung's arms, he nevertheless agrees that South Korea's car industry badly needs “restructuring”. Many analysts think that by 2000 South Korea can afford to have only two or three car makers at best, compared with today's five. Mr Kang's remarks provide a hint that the government might be resigned to such a consolidation.

Kia is the first victim of South Korean car makers' zealous expansion in the face of a global glut in car production and a slowing domestic market. Things will get worse over the next three years, as Samsung gradually adds the capacity to make 500,000 cars a year. By 2001, South Korea will have the capacity to make more than 6m cars, but not much more than half of it is likely to be used, predicts DRI, an American research firm (see ).

This looming overcapacity has already forced car makers to slash prices in South Korea. Firms are suffering because they no longer enjoy cheap, hard-working labour. Factories are heavily overmanned: a South Korean car-worker assembled, on average, 26 cars last year, while somebody working at Nissan's British plant made nearly three times as many. No wonder South Korean car makers' net profit margins average below 2%. By taking over Kia, Samsung would be able to become a large car producer much faster. The prospect makes its rivals, Hyundai and Daewoo, shudder; on the other hand, eliminating a sizeable competitor would make life easier for all of South Korea's car makers.

Kia, however, would rather recover on its own. It has a plan to raise 4 trillion won ($4.4 billion) before next year by cutting subsidiaries, reducing its workforce (by a rather modest 15%) and selling property, including its headquarters in Seoul. Analysts are unimpressed; little has been done to put the plan into action and Kia is unlikely to survive without another big bailout by the banks. The company says that it needs 521 billion won in additional “emergency” loans. The banks, however, have agreed to provide just 188 billion won—and then only on condition that Mr Kim agrees to go if he fails to turn Kia around.

At the end of June, the Kia group owed a total of 9.5 trillion won. The banks, which are sick and tired of seeing non-performing loans eat into their profits, are loth to lend more. Perhaps the banks also hope that Samsung will take over Kia and relieve them of one of their least-loved problems. The big snag is that such a takeover will further enhance the already overwhelming power of the chaebols.