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Introduction
The case under consideration investigates the problems encountered by Daewoo Motors, a South Korean Company heading the Daewoo Group. The company dramatically expanded its risky market in several companies by taking enormous debts. By taking the course on globalization and expansion, the company provided its production at low prices, which further led to huge losses. In addition, the case also discusses Daewoo’s financial management failure, including underpinnings and reasons. In order to analyze the causes of the company’s bankruptcy, it is necessary to examine the gaps in their financial management strategies.
The Korean System of Applied Payments and Its Influence on Daewoo and the Company’s Other Subsidiaries
Founded in 1967, Daewoo Motors started its rapid expansion by providing their unique model of corporate governance that prevailed in all industries in Korea. A family business model, or chaebol, was a peculiar management style whose major purpose was to control shareholder domination. Excessive concentration of power among the shareholder contributed to corporate governance problems (Kim, 2008, p. 19).
As a result, the main principles of corporate governance were distorted by transforming a state-oriented model of financial management into a shareholder-oriented corporate governance model. Therefore, the application of such concepts of corporate governance was inappropriate for the economic level of economic development in the 1970s. In this regard, Daewoo Group’s business proliferation based on the Korean economic models and concepts also contributed to the company’s failure because its policy was primarily based on acquisitions and mergers (Rowley and Warner, 2005, p. 223). Their expansion was based on debt programs allowing them to quickly penetrate to other countries and to capture other businesses instead of establishing their own.
The Shortcomings of Daewoo’s Financial Management and Its Negative Impact on Restructuring and Asset Sales
There is an assumption that Daewoo’s fall was aggravated by the Southeast Asian Financial Crisis in 1997-1998 because the company’s creditor demanded the company to return its debts. However, the primary cause of Daewoo’s failure consisted of ill-management and corrupt corporate governance initiated by Kim Woo Choong (Chow, 2004, p. 342). The situation is aggravated by the fact that Daewoo Corporation was considered as a coordinating center that controlled other operations and, therefore, did not have an opportunity to act as a financial supporter to its subsidiaries in numerous counties (Kim, 2008, p. 12). Instead, it was the center that controlled offshore fraud operations providing no support to weaker members of Daewoo Group.
Daewoo’s Bankruptcy and It’s Level of Debt. The Impact of Financial Management Approach on the Company’s Failure
Reckless expansion and inconsistent policy of corporate governance led Daewoo Group to official bankruptcy in 2000. The company debt reached almost $ 20 billion in December 1999 (IBC Center for Management Research, 2002). While evaluating the reasons for the Company’s failure, it should be stressed that ill-management, chaebol model of corporate governance, and corrupt activities of the company’s chairman greatly contributed to Daewoo Group bankruptcy. In addition, the company’s stake in debt policy also fosters the downfall of the conglomeration (Haggard, 2000, p. 154).
Its strategy of reckless investment at the international scale and inconsistent usage of borrowed money was flagrant gambling. Moreover, Kim’s shadow economy (about 60 % of all financial operations) has also made its final contribution to a failure (Haggard, 2000, p. 154). Besides, the management policies were not oriented on the construction of a strong and solid organizational structure, but on the international expansion and brand enforcement (Kim, 2008, p. 32).
Reference List
Chow, I. (2004). Business Strategy: an Asia-Pacific focus. US: Prentice-Hall.
Haggard, S. (2000). The Political Economy of the Asian Financial Crisis. US: Peterson Institute.
IBC Center for Management Research (2002). The Fall of Daewoo Motors. Web.
Kim, J. (2008). A Forensic Study of Daewoo’s Corporate Governance: Does Responsibility for its Meltdown Lie Solely with the Chaebol and Korea? Northwestern Journal of International Law and Business. 28 (2).
Rowley, C., and Warner, M. (2005). Globalization and competitiveness: big business in Asia. NJ: Routledge.
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