Kia Motors Corp., a Ford Motor Co. affiliate that is South Korea's third-biggest carmaker, was put into effective involuntary bankruptcy last week when a group of banks stepped in to reorganize it and 17 other subsidiaries of the debt-ridden Kia Group.
Kia Motors, the cornerstone of the group, Korea's eighth-biggest conglomerate, lists debts of about $6.3 billion. According to the Korea Federation of Banks, the group debt totaled $12 billion at the end of May.
The unilateral action by the banks apparently sought to avert what would have been the fourth, and biggest, collapse so far this year of one of Korea's 30 biggest chaebol, or industrial groups.
'Since late May, banks have extended $90 million in emergency loans to Kia, but we failed to solve its problems,' said Kwon Woo Ha, a Korea First Bank executive, Kia's lead lender. 'Our decision was inevitable.'
The failures underscore the underlying weakness of Korea's highly leveraged financial system, and have raised alarms over the huge debts accumulated by the country's industries in their race to expand into world markets.
Although the action technically is not a bankruptcy - it 'designates Kia for rescue' - the move has many of the same restrictions.
Under the rescue plan, Kia will be allowed to operate for the next two months, and even will be allowed access to credit while its lenders, led by Korea First Bank, craft a reorganization and repayment plan. The banks are expected to demand management changes and asset sales to help pay down debt. Meanwhile, Kia officials said they would immediately begin a restructuring aimed at cutting the number of affiliates to 14 from 28, and eliminating 4,300 jobs.
INDEPENDENCE IN DOUBT
Analysts said the banks' action could effectively spell the end of Kia's independence as an automaker by encouraging a takeover by giant Samsung Group, which tried two years ago to acquire Kia. From that abortive bid, Samsung still holds a 6 percent stake in Kia Motors.
But a spokesman in Seoul for Samsung Motors, a startup company that is scheduled to begin producing its own cars next year, said the company has no intention of seeking a takeover.
Reports of Kia's financial woes began surfacing in late June, when creditor banks began calling in loans. On June 23, Kia Group Chairman Kim Sun-hong requested government assistance, but was turned down.
Although Kia Motors' exports have been booming - through June, they are up 50 percent from a year earlier - it has steadily lost ground in the home market, the profit wellspring for all Korean carmakers. The company's share of the domestic car market has fallen from 26 percent at the end of 1995 to 20 percent for the year to date, knocking it to the No. 3 spot after Daewoo Motors.
Reflecting the erosion of share at home, the company earned only $8.3 million last year, on revenue of $7.8 billion.
FORD ISN'T WORRIED
Officials at Ford, which sources small cars from Kia for sale in Asia and which has a 9.5 percent equity stake in the Korean company, said the development posed only minimal risk to Ford.
'There is some risk in that, but we don't think it is a substantial one. Our financial obligation and risk in total is not big,' said John Devine, Ford Motor Co. CFO.
'Worst case - and we don't think worst case will happen here - we would have to write off our equity investment. But we don't have a financial responsibility to Kia beyond that. We don't have any loans to them. There is nothing like that on the books, and nothing like that anticipated.'
Geno Effler, Kia Motors America spokesman, also downplayed any impact of the Korean action on theautomaker's U.S. operation.
'The steps being taken in Korea have no immediate impact on the operation of Kia in the United States. Vehicle production and shipping will continue without interruption. We will continue to expand our dealer network on a market-by-market basis,' Effler said.
Kia started selling cars in the United States in February 1994, with a regional launch that has since expanded to about 260 dealers in 28 states.
The product line consists of the Sephia compact sedan and the Sportage mini sport-utility. A more upscale sedan, similar to the Mazda 626, is to arrive in spring 1999.
Through June, Kia sales were up 31.2 percent, due mostly to an increased number of dealership points compared with last year. Kia did not have a figure for same-store sales.
Dan Zeid, principal of Tempe Honda-Kia in Tempe, Ariz., said the banks' action surprised dealers. He said dealers received a letter from Kia Motors America President Kim Woon-Keun saying, in effect, 'There's nothing to worry about, and that they'd keep us posted.'
Clive Skilton, owner of the Don-A-Vee multiline franchise, which includes Kia stores in Bellflower and Placentia, Calif., said customers have not been asking about the situation.
'These are not the demographics of people tuned to Wall Street, especially the Sephia buyer,' he said. 'We're still getting cars, and Kia is asking us to take more.'
Staff Reporters Mary Connelly and Mark Rechtin and Staff Correspondent Oles Gadacz contributed to this report.