When bureaucrats invest

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When bureaucrats invest

“Hidden champion” is a term coined by German business author Hermann Simon referring to relatively small but highly successful enterprises that aren’t well known by the public at large. To fit into the category, the company should have a brand that controls a big share in the global or local market despite a low level of public awareness. There are over 1,300 hidden champions of small- or mid-sized scale in Germany that on average ship 293 billion won ($278.2 million) in annual exports and hire over 2,000 employees. They are the hidden secret behind Germany’s status as an export powerhouse.

In 2011, President Lee Myung-bak announced a large-scale support program to foster hidden champions in Korea. Small home appliances maker Moneual was crowned a hidden champion in the first year. The company, with its signature robot vacuum cleaner, came into the spotlight after winning awards at the Consumer Electronics Show, the largest consumer technology trade show that takes place every January in Las Vegas.

Afterwards, the company, which was founded in 2004 by Korean?American Harold Park (Park Hong-seok), was courted by state-invested and commercial banks. The Export-Import Bank of Korea, Industrial Bank of Korea, Korea Development Bank, Kookmin Bank and Nonghyup Bank willingly offered loans. It received red-carpet treatment because of such quasi-government backing. The company quickly grew. Revenue surged to 1.27 trillion won last year from 295.3 billion won in 2011. Its founder and CEO was cited as a successful entrepreneur.

Last year he pocketed a cash dividend worth 6.6 billion won. He lived in a luxury apartment in a posh neighborhood in southern Seoul. Then an employee at the loan department of Woori Bank smelled something fishy. He began to wonder why loan receivables took up so much of the revenue figures. The bank asked to scrutinize the company’s financial statements. The company refused to comply. The bank recovered all of its 85 billion won in loans and dumped Moneual from its client list.

A Shinhan Bank employee found something funny after checking out the company’s U.S. sales partner. There were scant records of sales of Moneual products. The bank also pulled back its loans. A quick look at the company’s financial statements and balance showed that Moneual was sound. The problem was in its cash flow. Export receivables should be paid in cash 60 to 90 days later. From its revenue figures, it should have been receiving billions of won. But it recorded a negative 1.5 billion for its cash inflow last year. The home appliance maker boasted sales of over 1 trillion won but didn’t even have a decent manufacturing line. The picture of a factory on its website was of a small parts assembly line. It acquired easy loans from banks with bonds that are worth no more than trash.

The Financial Supervisory Service launched an investigation after the company filed for court receivership. In September, the Korea Customs Service raided the company on a tip that it cooked export books but it didn’t bother sharing that information with financial regulators or banks. The prosecution launched a separate investigation into criminal activities. The Board of Audit and Inspection will also have to do some scrutiny as most of state-invested banks are involved.

The picture is a disheartening case of deju vu.

Reckless lending in financing caused enormous harm to the economy under the Kim Dae-jung administration. The state-run Korea Technology Finance Corporation lost 1 trillion won after guaranteeing 2.2 trillion won in primary collateralized bond obligations for startup companies in 2001. Amid a startup boom, schemers disguising as entrepreneurs used easy government loan guarantees to speculate on real estate or golf club memberships.

Every administration has an economic slogan. It was startups under Kim Dae-jung, a green economy under Lee Myung-bak and a creative economy under Park Geun-hye. Because of policies, money takes on a new color according to the administration’s theme. There have been some successes - and many failures. Credit was basically railroaded by bureaucrats.

The botched and reckless lending and lax supervision of the Board of Audit and Inspection described in the startup report from 2005 has been repeated. Bureaucrats in charge of finding hidden champions didn’t know what they were doing. They could hardly have examined balance sheets properly, let alone conducted regular field investigations. A total of 267 companies won hidden champion recognition. Of those companies, 93 saw their revenues fall from levels before they were chosen.

A friend of mine who is a CFO of a company said a securities firm would never have invested in Moneual. There were no names of foreign financial companies or mutual funds on the list of the company’s creditors. There were only banks that obeyed the government.

JoongAng Ilbo, Oct. 30, Page 34

*The author is an editorial writer of the JoongAng Ilbo.

by Cheong Chul-gun

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