In Carmaker’s Collapse, a Microcosm of South Korea’s Woes, a NYTimes Article

By CHOE SANG-HUN
Published: February 23, 2009

SEOUL, South Korea — When Shanghai Automotive Industry Corporation, China’s largest carmaker, set its sights on overseas expansion in 2004, it first took a small hop across the Yellow Sea. It bought a controlling stake in Ssangyong Motor of South Korea, the most ambitious foreign venture for China’s surging auto industry.

Five years later, Shanghai Auto’s marriage with Ssangyong, a milestone of China’s rising industrial clout and South Korea’s deepening economic ties with its neighbor, is falling apart in acrimony and criminal investigations.

Walloped by declining sales and bitter battles with its Chinese parent, Ssangyong filed for bankruptcy protection last month. Its combative labor unions and some South Korean commentators have vilified Shanghai Auto as an exploitative owner that siphoned off Ssangyong’s technology, reneged on promises to invest, and dumped the company when the market turned sour.

Shanghai Auto has a different account of what went wrong. But the collapse of the venture is a black eye for China, which has pushed its top state-owned companies, including Shanghai Auto, to use the country’s enormous dollar-based savings to expand abroad. It may also serve as a cautionary tale for Western companies seeking a lifeline from cash-rich Chinese businesses during the financial crisis.

“The Chinese made us rosy promises and then betrayed us,” said Lee Chang-kun, a member of Ssangyong’s labor union.

The Shanghai company, which has partnerships with General Motors and Volkswagen in China that make it the country’s largest carmaker, said its troubles in South Korea revealed a deep-seated Korean bias against the Chinese. The company said South Korea remained fraught with difficulties for foreign investors, despite Seoul’s professed commitment to open up its economy.

“We hope that South Koreans of all walks of life will become objective and fair and abandon their prejudices against foreign investors,” Shanghai Auto said in response to written questions.

South Korea embraced China over the past decade as an economic and political partner, partly to offset its traditional dependence on the United States. Since the two countries formally ended Korean War-era hostilities and re-established diplomatic ties in 1992, China has replaced the United States as South Korea’s biggest trading partner.

But just as many South Koreans fret about the United States, it did not take long for many here to worry about overreliance on China as well. Korea is sandwiched between China and Japan and has come under the sway of both countries in the past.

Against this backdrop, modern-day failures like Ssangyong — and a similarly acrimonious breakup between BOE Technology Group, a Chinese electronics company, and Hydis of South Korea — loom large in Korean minds.

In 2003, BOE paid $380 million to buy Hydis, which makes displays for cellphones and laptop computers. A year later, Shanghai Auto bought 48.9 percent of Ssangyong, a specialist in sport utility vehicles and luxury sedans, for $510 million. It later increased its stake to 51.33 percent.

The Ssangyong purchase gave Shanghai Auto, known mostly for producing cars in China with foreign technology, an international brand of its own. Hu Maoyuan, Shanghai Auto’s president, said the deal allowed his company to “branch out into the global market.” Ssangyong researchers helped Shanghai Auto develop the Roewe, Shanghai Auto’s first independently made luxury car.

South Korea, once one of the most closed of the major industrial economies, began opening up to more foreign investment after the 1997 Asian financial crisis. Foreign companies snapped up Korean banks and industrial concerns at fire-sale prices. When some later cashed out with sizable profits, South Korean workers began referring to them as meoktwi, a slang term that translates as “a thief who eats and runs away.”

Those fears increased when BOE used technology transferred from Hydis to build a new display panel factory in Beijing. When Hydis later ran into financial trouble, BOE did not pump in more money, leaving it to file for bankruptcy protection in 2006, according to Hydis employees. Now sold to a Taiwanese company, Hydis is a shell of its former self.

“BOE got the technology they wanted. All we got was layoffs,” said Hwang Pil-sang, a Hydis worker.

Shanghai Auto and Ssangyong never had much of a honeymoon. When the Shanghai company took over, Ssangyong was reporting net profits of $510 million a year. It was planning to roll out its new S.U.V. series: Kyron and Actyon.

But the new cars sold below expectations. Ssangyong’s hopes that Shanghai Auto could ease its entry into the rapidly growing but tightly regulated China market went largely unrealized, Ssangyong workers say. Heavy tariffs hindered Ssangyong’s sales in China. Ssangyong’s attempt to build a joint venture factory there faced red tape.

The two companies also clashed over how to expand sales. The 5,200-worker union demanded that the Chinese company infuse more cash, market more aggressively and speed up development of new models.

Shanghai Auto said that it had agreed to invest more in Ssangyong, but argued that it intended to reinvest profits Ssangyong was earning. When Ssangyong’s profits sank, so did the available cash to invest, the Chinese company said.

Chinese managers began shedding hundreds of Ssangyong workers in 2006, and relations spiraled downward. Ssangyong employees went on strike for nearly two months. Workers barricaded themselves inside the factory and locked the managers out.

The Ssangyong union also accused Shanghai Auto of stealing technology, setting off one investigation by prosecutors in 2006 and another last year. Last July, acting on tips from the National Intelligence Service, prosecutors raided Ssangyong’s research center, searching for evidence of illicit technology leaks.

The union’s allegations are disputed by Shanghai Auto. The Shanghai company says it has a normal technological give and take with its subsidiary. It shared its own technology with Ssangyong. It properly accounted for and compensated Ssangyong for Korean technology it took back to China, the company says.

No charges have resulted from the legal inquiry. But it generated headlines in South Korea, where the media were already abuzz with reports of high-profile industrial espionage cases in which former employees of South Korea’s biggest exporters — Hyundai and Kia Motors, LG Electronics, the Daewoo shipyard and the steel maker Posco — were convicted of leaking, or plotting to leak, sensitive technology to Chinese companies.

In December, union members surrounded a car carrying Shanghai Auto officials and held it hostage for seven hours outside their factory south of Seoul, accusing the executives of absconding with proprietary technology.

Yang Hyeong-geun, a 20-year veteran of the Ssangyong assembly lines, said he and his colleagues initially welcomed Shanghai Auto because the Chinese company promised job security, entry to the vast China market, and new investment to double Ssangyong’s annual capacity, to 400,000 cars.

“We trusted their promise to help us into the vast Chinese market,” Mr. Yang said. “In the end, they kept none of their promises, and they got what they wanted: our technology.”

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