The embezzlement trial of Hyundai Motor Co. chairman Chung Mong-Koo prolonged the carmaker’s worst strike, slowed factory construction and delayed new models. Now his appeal may prolong the pain.
Chung decides everything from employee raises to the size of the Christmas tree in the headquarters’ lobby. His management style helped triple sales and transform Hyundai Motor from the butt of jokes to a rival to Toyota. It is a liability as Chung faces the distraction of a year-long appeal and possible prison time.
“The chairman is at the center of every decision taken at the company,” says Park You-Ki, the former leader of Hyundai Motor’s 43,000-member union. “Management was unable to make decisions while he was away, and that was one of the reasons wage negotiations dragged on so long last year.”
Chung, 69, spent two months in jail last year before he was released on bail during the trial. On Feb. 5, he was found guilty of breach of trust and embezzling more than 69.6 billion won ($73.8 million). He was sentenced to three years in prison but remains free pending appeal. His first hearing is Tuesday.
“It could work out like ‘Goodfellas,’ where the mob boss keeps running his operations from his jail cell,” says Henry Seggerman, chief executive of New York-based International Investment Advisers, which manages $170 million of South Korean stocks, including Hyundai Motor shares.
Shares of Hyundai Motor have lost about a third of their value since the beginning of last year as the chairman stood trial and the won climbed against the dollar. They slid 0.9 percent to 66,200 won this morning in Seoul.
Net income for the year fell 35 percent to 1.53 trillion won, compared with 30 percent growth in the previous five years.
Hyundai Motor, together with affiliate Kia Motors, seeks to become the world’s fifth-largest carmaker by 2010. It’s currently ranked sixth, trailing General Motors, Toyota, Ford, Volkswagen and DaimlerChrysler.
Chung’s court appeal threatens to further delay the company’s goal of introducing a luxury model to compete with BMW, Toyota’s Lexus and Nissan’s Infiniti. Hyundai plans to unveil the new car, code-named the BH, in the first half of 2008, a year later than initially planned.
“Delays in such symbolic and significant projects as the BH are very negative for the company, especially when the head of company’s legal problems caused them,” says Hyun Hye-Jung, an analyst at Woori Credit Suisse Asset Management Co. in Seoul. “It’s such a critical period to become a real global player, and further delays will hamper its growth.”
Chung, the son of Hyundai founder Chung Ju-Yung, took office in December 1998 amid the Asian financial crisis. He immediately introduced a 10-year, 100,000-mile warranty on vehicles sold in the U.S. to counter a sales slump. U.S. sales began rising the next year and increased fivefold from 1998 through 2005. The carmaker also improved the quality of its vehicles, ranking third among brands last year in J.D. Power & Associates’ annual study.
Hyundai Motor exported 5 million vehicles in the 30 years from its founding through September 1998. It doubled the figure by July 2004. Export growth slowed during Chung’s trial. In 2006, sales in the U.S. increased 0.1 percent, the slowest pace since 1998.
Hyundai Motor’s union staged a four-week strike in June and July, costing the carmaker 1.3 trillion won in lost production.
Chung’s case follows the arrest and trial of other executives at Korea’s largest business groups, known as chaebol, which for decades have operated as family-run fiefdoms. In the last two years, executives at both Samsung Group and Daewoo Group have gone on trial for fraud or breach of fiduciary duties.
The latest trial may convince other chaebols to bring in outside managers and become more open to shareholders, says Hirofumi Yokoi, a Tokyo-based analyst at CSM Worldwide.
