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Hyundai Engineering & Construction: Returning to Hyundai with Motor Group

Monday, May 23rd, 2011
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Hyundai Engineering and Construction, the original company of the mighty Hyundai empire, is about to enter a new phase of its history as Korea’s biggest builder, both at home and abroad.

It is now emerging from under the grip of the creditor banks that took it over after the 1997-1998 financial crisis, and returning to the Hyundai fold.

This time around, however, Hyundai Construction, as it’s widely known, will not be part of the original “core” group that wanted to get it back. Rather, it’s going to the Hyundai Motor Group, the biggest and probably most successful arm of the empire that was founded by the legendary Chung Ju-yung. Already Korea’s second largest chaebol, or conglomerate, after Samsung, Hyundai Motor in the midst of the 19971998 financial crisis acquired Kia Motor and in recent years has built a steel plant and formed the country’s biggest logistics firm. In addition, the group has companies building railway cars and aircraft parts, among other products.

Korean bureaucrats had opposed the foray into steel as an expansionary move that concentrates too much power in one group and provides unwanted competition for the government-invested Pohang Iron and Steel, a showpiece of Korea’s global industrial power. They did not raise serious objections, though, when the group in late March agreed to buy 35 percent of Hyundai Construction for US$4.4 billion after the core Hyundai group was unable to show it had the resources to pay what had been its original winning bid.

The takeover of Hyundai Construction by Hyundai Motor is more than just a business deal. With the acquisition of Hyundai Construction, Hyundai Motor is realizing the dream of Chung Ju-yung, who had to suffer through the troubles of the company before his death in March 2001. Chung carefully divided up his empire among his sons and heirs but never planned on losing the construction unit to creditors. It was from Hyundai Construction, after all, that he drew many of his top executives. The company for many years had powers over financing and interlocking ownership of other Hyundai companies.

Hyundai Construction will not regain its historic role over the entire Hyundai empire, but its return to Hyundai corporate control marks a poignant moment in the history of an extended family whose often competing heirs have perpetuated the Hyundai name and legacy with varying degrees of success. Chung Mong-koo, oldest of six surviving brothers, controls Hyundai Motor with an iron hand. His next brother has Hyundai Department Store, a glittering up-scale national chain. Sixth brother Chung Mong-joon, a member of the National Assembly, controls Hyundai Heavy Industries, the world’s largest shipbuilder, thanks to ownership of 11 percent of the shares, the biggest single block.

The family, however, has endured terrible tragedies, including the suicide in August 2003 of fifth brother Chung Monghun, who leapt from his office in the headquarters of the core group in the midst of a scandal of global proportions. Prosecutors had implicated him in the movement of US$500 million that was transferred illegally from state banks through Hyundai Asan, the core group company responsible for business dealings with North Korea, to bring about the June 2000 summit between South Korea’s President Kim Dae-jung and North Korea’s leader Kim Jong-il. The transfer, revealed in an investigation three years after the summit, was a bribe that ultimately helped to finance North Korea’s nuclear and missile programs.

Since Chung Mong-hun’s death, his widow, Hyun Jung-eun, has had to struggle to hold the group together with a steely will that some said was engendered by her desire for vengeance against his greedy brother and an uncle, Chung Ju-yung’s youngest brother, who sought to wrest her companies away from her by purchasing large blocks of shares. Throughout, she’s had to deal with the troubles besetting Hyundai Asan, which has invested and lost more than a US$1.5 billion in building up the Mount Kumkang tourist zone in North Korea and another US$1 billion or so on the Kaesong Economic Complex, in North Korea near the Panmunjom “truce village” 40 miles north of Seoul.

North Korea in recent months has taken over the Kumkang zone, above the NorthSouth line on the eastern coast. Now North Korea is sponsoring tours to the zone, mostly for visitors from China, after South Korea cut off tours from its side of the North-South line in the aftermath of the killing in 2008 of a South Korean woman by a North Korean soldier who shot her when she strayed outside the zone to gaze upon the sunrise. Losses suffered by Hyundai Asan had much to do with the core group’s inability to bring Construction back under its wing.

Hyun Jung-eun had actually beat out Hyundai Motor for recovery of Hyundai Construction until finally it was revealed that her core group simply did not have the funds to back up its bid. The core group’s failure to recover Hyundai Construction was a bitter blow to the dreams of a woman who can take comfort in the success of Hyundai Securities and shipping companies but who had seen Hyundai Construction as the pillar of her chaebol, once the centerpiece of the entire Hyundai empire. For Hyundai Construction, meanwhile, ownership by Hyundai Motor is sure to presage a new era in the history of a company that emerged on the international stage with projects throughout the Middle East, including port facilities, hospitals, highways and apartment blocks in every country in the region. While Iran and Iraq were fighting each other for eight years in the 1980s, Hyundai Construction had enormous projects in both countries.

