SEOUL - South Korea's SsangYong Group has begun a major corporate restructuring. The group is trying to save its troubled auto business from becoming the industry's first victim of a slowing local economy and huge capacity surplus.
The group's 25 affiliates will be cut to 21 through mergers and selloffs. Moreover, Chairman Kim Suk-Joon has ordered cost cuts across the board, and he has trimmed debt by about $600 million.
SsangYong also has been looking for fresh capital. It is offering a 49 percent interest in its automotive unit to major automakers, including General Motors. An investment banker in Tokyo said SsangYong has also made presentations to at least three Japanese carmakers.
So far there have been no takers. Daimler-Benz AG owns 5 percent of SsangYong Motor Co. Daimler-Benz has an option to raise its share to 10 percent.
'The underlying message is that the restructuring ... won't affect the bottom line anytime soon,' said Kang Hun-Sok, auto industry analyst with ING Baring Securities Ltd. in Seoul.
Since 1991, when it last made a profit, SsangYong Motor's cumulative losses have totaled about 500 billion won ($565 million).
But the financial bleeding is getting worse. Last year's loss of 228 billion won ($256 million) was nearly twice as large as the previous year's loss.
The principal source of SsangYong's problems is its heavy debts, now about $3.4 billion.
The company, a truckmaker and specialist in four-wheel-drive vehicles, began borrowing heavily several years ago to finance its entry into the luxury passenger car segment. It developed a version of the last-generation Mercedes E class to be called the Chairman. Borrowing has since pushed its net debt-to-equity ratio to 8.8-to-1, a stratospheric level when compared to a typical level of 1-1 or 1.2-to-1 at most well-financed companies.
The South Korean market is now saturated. Competition is intense both there and overseas in its segment. SsangYong's investment appears to have little chance of ever paying off.
'They're being killed by interest costs. Most of their losses are due to interest expenses,' said Kang. 'On an operating level, they're doing OK.'
As part of the streamlining, SsangYong Motor will sell the building that houses its Seoul r&d center. The value of the building is estimated at $110 million. The r&d staff is moving to a new, lower-rent location in Pundang, a satellite city.
Also reported to be up for sale is the company's wheel manufacturing division in Pupyong, a suburb of the Korean capital. With an annual production capacity of 2.7 million units, it is the country's largest producer of wheels.
At the same time, SsangYong Motor has been working hard to improve fundamentals. Revenue last year rose 39 percent to $1.7 billion, on sales of 79,800 vehicles. Home-market sales jumped 69 percent, and exports rose 31 percent.
No company has taken up SsangYong's offer to sell more equity because there is little benefit in taking less than a controlling stake in such a debt-laden company, Kang said.
'It's just not realistic to take on such a big debt,' he said.
Daimler-Benz has not exercised its option to increase its equity stake to 10 percent because the partnership may already have achieved its intended goals.
Daimler-Benz wanted to establish a supply base for low-cost engine parts and it wanted a source for Mercedes-badged vans for sale in Southeast Asian markets.
Daimler imports SsangYong-made engine parts into Germany. SsangYong's Istana, a modified version of the MB100 van, is exported to Southeast Asian markets.