Asian Financial Crisis Deals Body Blow to U.S. Operations of Asian Companies

Asian Financial Crisis Deals Body Blow to U.S. Operations of Asian Companies

by Andrew Pollack

LOS ANGELES -- When Korea's Hyundai Electronics Industries acquired Symbios Inc. from AT&T Corp. for more than $300 million in 1994, it marked the beginning of a spurt of investment by South Korea's ambitious companies in the American market.

Now Symbios, a Colorado semiconductor company, might represent the beginning of a wave of divestitures in the wake of Asia's financial crisis. Anxious for cash, Hyundai just sold Symbios to Adaptec Inc., a Silicon Valley company it had beaten in the bidding in 1994. The deal, announced Thursday, took less than three weeks to complete at a price, $775 million, considered by analysts to be low.

"There's nothing like having an I'm-going-to-sell-this seller and a willing buyer," F. Grant Saviers, president of Adaptec, said.

The Asian financial crisis has dealt a body blow to the U.S. operations of South Korean and other Asian companies. Subsidiaries and real estate are being sold, branch offices closed, people laid off or brought home, and once-ambitious investment plans are being scaled back or put on hold. The impact has been felt most in New York and Los Angeles, where Asian investments and businesses are concentrated.

"Most of the companies in Korea are cutting back," said Young M. Kim, president of the Korean Chamber of Commerce and Industry in the United States. "Every subsidiary in the United States should follow suit." Kim said the situation was so dire that he expected the chamber to forgo the collection of dues from its 700 members this year.

The conundrum is that with their own economies ailing, Asian companies need their overseas sales more than ever. At the same time, the sharp weakening of their currencies has made their products more competitive overseas, although most companies have been unable or chose not to make dramatic cuts in their U.S. prices.

But the devaluation of currencies also makes it more expensive for Asian companies to pay the expenses of their operations in the United States. Their American subsidiaries are having trouble raising cash because American banks are reluctant to lend to them -- except at prohibitive interest rates -- and neither the parent companies nor Asian banks have the money. South Korea's finance ministry, worried that money-losing overseas business operations will drain it of scarce foreign reserves, is asking to see financial statements of overseas subsidiaries and pressing for closing those that are not consistently profitable, executives said.

"They really need these offices running on full cylinder right now, and it's very painful to do so," said Stewart M. Kim, managing partner of Pacific Gemini Partners, a Los Angeles investment management firm that is half-owned by South Korea's Ssangyong Investment and Securities Co.

The American operations, for instance, have been a lifeline for Kia Motors Corp., a South Korean auto maker that fell into bankruptcy last year. The American subsidiary was asked to accept shipments of extra cars, said Greg Warner, executive vice president of Kia Motors America. U.S. sales were up 65 percent last year and in January were nearly triple the level of a year earlier,because of the devaluation of the won and because new dealers have opened. But dealers are having trouble getting financing, Warner said.

Hyundai Motor America has not lowered car prices because it does not want to cheapen the image of its cars. But it is offering hefty rebates on some models. The company has had two rounds of layoffs since December, one of them at its financing subsidiary, which has had trouble raising funds and ended its leasing program.

The cutbacks and other changes are not limited to Korean companies. Indonesian, Thai and other Southeast Asian companies are affected but have a smaller presence in the United States. Hong Kong and Taiwan companies, many of which are big investors in this country, have not been hit as hard by the Asian crisis.

The biggest impact, however, could come from Japanese companies, whose ownership of U.S. businesses, factories and real estate dwarfs that of all other Asian nations combined.

Japan's financial problems are not as sudden or as acute as those of South Korea, Thailand and Indonesia, so the reaction of Japanese companies has been more gradual. Japanese investors, who ran headlong into waves of xenophobia in this country when they purchased trophy hotels, office buildings and golf courses in the late 1980s, have been selling $3 billion to $5 billion of United States real estate annually in the last few years, according to Jack Rodman, head of Pacific Rim activities for E&Y Kenneth Leventhal Real Estate Group, which tracks Japanese property investment in the United States.

Still, some analysts think the sell off of Japanese-owned businesses and real estate will accelerate because Japan's government is getting more serious about cleansing bad debts from the banking system and because United States real estate prices have been rising. Sumitomo Bank announced it was looking to sell Sumitomo Bank of California. The Inter-Continental Hotel chain, which includes U.S. properties like San Francisco's Mark Hopkins Hotel, is being sold by Saison Group to Bass PLC of Britain. Taisei, a construction company, is said to be selling the Sheraton Grande Torrey Pines in San Diego and a big office building in Chicago.

According to Commerce Department figures for 1995, the latest available, there were 109 non bank affiliates of South Korean companies operating in the United States, with sales of $23.8 billion and 22,900 employees. Few Korean companies have set up United States factories in the way that Japanese companies like Honda and Sony have. So many of the most recent cutbacks since then have been in sales and administrative personnel and have tended to be small.

Samsung Group, one of South Korea's largest companies, closed its American headquarters in Ridgefield, N.J., and dispersed its 30 employees to other subsidiaries. Asiana Airlines, Korea's second-largest carrier, stopped flying to Honolulu in January and closed its 15-employee office there. SK Group, the fifth-largest conglomerate, is in the process of laying off a quarter of its 200 employees in the New York area.

