These should be good times for Hyundai Group. Global expansion is gathering pace for both Hyundai and Kia, and the companies are about to spend a month in the global spotlight as a keynote sponsor of football’s World Cup, writes Mark Bursa.
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But instead of pressing flesh with Ronaldinho and Rooney, Hyundai chairman Chung Mong-koo will be spending the next few weeks in a Seoul courtroom facing trial for allegedly embezzling USD100m of company money to create a slush fund for bribing political lobbyists.
If found guilty, he could face a jail term. The Korean courts have indicated they are finally getting to grips with high-level corporate corruption by handing out a stiff 10-year jail sentence and massive fines and forfeits of USD32bn to Chung’s former opposite number at Daewoo, Kim Woo-choong.
Kim turned himself in last year after spending several years in exile following the collapse of Daewoo in 1999. Kim was indicted on charges of multi-trillion Won accounting fraud, illegal financing and diverting funds out of the country. He was also accused of embezzlement and breach of trust. A severe sentence was “unavoidable” since Kim was engaged in activities that contributed to Daewoo Group’s bankruptcy and hurt South Korea’s image abroad, the court said in the ruling.
However, it’s unlikely the courts will be quite so strict with Chung Mong-koo. The circumstances of his predicament, compared to Kim Woo-choong’s demise, are vastly different. Kim Woo-choong built Daewoo largely through acquisition. And he built it very quickly, leaving it very vulnerable to economic downturn. When that happened, with dramatic effect, in 1997-98, Daewoo was the first, and biggest industrial casualty.
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By GlobalDataBut Hyundai has stayed afloat. Indeed, it benefited from the Asian economic crisis, acquiring rival Kia Motors, which, like Daewoo, had been dragged into administration. And under Chung Mong-koo, Hyundai Motor has been one of the country’s biggest industrial success stories. It has enhanced, not hurt South Korea’s image abroad.
However, behind the company’s success there lies a tale of bitter family rivalry, and no shortage of scandal. And the path that led Chung Mong-koo to the leadership of Hyundai Motor is itself a tortuous one, and one that could have had a very different outcome.
The Chung family hails from part of the country now in Communist North Korea. Originally a farming family, Chung Mong-koo’s father Chung Ju-yung left home in his teens to work on a railway construction site, and from there decided the construction industry was his future.
He founded Hyundai in 1947, and was joined by several of his brothers – including his younger sibling Chung Se-jung, who came on board in 1957. It was Se-jung who saw the automotive industry as a major worthwhile diversification for the group. From low-key beginnings assembling CKD Fords in 1967, he established Hyundai Motor as a leading global automaker. In 1977 he launched the first true Korean car, the Pony, developed with the help of ex-British Leyland executives.
Under Chung Se-jung, Hyundai Motor flourished – but his elder brother was still in charge of the group – and asserted his authority in dramatic fashion in 1999, after Se-jung appointed his son Chung Mong-gyu as his successor.
Chung Ju-yung was having none of this – he wanted his own son, Chung Mong-koo, to assume control of Hyundai Motor. In typically Korean style, Ju-yung pulled rank over his brother, ousting Se-jung and Mong-gyu and installing Mong-koo at Hyundai Motor, while promoting his favourite son, Mong-koo’s younger brother Chung Mong-hun, as his successor as group president.
Mong-koo got the better deal. Ju-yung had become obsessed with investing in North Korea, pumping funds into Pyongyang and weakening the group’s balance sheet. Things came to a head, and the Korean government forced the Chaebol to be split up into smaller units. Amid growing accusations of corruption and bribery involving North Korea, Ju-yung and Mong-hun resigned in 2001.
Within two years, both were dead. Splitting the Chaebol was Ju-yung’s last act – he died in 2001. Mong-hun suffered a grizzlier fate – facing charges of bribery and corruption, he jumped to his death from the window of his 12th floor office in 2003.
Mong-koo, meanwhile, had refused to fall on his sword alongside his father and brother. With Hyundai Motor freed from the group’s financial constraints, he seized the moment, embarking on a growth strategy involving opening plants in Europe and America, with considerable success.
It’s hard to believe that Mong-gyu would have done a better job than his cousin. Mong-koo has been a tough and ruthless leader of Hyundai Motor. But ultimately he’s fallen into the same trap as the other discredited Chaebol heads – greed. But Mong-gyu is from a younger generation, Oxford-educated and with a more “westernised” approach to business. Hyundai Motor might not have come so far under him, but it’s unlikely Mong-gyu would be sitting in the dock right now.
Aged 68, Mong-koo is “old school” – and despite Korean claims that the Chaebol had cleaned up their act after the economic crisis on 1999, he’s simply carried on running things the way his father did. He’s accused of embezzling USD100m to create a slush fund with which to bribe politicians. What’s new? He’s manipulated the company’s share price by creating satellite companies owned by his son, Kia president Chung Eui-son, who is being groomed as Mong-koo’s successor but is also implicated in the scandal. So what?
Such goings-on are nothing new in Korea. Almost every one of the Chaebol has been dragged through the dirt – only to buy their way out of trouble by offering “contributions to society” – effectively massive, public bribes worth hundreds of millions of dollars. It worked for Samsung, whose chairman Lee Kun-hee has avoided a similar prosecution, despite basically doing the same as Mong-koo – manipulating share prices to benefit his son and heir.
And even if it all goes wrong the Chaebol chiefs seem Teflon-coated. In 2003, Chey Tae-won, head of LG Group, spent several months in chokey after a similar scandal. But guess what – he’s still in charge of the company. It helps that he’s married to the daughter of former Korean president Roh Tae-woo, of course…
So while the omens look bad for Chung Mong-koo, he might yet be able to cheat jail. After all, it would take a brave court to jeopardise Hyundai Motor’s future by handing out a punitive sentence to its leader, the man behind its extraordinary success. A very big fine – and a “contribution to society” of 1 trillion Won is already on the table – is probably the most likely outcome.
And even if he does go down, he’ll still probably be able to keep control of Hyundai Motor. In fact, the worst that will happen is that he’ll miss the World Cup final.
Mark Bursa
