TOKYO - A highly public mud-slinging match among Korea's carmakers has hurt the reputations, and perhaps the financial prospects, of the two main participants.
On one side is Samsung Motors, which plans to build its first car next year using technology licensed from Japan's Nissan Motor Co. On the other side is Kia Motors Ltd. - backed by the rest of the Korean industry.
The controversy comes at a bad time. Sales in Korea are slowing, exacerbating the core issue in the dispute: overcapacity.
In early June, in a report to the government, Samsung warned that the Korean industry's massive overcapacity problem could only be solved through mergers and acquisitions. The report urged the government to change laws that stand in the way of takeovers.
Samsung had tried to take over Kia two years ago, but public and government pressure forced it to back off.
NOT A NEW TOPIC
Warnings of overcapacity have been raised before. In March, the Hyundai Economic Research Institute predicted that excess capacity plus slowing sales growth at home and abroad would lead Korean carmakers to merge into two or three giant enterprises within the next five years.
Still, the report was the first time a Korean carmaker had admitted publicly that the industry has too much capacity - and it came from a company which has not yet revved up its plants. Besides, the Samsung report went beyond overcapacity generalities.
The report listed what Samsung sees as the weaknesses of each Korean carmaker. For Kia, it alleged management problems, weak finances and the lack of a diversified group to see it through downturns. Kia is the only Korean carmaker not a member of a chaebol, the huge industrial groupings that can funnel funds from, say, chemicals to autos to electronics as necessary.
Kia responded by filing a libel complaint with the public prosecutor's office. Four hundred Kia office workers rallied outside Samsung's Seoul headquarters, demanding an apology and Samsung's withdrawal from the auto business.
Samsung has refused.
'The report ... was leaked, and does not represent the official position of Samsung Motors,' said spokesman Kim Jin-Ho.
'At this point, it's not clear that we've done anything wrong. But if, after the (prosecutor's) investigation, Samsung is found to be at fault of intentionally libeling Kia, we'll issue a public apology. Right now, we've suffered just as much damage as anyone else.'
Kia isn't buying that. Kia spokesman Jeun Sang-Jin said Kia is 'still collecting evidence' of libel, and has met twice with the public prosecutor.
Intentionally or not, Samsung's questioning of Kia's finances and management has made those finances even more shaky.
TROUBLE WITH BANKS
Kia has complained to the Finance Ministry that banks, without cause, have stopped lending to the carmaker. It asked the Korea Development Bank for a loan of 60 billion won, or about $67.5 million at current exchange rates, to make up for dried-up credit lines; it got only half that.
Korea First Bank, a key lender, is indicating that it wants the government to help it keep Kia's other creditors in line. A Kia affiliate came close to missing a loan repayment. Kia announced it will sell assets, including land valued at $893 million to bolster its cash position.
Meanwhile, Kia's share of the Korean market has fallen from 30.6 percent in 1996 to 22.5 percent in the first five months of this year. The company's position as Korea's second-largest carmaker is under assault from Daewoo Motors, which has introduced three all-new models since last November.
Kia and Hyundai Motors have both had to cut production to cope with slow sales.
Samsung has been hurt, too. Stung by the backlash to the report, it has had to state publicly that it will not try any takeovers. In other words, it won't attempt a takeover of Kia, or similarly troubled Ssangyong Motors.
The company has spent an estimated $2.6 billion so far in its bid to build cars. But Seoul-based analyst Kim Young-tae of Ssangyong Investment & Securities estimates that Samsung will have to invest another $2.2 billion to field a full lineup of cars.
'And that's not all. That doesn't include the total costs of selling, distribution, and so on. They're going to need a lot more money,' he said.
Samsung has been financing its entry into the auto world with profits from its huge semiconductor operations. But a glut of chips worldwide has slashed prices, and hence Samsung's chip profits.
One analyst in Seoul, who declined to be identified, said that Samsung could have bought Kia for substantially less than the $2.2 billion tab it still faces, and gotten everything it needs: distribution, assembly capacity, a lineup of well-respected cars, and a supplier network.
To Kim, the Ssangyong analyst, Samsung's decision to get into the car business in the first place is the real problem.
'Samsung's sales and exports will have to erode the export market share of other Korean automakers,' he said.
'All are competing in the same segment of the market. So Samsung's entry, both domestically and in the export market, is a very bad thing for everyone.'
Staff Correspondent Oles Gadacz in Seoul contributed to this report