Hyundai bribery scandal puts a spanner in works

SEOUL - The bribery scandal hanging over Hyundai chairman Chung Mong Koo and his son, Kia president Chung Eui Sun, is hindering their plans to become one of the world's top five car-makers by 2010.

The two have appeared at the Supreme Prosecutors' Office in the past few days to answer questions about a slush fund for bribing Government officials. In response to the scandal, the Chung family agreed to donate 1 trillion won ($1.7 billion) in shares to charity as contrition.

"If the probe drags on, it may disrupt the normal course of Hyundai's daily operations," said Lee Seung Jun, of CJ Asset Management.

At stake is the elder Chung's drive for Hyundai and Kia to leapfrog Volkswagen and DaimlerChrysler, the world's fifth- and sixth-largest car makers. Investigations have led to three arrests and travel bans on 10 executives, forcing Hyundai and Kia to delay opening factories in the United States and the Czech Republic.

Henry Seggerman, chief executive officer of New York-based International Investment Advisers, said if the probe "ends up reducing the family's influence, it could ultimately benefit investors. If there's a perception that voting power has improved for shareholders, that's positive."

Prosecutors are investigating the grant of permits for two blast furnaces at Hyundai Motor affiliate INI Steel, a permit for a Seoul office building and how the Chung family used logistics affiliate Glovis to strengthen its hold on Hyundai affiliates.

Kim Eun Jin, a Standard & Poor's analyst, said investors should be concerned by about 13.8 trillion won in debt spread through dozens of companies now controlled by Chung Mong Koo, not just 1.8 trillion won in debt at Hyundai.

It's the second time in three years Hyundai has been part of allegations of illegal payments to government officials. A vice-chairman was given a two-year suspended sentence in 2003 for such activity.

- BLOOMBERG