Daewoo Motors Inception, Development and Collapse - Case Study Example

?Corporate Governance & Globalisation Task: Executive summary This write-up will address a host of issues, which pertain to the Daewoo Group. However, the report focuses on Daewoo Motors’ inception, development and collapse. The Daewoo Group is the holding company that owned Daewoo Motors. The entity operated in a country where the policies favoured its emergence. This allowed the entity to dominate the automobile industry. However, change in political regime, Asian recession, poor management and opening up of the South Korean market resulted in a dip in its fortunes. The troubles in the entire conglomerate culminated in the sale of this subsidiary. This report analyzes problems leading to the collapse and recommends relevant corporate governance measures, which would have prevented such managerial malpractices. Introduction Daewoo is a South Korean company founded in the late 1960s. It represented pioneering entities in the automobile sector in not only South Korea but also Asia. Kim Woo Choong played a vital role throughout the early years of the corporation. The entity benefited massively from the government’s goodwill. The government enacted policies, which ensured that the entity did not face major competition. Additionally, it offered credit to the entity at friendly rates. This reduced the overall cost the entity incurred. The reduction of cost gave the entity a massive competitive edge over rivals. This shows the impact of government’s goodwill on the entity’s fortunes. The success of the entity did not last long since it encountered major managerial problems. This write-up will analyze problems which this entity encountered culminating in its sale. Furthermore, it will propose corporate governance measures that would have impeded the chaos that emanated and led to its collapse. Daewoo’s history and managerial problems Daewoo is a conglomerate with numerous subsidiaries, which included Daewoo Motors, Daewoo Bus Company, Daewoo Electronics, Daewoo Heavy Industries and Daewoo Securities. This was a huge corporation with several subsidiaries and joint ventures. The sheer size and complexity of this entity made its management challenging. Managers in such an entity encounter countless constrains. The multinational had diversified its operations into several industries. Diversification enabled the entity to sustain its financial stability (Lopez 2000). The collapse of this entity resulted from some diverse factors. The government’s policies were key to the collapse of the entity. The government enacted protectionist policies. Such policies ensured that the entity got cheap raw materials. This reduced the entity cost allowing the entity to make phenomenal profits. Additionally, the entity got cheap financing from the government. Similarly, this reduced its costs availing more funds for further investment. The government also focused on policies, which favoured one entity. Therefore, the government failed to support emergence of other smaller entities. Therefore, such policies shielded Daewoo from competition, costly raw materials and high cost of credit. This provided a perfect market for the entity to succeed. The government seemed not to have a clear policy to ensure fair trade in its economy either. These policies were friendly to the entity since the entity gave political support in exchange for such skewed governmental strategies, which favoured the entity (Lopez 2000). The expansion of the entity entailed several five-year plans. These plans would outline what the entity should accomplish within the period. Daewoo Motors commenced operations in the early 1980s. Daewoo Group acquired an entity that was failing in the automobile sector owing to competition from Hyundai. Using its massive resources, Daewoo Group turned around the fortunes of this entity and renamed it Daewoo Motors. This acquisition added another subsidiary to the already expanding corporation. The Daewoo conglomerate seemed to be undertaking an expansion strategy. However, such a strategy requires stringent management. Rapid expansion will require change in management. The change in management should ensure that the entire structure acknowledges the new subsidiary. Management of such an entity is tricky since the management must ensure that the objectives of each subsidiary adhere to goals of the entire organization. The management should ensure that the subsidiary creates synergy with the entire organization. Synergy would guarantee improvement in the total output of the entire organization. However, in Daewoo’s case, there was a haphazard acquisition of subsidiaries. This created massive inefficiencies and duplication of workforce in the entire organization. These problems trickled down to some of its subsidiaries such as Daewoo Motors (Homann, Koslovski & Luetge 2007, p. 145). The complexity of an entity may pose numerous managerial challenges. This was evident in this case since the Daewoo holding company controlled numerous subsidiaries. Preparation of records of such entities is extremely complex and demands both expertise and experience. Daewoo Motors was dependent on the government’s policies. The ties with the government enabled the entity to succeed. Essentially, the entity did not encounter an ideal market. In an ideal market, the entity would not encounter higher cost of credit, competition for clientele and high cost of acquiring raw materials. Such would have resulted in stringent management. There was gross failure of the management. The management seemed not to have an appropriate strategic plan. A strategic plan would have addressed some of the major hitches the entity encountered. The entity operated in a protectionist market. The government had enacted that policy. An adequate management team would have foreseen that changes in the political environment might result in an administration