Conversely, the event proved to be one that would eventually enrich and transform Iscar by giving it confidence to acquire a suite of other overseas cutting tool operations and enabling it to draw on the expertise and product range of what was once one of Korea's oldest and most venerable companies.

The strong presence that Iscar now enjoys in the Korean and global auto industries was not won overnight. Begun by Israeli business legend Stef Wertheimer in 1952, Iscar was attempting to penetrate the Korean market in the 1980s via a Japanese distribution network. While attempting other markets globally, Iscar had no overseas manufacturing presence outside its native Israel. Explains TaeguTec president Moshe Sharon, "As a importer into Korea, our market share was fairly small since Koreans have a preference for domestically made products. KTC at the time was the market leader and we were offering competing lines."

The origins of KTC go back to April 1916 and the discovery of an outcrop of wolfram (tungsten ore) that was later exploited as the Sangdong Tungsten Mine. In 1972 during Korea's period of rapid industrialization, the then Korea Tungsten Mining Co. opened a plant to produce ammonium paratungstate, an intermediate material used in making tungsten powder. This forms the basis of a wide variety of tungsten products-wire, rod and sheet. In November 1977, KTC completed a cemented tungsten carbide tool plant, and followed this initiative by opening a tool holder plant in November 1979. Plants to produce tungsten carbide rolls and tungsten wire were opened in November 1988 and November 1989, respectively. KTC subsequently gained a strong foothold in the market, supplying cutting tools to the domestic industrial giants of Kia, Hyundai and Doosan.

THE RIGHT MOMENT TO BUY At the beginning of the 1990s Iscar contracted with KTC to sell the Israeli company's line of cutting tools through its existing channels. In 1995, Iscar opened a wholly owned subsidiary with the exclusive rights to sell its advanced cutting tools. The venture was a success, with the subsidiary grossing over US$1 million in sales. By the end of the decade, Iscar was a seasoned player in the market.

"We were involved with what you might call the Korean reality' and knew the Korean environment well," said Mr. Sharon. Iscar also knew KTC, then ranked as the 28th-largest chaebol by assets. "Because of our cooperation with KTC, we also recognized its capabilities in production, R&D and marketing within Korea," said Mr. Sharon. "When what Koreans call the IMF Crisis' struck in 1998, the moment was right for us to buy a company here."

KTC's proprietor, the construction-based Keopyung Group, defaulted on its loans and was declared bankrupt by its main creditor, Chohung Bank. Under pressure to restructure radically, Keopyung announced it would shed 14 of its 19 subsidiaries, KTC among them. Once up for sale, the Daegu company found a interested buyer in Iscar and negotiations began, a process overseen at every stage by founder Stef Wertheimer and a matter that had been the subject of serious consideration.

"It was a major step for us in two ways," said Mr. Sharon, "First, a lot of money was involved even for us; and second it was the first time we had bought such a large company. Moreover, it was outside of Israel." After months of negotiations marred by a labour dispute, Iscar finally bought KTC. The purchase also represented a change in philosophy for Iscar, a large company that had grown out of a welding shop. "It's very difficult to grow as a single company. You can grow much faster if you acquire one company and then another," said Mr. Sharon. "This represented a change in the mindset of our owners."

KTC proved to be the first of a worldwide wave of acquisitions of companies in the metal-cutting field by Iscar that included the tool companies of Ingersoll of Germany, Ingersoll of U.S.A., Outil of France, and more. However, following the acquisition of KTC another major decision was made concerning the future of its (until then) only overseas subsidiary-that the company should not be absorbed completely by Iscar but rather should be allowed to operate as an autonomous entity with its own identity, R&D effort and product development program. The same approach was subsequently taken with Iscar's other overseas acquisitions. "Our subsidiaries even compete with each other, so in some market situations we have Ingersoll versus Iscar versus TaeguTec," noted Mr. Sharon.

ISCAR'S ANCHOR IN ASIA Despite the concerns, a major element in the decision to buy Korea Tungsten was the fact that Korea was a highly industrialized country with an industrial structure underpinned by corporate behemoths such as Ssangyong and Hyundai. Commenting that the acquisition of KTC was a strategic decision, Mr.Sharon said, "I believe our management considered the company would be a good anchor' for Iscar in Asia."