South Korean banks are closing their American branches and selling loan portfolios. Korean banks collectively had 26 branches and seven subsidiaries in the United States with total assets of $21.2 billion at the end of 1996, according to the Bank of Korea.

The branches generally do not take deposits and instead raise funds by borrowing from other institutions, a strategy that has now become untenable. "Our funding cost has shot up to a level where we are no longer competitive at all," said a manager at Korea First Bank, which is closing its three United States branches.

The sale of Symbios has heightened speculation that Korean companies might sell interests in such well-known companies as AST Research Inc., Zenith Electronics Corp. and Maxtor Corp. that were acquired over the last few years to gain technology, brand names or new businesses.

Cheil Jedang, a food company, has had second thoughts about the $300 million it committed for an 11 percent state in Dreamworks SKG, the Hollywood studio started by Steven Spielberg and other luminaries. But despite Dreamworks' slow start, a Cheil official said the company intended to stick with the studio.

AST, a money-losing personal computer maker in Irvine, Calif., is owned by Samsung Electronics Co., a company that is under financial pressure because of the sharp drop in the prices of computer memory chips, its main product. It has delayed the planned expansion of its chip factory in Austin, Texas, and is reportedly seeking a hefty capital infusion from the Intel Corp.

But Tom Scott, senior vice president of AST, said the company's brand name and presence outside South Korea made it more valuable than ever for Samsung, which, he said, has no intent to sell.

Likewise, LG Group, which owns a controlling stake in Zenith, "has no thought of selling it and we're in it for the long run," said Peter McDermott, executive vice president of LG of the Americas. But the credit ratings of the Glenview, Ill., television maker were recently lowered out of concern that the Asian crisis would make it more difficult for LG to support Zenith, which it has not been able to make profitable.

As for Maxtor, a disk drive maker, it is owned by Hyundai Electronics Industries, the same company that unloaded Symbios and which is trying to complete a billion-dollar chip factory in Oregon.

Some smaller, lesser-known investments have already been sold off. The Ssangyong Group, struggling to avoid bankruptcy, sold the Riverside Cement Co. to Texas Industries for $120 million and two Marriott Residence Inns, in Sacramento and San Diego, to Sunstone Hotel Investors for $30.5 million. Sunstone also bought two hotels in the Los Angeles area from the bankrupt Halla Group for $16.5 million.

Besides the need to raise cash quickly, other factors could be motivating Asian owners to sell American real estate. Prices in Asia have dropped so far and American prices have risen so high that it might be time to take profits here and invest them back home. The weakness of the Asian currencies adds to this effect.

Richard Rosenberg, the director of North American real estate for Octagon Group in Pasadena, Calif., which is part of an Indonesian conglomerate, said his company bought American real estate when the exchange rate was about 2,200 Indonesian rupiah to the dollar. "If you can sell those assets at 10,000 rupiah, it's an absolute windfall," he said.

But Richard Alter, the managing director of Financial Capital Investment Co. in Los Angeles, which pools money from ethnic Chinese investors in Hong Kong, Taiwan and other countries to purchase United States properties, said his clients were continuing to invest in this country because it offers stability. "What all this crisis does is make more instability" in Asia, he said, "which is why our investors are coming here."

Some South Korean companies say their American subsidiaries have barely been affected by the crisis. While their countrymen back home were bracing for austerity, LG executives were in Florida recently sponsoring the LG Championship golf tournament, awarding $1.2 million in prizes.

Two South Korean companies said they planned to go ahead at least with the first phase of construction on polyester-product plants expected to cost about $300 million each.

"When you're doing this size of a project, it's not for today or tomorrow," said Eugene Chin Yu, president of Hankook Synthetics/America, part of the Ehwa Group. "We're looking for the long run." He said the company had arranged 80 percent of the financing for its plant locally, with 20 percent coming from Korea.

A manager at SKC Inc., the SK Group subsidiary building the other plant, said half the financing had been arranged but that the rest was becoming harder to obtain. "Anyone who has a Korean tie has a difficult time financially," he said.

Even as companies soldier on here, expatriate managers, who generally receive housing allowances that have become more expensive in terms of Asian currencies, are being called back home. That could open up more opportunities for Americans, who are often shut out of upper-level jobs at Asian companies.

"The number of Koreans stationed in the U.S. has been drastically cut, and they will be replaced by local hires," said Sung Ho Lee, cargo marketing manager for Korean Air Lines in Los Angeles. His department, he said, now has one manager from Korea, down from three a couple of years ago.

Although the South Korean won has lost nearly half its value against the dollar since the crisis began, prices of Korean products here have dropped only a little. That is because the costs of imported raw materials and energy needed to make the products have gone up in terms of won. Higher interest rates also add to costs.

"The big impact that everyone sort of hoped for has not really materialized," said Bob Jones, executive vice president of the American sales arm of Samick Musical Instrument Co., a large South Korean piano and guitar manufacturer. Still, he said, his company has cut its U.S. prices by 6 percent to 8 percent, helping it better compete against Chinese manufacturers.