January 9, 2009 - Ssangyong Motor Company, Seoul South Korea

Korean Carmaker Seeks Receivership

Ssangyong Motor, the South Korean unit of the largest Chinese automaker, filed for bankruptcy protection Friday, becoming the first major casualty among Asian carmakers as demand plunged and credit dried up.

Ssangyong, the smallest of the five automakers in South Korea, had been struggling to obtain cash after being hit hard by slumping sales. In the last month, it was unable to pay its employees while governments and creditor banks in China and South Korea were locked in a dispute about who should bail out the company. Ssangyong is owned 51 percent by SAIC Motor of China but runs its factories in South Korea, employing 7,100.

The automaker needed 600 billion won, or $451 million, in new financing to stay in business, according to its biggest creditor, the Korea Development Bank.

On Thursday, Ssangyong’s board met in Shanghai, where SAIC is based, to discuss the crisis.

“We were running out of time as we discussed what we could do to avoid going bankrupt and deal with the acute cash flow crisis,” Choi Sang Jin, Ssangyong’s executive in charge of corporate planning, said Friday.

On Friday, Ssangyong filed for receivership — similar to bankruptcy protection in the United States. If the request is accepted, SAIC maintains its share holding but must relinquish management control while court-appointed executives and creditor banks determine the company’s fate.

In South Korea, creditor banks usually take over a company in court receivership, overhaul it by selling assets and laying off workers and then re-sell it. Or they can liquidate the company when it is deemed unviable.

Like their rival around the world, South Korean carmakers have been cutting production to cope with a slump in demand. On Friday, Hyundai Motor, South Korea’s top automaker, planned to cut production at all its domestic plants, except one producing small cars, by 25 to 30 percent in the first quarter, a company spokesman, Jake Jang, said.

The deteriorating industry environment also prompted Moody’s, the ratings agency to place the Japanese carmaker Honda on review for a possible downgrade.

In the fallout from the Ssangyong collapse, its chief executives, Choi Hyung Tak and Zhang Haitao, resigned on Friday.

“SAIC’s behavior so far has shown that it is not much interested in Ssangyong any more,” an analyst at Woori Securities, Chong Yon Ho, said. “Ssangyong will find it hard to find new investors, since demand for its main products, such as S.U.V.s and oil-guzzling big sedans, will not improve in the next two or three years.”

SAIC said in an e-mailed statement that the decision had been a tough one to make and that it would work with all parties to help Ssangyong normalize operations.

“SAIC would like to play a role, if given the chance, during the process of reviving the company,” Mr. Choi, the Ssangyong executive, said when asked about reports that regarded the filing for court receivership as a way for SAIC to exit South Korea.

Ssangyong became South Korea’s first high-profile victim of the global crisis in the same day the country’s central bank cut its key interest rate for the fifth time in three months. The bank worried about domestic economic activity “slackening at a rapid pace.” The rate is now 2.5 percent, a record low, down from 3 percent.

Ssangyong, previously owned by South Korea’s Ssangyong conglomerate, faced similar trouble in after the 1997-97 Asian financial crisis.

When SAIC gained control of Ssangyong in 2004 for $500 million, it made headlines because it was the first acquisition of an overseas automaker by a Chinese company.

But it shocked South Koreans who feared that their giant neighbor was quickly catching up in another important industry. Ssangyong has been plagued by negative news reports in South Korea, and prosecutors are investigating accusations of illegal technology transfers from Ssangyong to SAIC.

Last month, Ssangyong and SAIC sought help from the Seoul government. But the government and Ssangyong’s main creditor, the state-owned Korea Development Bank, insisted that SAIC as the majority shareholder take the lead in providing cash relief.

SAIC faced its own troubles at home, with its sales plunging. In addition, the Chinese government complained that South Korean banks were reluctant to extend loans to Ssangyong, said people close to talks between Ssangyong and the South Korean banks. They spoke on condition of anonymity because they were not authorized to discuss the matter with the media.

Ssangyong on Friday unveiled several measures to cut costs such as seeking voluntary retirement, wage cuts of up to 30 percent for the next two years and provisional suspension of welfare support.

Manufacturers around the world have suffered greatly from shrinking demand, but some have received government assistance. American automakers, notably General Motors and Chrysler, have recently received emergency bailout money.

Because of its relatively small size and its Chinese ownership, Ssangyong has failed to stir the kind of public sympathy that giant domestic companies in trouble had elicited from the public.

But political pressure is expected to mount on the government to save the company when Ssangyong begins shedding its local workers.

Toyota Motor, which had been deemed relatively resilient because of its fuel-efficient cars, recently warned of a likely operating loss this year — an announcement widely interpreted as a sign of worse to come.

With an annual production capacity of 200,000 vehicles and 7,100 employees, Ssangyong has posted four consecutive quarterly losses. Its sales fell 30 percent last year.

Original Story - New York Times