that would open up the economy to foreign investment. This would transform the economy radically. Opening of the economy would result in the entry of foreign organizations. These organizations would create competition in the automobile industry. Additionally, the expenditure pertaining to raw materials would increase due to higher demand. The change in governance would result in impartial polices. Daewoo’s management failed to address these matters by developing a strategic plan, which would ensure the entity’s progress irrespective of changes in politics (Guillen 2001, p. 65). The entity operated in an economy where labour was cheap. In the year leading to the collapse of this entity, there was massive industrial action. Industrial action was a quest for higher remuneration. Increased remuneration would culminate in higher cost. This would reduce the returns of the entity. In the wake of such developments, the management should have undertaken a plan to reduce the entity’s human labour. The entity should have mechanized its operations reducing human labour and boosting its output. Mechanization would have reduced its cost by eliminating human labour and increasing efficiency. The management seemed to have no vision of this nature. Once industrial action commences, the management should have embarked on a contingency plan. Management should react swiftly to such developments that would affect production in Daewoo Motors. Therefore, the management should have offered employees additional pay or retrench employees paving way for mechanization (Haggard, Lim & Kim 2003, p.232). The changes in governance reduced partial policies, which the government previous administration instituted. This meant that Daewoo Motors encountered higher cost in of acquiring credit. This diminished its profitability. The Asian financial crisis affected the automobile entity massively. The Asian crisis culminated in reduced consumption in the late 1990s. Therefore, sales of most entities declined. This affected Daewoo considerably. The crisis did not only decrease it sales but it also reduced the availability of credit. The reduction in credits affected the entity in several ways. There were reduced funds that the entity could spend on production or improving its operations. The reduction in sales coupled with unavailability of credit affected Daewoo Motors considerably. The management should have undertaken several measures, which could address such problems (Fernandez & Symonds 1999). The global market had the perception that products from South Korea were of inferior quality. This perception would result in fewer customers in lucrative markets. The management could have addressed this perception by better marketing of its brand. The management seemed not to undertake any campaign to correct this perception. Daewoo Motors had countless problems, which the management failed to address. The problems culminated in the accusation against Daewoo’s manager, which alleged that he supported one presidential candidate financially. The entity’s managers seemed not to adhere to any ethical requirements. Ethics is a vital constituent of corporate management. Unethical conduct affects the corporate image of an entity significantly. Therefore, the manager’s actions were detrimental to the image of the entity. Ethics denotes rules that employees should adhere to ensuring fair play. However, supporting any candidate would culminate in authorities favouring an entity in matters pertaining to policymaking. Daewoo needed to rebuild its image, brand and management if it was to survive the crisis. The management seemed devoid of skills, which would enable them to handle such an entity. Addressing the problems that Daewoo was encountering required a multifaceted solution. The solution would address issue pertaining to branding, strategic management, efficiency and ethics (Lopez 2000). Avoiding such a collapse Daewoo’s problems pertained to breakdown in corporate governance. The management acted in ways that breached their duty towards employees, shareholders and other investors. The managers seemed devoid of any skills, which would enable them to address any of the challenges that the entity was encountering. The unjustified favours that entity received should have raised concerns among the managers. The favours made it easy for the entity to operate. The entity dominated the market easily owing to such favours. The managers should have realized that change in politics would result in transformations in the business setup. This would culminate in entry of other firms and increase in relevant costs. Such changes would reduce profitability of such an entity. This point also brings to focus the role of the authorities in the corporate world. The government should have acted as a facilitator of the corporate sector. In this scenario, the government’s policy favoured one entity. Therefore, the Korean government failed to undertake its role appropriately. Government corporate policy should be impartial. It should aspire to provide a suitable business environment. An appropriate business setting would ensure that firms could access credit at similar cost. Additionally, it should guarantee fair competition among players in an industry (Tricker 2009, p. 102). The protectionist policy adopted by the government was inappropriate. The government should have allowed competition. Competition would have ensured diligence in Daewoo’s management. However, the protectionist policy assured business of Daewoo Motors; hence, the management became reckless in management. The government had a central role in the collapse. The government partial policy seemed to favour Daewoo. Consequently, the managers in the entity became reckless since they dominated the motor industry. Conclusively, the government should facilitate the corporate sector. This would entail policy that eliminates malpractice while encouraging astute