Industry giants get arm twists...

On Monday, South Korea's five most powerful business-men will be chauffeured to the presi-dential mansion and perhaps, be handed an ultimatum: "Follow orders, or else!"

It sounds like a scene from decades ago, when central government mandarins had conglomerates dancing to five-year economic plans and export quotas. But when President Kim Dae Jung confronts the heads of the "big five" chaebols - Hyundai, Samsung, Daewoo, LG, and SK - he hopes to mark an end to old ways.

A year into South Korea's worst crisis since the Korean War, Mr. Kim is tired of slow reform and set to confront core problems in the economy. While credited for industrializing the country and making South Korea the fastest- growing economy in the 1980s, the chaebols are now considered dinosaurs. Affectionately known to make everything from "ships to chips," most are run by a founding family and do not answer to stockholders. While Koreans are proud to work for a chaebol, they also envy its vast economic and political power.

Bloated on cheap credit, the chaebols never were truly competitive. Owners valued assets more than profits, expanding into every industry under the sun. The top 30 chaebols have five times more debt than assets, and taxpayers must now help bail them out. Korea was forced to go to the International Monetary Fund to avoid default last year when international investors pulled money and demanded loan repayments.

Accounting for about 40 percent of gross domestic product, the big five remain the heart and soul of Korea's economy. Changing their business practices is key to resolving the crisis, which will have shrunk the economy 7 percent this year and thrown 1 million people out of work.

Regardless of how the big five drag their feet, the government says, something will change, even if it requires the ultimate weapon: cutting credit.

The big five have announced plans to swap companies in major industries. The "Big Deals" would allow them to focus (and presumably eliminate overcapacity and debt). While some deals have been approved, unsatisfied officials sent chaebols back to the drawing board this week after rejecting some of their plans. The government demands deals be completed by year-end. More deadlines follow: Chaebols should reduce debt ratios to 200 percent by late 1999. By March 2000 they must eliminate debt guarantees between subsidiaries, which prop up sick companies at the expense of profitable ones.

Further raising the heat, the government has limited credit and slapped chaebols with multimillion-dollar fines. Soon, with expanded powers the Fair Trade Commission (FTC) will be able to search and seize company documents.

But Kim can only push so hard. If one of the big five goes bankrupt, the repercussions will be enormous. More than 100,000 employees and their families could hold street protests. And the chaebols' connections are strong in both political parties.

"In the recent past the [ex-ruling party] has acted as a spokesman for the big five chaebols," says Henry Morris at Industrial Research and Consulting in Seoul. Today, the president's coalition partner is Kim Jong Pil - the old No. 2 man in the 1961-79 dictatorship that nurtured chaebols to power.

Politics is a particular concern because President Kim wants a friendly successor, say analysts. Nearly every Korean president has fallen victim to political revenge, and been either assassinated, exiled, or jailed. The big five chaebols aren't "too big to fail ... [but] the government wouldn't like to be accused of catapulting them into abrupt bankruptcy," says Mr. Morris.

Short-term difficulty could mean long-term health, and letting one of the big five fail could set an example for others and convince foreign investors that Korea is serious about reform. It would also liberate credit for small and medium companies who might ultimately drive a recovery.

But the big five know Kim's limitations. Having survived harsh times before and developed Korea's "miracle economy" from the ashes of war, each wants to remain standing if one has to fall. They complain of government pressure, saying reform should be left to market forces and financial institutions. It's the government that is stuck on old ways by strong-arming them, they say.

Banks can cut credit and demand corporate reforms. But in today's Korea, they cut their own throats as well. With too much bad debt on their books, banks themselves go under. Conveniently, the government controls four of six major banks through recapitalization of such formerly unhealthy institutions.

"[Kim] has a lot of power if he wants to," says Richard Samuelson at SBC Warburg Dillon Read in Seoul. Maybe the president will force a chaebol to bankruptcy. Or maybe he won't. Certainly, he is "likely to rattle their chains a bit" next week, says Morris. The chaebols "can either choose to believe he's bluffing ... or decide the bluff is too serious to stand" and follow Kim's requests, adds Morris. In any case, "[Kim] has momentum [and public opinion] on his side," says Keith Nam, an analyst at ABN-AMRO in Seoul.

Meanwhile, the chaebols' big deals are getting even bigger. Samsung Motors may be traded for Daewoo Electronics. The big five will be working through the weekend to come up with new plans before the big meeting.