The deal also had the blessing of President Lee Myung-bak. Let it not be forgotten that Lee rose to president and then chairman of Hyundai Construction after having helped to establish it as a global force. Lee was hired by Hyundai Construction fresh out of Korea University in 1965 after having ranked at the top of the first competitive written examination for job applicants. After rising at meteoric speed to the post of chairman while still in his 30s, he fought to keep Construction’s interest alive in Iraq through the Persian Gulf War of late 1990 and early 1991 that finally forced all Hyundai staffers to leave. More than a decade earlier, Hyundai workers had also had to flee Iran after the fall of the Shah in 1979. By historical irony, Hyundai Motor was in the process of acquiring Hyundai Construction during another round of Middle Eastern violence that was definitely a distraction in the midst of much larger corporate concerns. Civil strife and rioting in Libya exposed foreign firms to violence and looting not only there but in other North African and Middle Eastern projects as the mayhem spread around a region caught between the conflicting forces of autocratic dictatorship, democratic yearnings and radical Islam.

South Korea, one of the biggest investors in construction projects in the Middle East for more than 40 years and a major importer of the oil needed to fuel its economy, had more to fear than most. Nowhere was the danger more acute than in attacks on giant Korean projects, notably those of Hyundai Construction. As the rioting hit construction sites in Bengazi, the port city to the east of the Libyan capital of Tripoli, and then to Derna, a small port east of Bengazi, protesters from poverty-stricken regions blasted foreign companies as oppressors ripe for looting. Driven by a level of poverty that is lowest among tribal groupings in the east, looters stole or wrecked vehicles and set fire to buildings.

The evacuation forced a halt to construction of major power plants by Hyundai as well as Daewoo Engineering and Construction, the two biggest among 37 Korean companies involved in projects in Libya. All told, an analyst at the Federation of Korean Industries told me, upwards of 7,000 Korean companies do business in the Middle East, most of them medium, small and tiny subcontractors for 100 or so major Korean firms working on 130 projects.

Against this background, Hyundai Construction people were confident that the evacuation of 100 Hyundai workers, from Korea and other countries, would bring only a temporary halt to a wide range of projects. With Hyundai Motor behind them, Construction expected a return to the good old days. Whoever finally wins the power struggle in Libya, said Yoon Young-keun, a Hyundai Construction manager in Seoul, “They need contractors.”

The fear, however, was that rioting would escalate into attacks on foreign companies all over the region. Before special planes and ferries were dispatched to extricate workers from Tripoli and Benghazi, rioters had injured at least three South Korean workers and a number of others from elsewhere in Asia.

“Events in the Middle East have come out of the blue,” said Lee Jong-hwa, senior economic adviser to President Lee. “The situation is a lot worse than expected.” Dr. Lee cited oil prices rising above US$100 dollars a barrel as well as rioting and looting of foreign companies as reasons for concern about an upheaval that some analysts compared to the fall of communist rule in the Soviet Union and eastern Europe more than 20 years ago. The rising price of oil was the top topic at an emergency meeting at the Blue House, the center of presidential power.

“There is risk,” said Lee of the chances of violence against foreign interests erupting in other Arab countries caught up in a democracy movement that also bears parallels to mass protests that ended military rule and led to elections in South Korea in 1987. Yes, he acknowledged, “The fear is very high.” All countries with stakes in the oil-rich Libyan economy issued urgent travel warnings. Thousands of foreign workers, from executives to laborers, fled as Libyan leader Moammar Gadhafi clung to power and loyalist forces battled for control. Park Hyun-do, senior researcher in the Middle East Institute of Myongji University in Seoul, feared surging emotions might also turn against Israel, always a target of Arab wrath. “I worry about another possible Arab-Israeli conflict,” he told me.

Aside from the danger facing construction projects, Japan and South Korea as huge oil importing economies faced the effect on oil prices. Both countries rely almost totally on oil imports, 85 percent of it from the Middle East. “We are a major oil importer and a large investor,” observed economic adviser Lee Jong-wha. “Developments in the Middle East do have a large impact on the Korean economy. There could be expansion of tensions. If oil prices increase by 10 to 20 percent, that has a significant impact.”

Korean officials did not have to go into emergency reserves, however, while the Korean economy was predicted to grow by five percent this year. Korea gets 40 percent of its oil from Saudi Arabia and much of the rest from Persian Gulf states while importing five percent from Libya. Still, “We wonder about what’s going on after the democracy movement,” said Song Dae-sung, president of the Sejong Institute, an influential Korean think tank. “Liberal democracy is so difficult. I worry so much about the consequences.”

As for fears that Islamic radicals might rise to power, however, Hyundai Construction and its Korean rivals could be optimistic about the need for their services. The sense was that new regimes would follow in the same pattern in countries whose dictatorial leaders had welcomed Hyundai Construction in return for payoffs and favors, public and secret. Yoon Young-keun, at Hyundai Construction, expressed the corporate attitude toward dealing with new leaders. “We can go with them too,” he said.

While revolutions convulse the region, Koreans, looking back on past successes, have reason to hope the good times were far from over for Hyundai Construction as well as its many Korean rivals. “The Middle East has been the golden land for Korea,” said Park Hyun-do at the Middle East Institute of Myongji University, balancing confidence and concerns. “It’s been the land of opportunity since the 1970s.”

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