management (Stiglitz 2007, p. 98). Managers at Daewoo seemed to have no strategic plan. This kind of a plan is imperative for such an entity, which denotes massive investments. This plan should have guided the management on diverse issues. The conglomerate seemed to acquire firms without proper evaluation of their impact on the entire organization. The management should have undertaken an expansion path, which has minimal risks. The entity should have first ventured into industries, which would ensure the success of its core undertaking. However, the Daewoo Group opted for a haphazard accumulation of subsidiaries. This culminated in a complex organization. The complexity of the organization exposed the entity to many managerial risks. First, it was easy to commit fraud in such a firm. Management had become complex. Therefore, ensuring adherence to ethics and corporate governance values was tricky. Resolving such a problem would require establishment of strong managerial structures. Such structures would ensure that managerial personnel do not conspire to commit fraud. The government should also bar certain acquisitions. The government should prevent business realignment, which would eliminate fair play in the market. This would bar emergence of monopolistic entities in the economy (Monks & Minow 2008, p. 67). Auditing of entities is vital. It enables an entity to reveal its financial status. Auditing would have enabled investors to have a clear picture of Daewoo’s financial status. However, the size of the entity was deceiving to most investors. The entity had deep lying managerial problems. Eventually, the entity would succumb to bankruptcy coupled with other problems. Auditing would have revealed that the entity going concern assumption was in doubt. This would have resulted in reduced in investment in Daewoo Motors. Thorough auditing would have revealed the managerial malpractices earlier. The relevant authority should have undertaken actions that would have punished such managers or the organization. South Korea should enact strict laws governing corporations. The country should enact a company act, which can punish institutions, and persons who participate in such malpractices. Company acts globally outline how entity should undertake its activities. Among the core duties of company act is to ensure that the shareholder investment is safe. South Korea should enact laws, which will ensure that malpractices do not swindle investors out of their funds. Enforcement of such laws is vital since it would discourage unscrupulous managers from partaking in such activities. Directors in companies undertake vital roles. They determine the policy of an entity. Consequently, they seem to have been complacent on the management of Daewoo Group. Directors owe shareholders a duty of care. Therefore, if there is evidence of negligence, then they should bear the blame. Directors should enact policy that will prevent any malpractice among managers (Hill, Cronk & Wickramasekera 2008, p. 132). Corporate governance has failed in this scenario. The managers and directors seem to have acted in their own egocentric interests rather than those of the entity and the shareholders. The government’s partial policy set the stage for malpractice and managerial recklessness. Furthermore, the notion that the entity was too large to fail resulted in ill-advised investments. The banking sector also lent Daewoo Motors money owing to its size rather than its financial stability. The collapse of this entity reveals that irrespective of an entity size, managerial malpractices can cause corporate failure. Daewoo Motors’ failure was gradual; hence, bailouts would have only culminated in additional problems. The collapse of the entity allowed investors and the government to undertake corrective measures. This entailed the liquidation of the entity. The government attempted to repay investors who suffered losses. However, Daewoo‘s debts limited the ability of liquidator to cover all the investors’ losses. Daewoo’s collapse is an illustration of how failure in corporate governance and poor government policies resulted in an entity’s failure (Bainbridge 2008, p. 45). Conclusion The management at Daewoo lacked a vision, which would have steered the company ahead. The management seemed unable to address the challenges that the entity was encountering. Daewoo Motors’ close association with the administration worked to its detriment. The government’s formulation of partial policy also contributed to this tragedy. The government should only have provided an enabling corporate environment, which would have allowed several entities in the South Korean automobile market. However, its protectionist policy in the 1980s and early 1990s discouraged entry of other firms to challenge Daewoo Motors into improving their products. Bibliography Bainbridge, S 2008, The new corporate governance in theory and practice, Oxford University Press, Oxford. Fernandez, L & Symonds, P 1999, Daewoo collapse threatens further financial crisis in South Korea, viewed on 23 July, 2012, .  Guillen, M 2001, The limits of convergence, Princeton University Press, New Jersey. Haggard, S, Lim, W & Kim, E 2003, Economic crisis and corporate restructuring in korea: reforming the Chaebol, Cambridge University Press. Hill, C, Cronk, T & Wickramasekera, R 2008, Global business today: an Asia-Pacific perspective. Homann, K, Koslovski, P & Luetge, C 2007, Globalisation and business ethics. Ashgate Publishing Company Hampshire, UK. Lopez, J 2000, Daewoo collapse to have global consequences. Viewed 23 July , 2012 from < http://www.wsws.org/articles/2000/nov2000/dae-n18.shtml>. Monks, R & Minow, N 2008, Corporate governance, Chichester, John Wiley & Sons, UK. Stiglitz, J 2007, Making globalization work, WW Norton & Co, New York. Tricker, R 2009, Corporate governance: principles, policies and practices. Oxford University Press, Oxford. Read More