SEPTEMBER 1982 - VOLUME 3 - NUMBER 9
Dow fights with Korean Partners, Slams Business Climate
by Tim Shorrock
A serious dispute has broken out between Dow Chemical Company and its joint venture partners in South Korea. Pitting the interests of the giant Michigan-based corporation against 2,000 Korean shareholders, the conflict threatens to undo the Korean government's attempts to increase foreign investment in the country.
Dow has $120 million invested in South Korea, making it the largest foreign investor in the country, so any controversy involving Dow cannot be taken lightly by the South Korean government.
And this dispute is particularly bitter.
After failing to settle the disagreement on his July visit to Korea, Dow president Robert Lundeen made an extraordinary statement to the press: he criticized the business climate in Korea, and warned foreign companies about doing business there.
"We aren't interested in investing five cents more in South Korea until the present problem is solved," Lundeen was quoted in the Asia Wall Street Journal as saying. Dow's investment in the country "was an absolute disaster," he added, and then said he "would advise investors who haven't already invested in South Korea that they ought to consider the situation very carefully."
The controversy stems from an attempt by Dow to merge its wholly-owned Korean subsidiary (Dow Korea) with its 50/50 joint venture, Korean Pacific Chemical Corporation (KPCC). Dow also wants to remove four government-appointed directors of KPCC, two of whom are retired generals.
Dow has gone to court in South Korea to force the merger and the removal of the managers. The company is also suing its Korean partners for damages in a Swiss court. In retaliation, KPCC has gone to court to force the replacement of Dow's appointee to the KPCC Board of Directors.
Since first coming to Korea in the mid-1960s Dow has built one of the largest petrochemical complexes in Asia at its Yeochon site on the southeastern coast of South Korea. (While highly profitable to the company, this site has caused serious pollution problems to local farmers and fishers.)
But for the last two years, Dow's once-profitable chemical plants have been losing money. After oil price increases in 1978, costs of its naptha-based petrochemicals increased, and its fixed price is now 50 to 75% higher than world prices. In 1980 two new plants came on line, just as the world recession was pushing the world-wide petrochemical industry into a slump - essentially a crisis of overcapacity.
Because of supply contracts between Dow Korea and KPCC (which markets chemicals to Korean companies), the joint venture has been buying all of its chlorine from Dow for the last 10 years. But the high price of Dow's chemicals has led KPCC's Korean managers to buy cheaper imports. Dow Korea is now operating below capacity. In 1981 - even with government price supports - it lost over $23 million. Together, Dow Korea and its joint venture have lost $60 million in the last two years.
To restore the profitability of its operations Dow is asking the government for increased protection against imports, and lower electricity rates. But its biggest problems are with KPCC's Korean management.
Because of its heavy losses over the last two years, Dow wants to merge its wholly-owned venture with KPCC, which would give Dow full managerial control over the combined companies. Dow also wants to oust KPCC's four government-appointed directors, whom Dow claims are incompetent.
Dow's criticism of these men provide an interesting glimpse into the workings of a partially state-run Korean industry. In an interview with the Asian Wall Street Journal, Dow Executive Andrew Butler complained, "These people haven't run a garage... They have no industrial experience."
But Dow was quite content with this situation during the profitable days of the 1960s and 1970s. Now that its operations are losing money, Dow wants the managers to go. "Many of the problems and frustrations existed in the '60s and '70s, but foreigners were then making a reasonable amount of money," a Dow executive told the Christian Science Monitor recently. "Now many are losing a lot of money, and that brings a whole different set of tensions into play."
Dow is urging the Korean government to intervene in the conflict so the two companies can be merged and the Korean managers removed. But the government says it will remain "neutral." It may have little choice in the matter, however. As the largest single investor in South Korea, Dow has plenty of clout. If the dispute leads to liquidation of its investments - a possibility if the dispute continues - it could jeopardize the success of the Korean government's foreign investment policy.
To make matters worse, Dow is also suing a Korean company for allegedly stealing its technology and using it in Korea without a license. (The lack of proper protection for technology has become an issue for other corporations in the country.)
The dispute between Dow and its Korean partners reflects growing tensions between Korean and multinational corporations operating in the country. Many Korean businessmen believe that foreign investors have too much power on the local market, and can use their enormous resources to compete with Korean firms. These fears have affected government decisions. For instance, the Bechtel Corporation recently announced a 50/50 joint venture with Korean Nuclear Engineering Company, which is 95% owned by the state-run Korea Electric Power Corporation. But its 50% share was reduced to 40% due to pressures from local engineering firms, who feared a Bechtel monopoly on engineering in the country.
The government has also been involved in a long dispute with General Motors over its role in the Korean auto industry. And last month a major U.S. investor, Control Data, pulled out of Korea partly because of the government's interference in its negotiations with a labor union (see page 14).
The dispute with Dow, however, is the most serious, and is being carefully watched by other companies. Despite the relatively open attitude towards foreign investment in South Korea, many American businessmen claim that there are too many regulations and blame Korean government bureaucrats for stifling the business atmosphere.
Foreign companies invested a total of $146 million in 1981, far short of the government target of $200 million. U.S. corporations accounted for $85 million, and close to half of this was in wholly-owned firms. Cancellations of investments in 1981 were up $10 million, an increase of 32% from 1980, which was the worst year economically for South Korea in over 20 years.
The South Korean government wants $2.5 billion in equity investment over the next five years. But the disputes with Dow and other foreign investors are raising question about the government's ability even to maintain current investors in the country.
Tim Shorrock is a freelance journalist based in San Francisco, who specializes in Korea and Japan issues. He is a member of the Bay Area Korea Support Committee.