However, much work had to be done before the new entity could be vested with such responsibility. The company was on the ropes financially, the accounts receivable system was not conducive to maintaining a satisfactory cash flow (customers were given one year to settle their bills), the head office was located in Seoul far away from the source of the company's wealth on the shop floor in Daegu, and the product line was outdated. Moreover, in the global tool market a "Made in Korea" label was not synonymous with quality.

"It was not a modern company," said Mr. Sharon. "In comparison with Iscar, the management philosophy was totally different. For example, we believe in the full involvement of management in sales, but the need for executives to meet with customers was not a common concept at the time."

There followed a comprehensive overhaul of the company effecting its physical structure, business structure, workforce, product policy, distribution, image, infrastructure and development. Physically, the impressive head office in Seoul was closed and all administration relocated to Daegu to be close to the company's "nerve center activities" of R&D, purchasing, production, marketing and sales. "Every place was renovated or redesigned," said Mr. Sharon. "Not only was our production area equipped with the latest technology, but even the dining room was upgraded to give our employees the feeling they were working for a high-tech company."

Within the business structure, all low-tech and low-profit activities where value added was limited were jettisoned. Some products were clearly past their prime. "You don't keep trying to sell the same thing you can't sell," said Mr. Sharon. "While we are an international company, KTC was local. So we brought an international perspective to the needs of the market" said Mr. Sharon. "We brought in new materials and new types of tools." While the new management was creating a revolution in the kind of tools manufactured, it was decided to retain KTC's range of industrial products such as carbide rolls used by POSCO to produce wire rods, and dies and anvils used to create what is, in effect, artificial diamond for high-resistance industrial applications.

With regard to the workforce, the necessary structural changes would also impact upon the delicate issue of staffing levels. The prospect of redundancies spurred the union to hold a short strike and management responded with a lockout, but finally both sides agreed that to save the company, sacrifices had to be made.

LOGISTICAL SUPPORT & AN INTERNATIONAL IMAGE Product policy underwent a major shift as emphasis was put on those product areas judged to have growth and developmental potential. Over the next five years it was decided that out of total turnover, 35 percent should be derived from tungsten powder and industrial products, and cutting tools, 65 percent. By market, 35 percent should be generated domestically, and the remaining 65 percent by exports, a major change for a company 90- percent dependent on the home market alone. Production was slated to increase by 100 percent.

To support these goals, five branches were put in place nationwide to respond to the day-to-day needs of domestic customers plus some 30 subsidiaries and distributors were set up globally to sell TaeguTec products. Locations include Britain, China, Japan, Germany and India. Whereas most are sales points, this latter example was established as a manufacturing operation to avoid the high tariffs India imposes on imports of cutting tools.

"There was a need to create a distribution and market support strategy to enable such growth," said Mr. Sharon. "This included the provision of stock, and the introduction of a logistical system to keep ahead of everyone in order to support demand." TaeguTec's central computer system supports the logistical system, thus enabling the company to serve as a reliable source of supply for customers worldwide.

Because the owners wanted to transform their new acquisition from a local to an international company, they felt it appropriate that it have an international image. Accordingly, the company was given a new name- " TaeguTec "-by IMC (Iscar Metalworking Cos.) Group president, Jacob Harpaz in acknowledgement of the company's home base and the advanced technology with which it had been infused.

Massive investments were made in both personnel and productive capacity. Advanced software for design and management purposes were introduced and TaeguTec engineers underwent long-term training at Iscar in Israel. Facility investment on a huge scale resulted in TaeguTec having one of the highest levels of robotic manufacturing of any plant in Korea.

"We took the philosophy from Iscar that if you produce with an automatic system you will produce with consistent quality," explained Mr. Sharon. "Every one of our items has to be the same and we produce millions every month." While the use of robotics is more expensive than labor and is not economic in the narrow sense of competitiveness, the issue of quality, and by extension predictability, ranks high with Taegu Tec's customers.

"My cutting tools cost US$8 per each but are put into a machine that costs US$500,000 and works for 20 minutes; after that time, the machine can't use it anymore," continued Mr. Sharon. "But, if by producing with quality, the customer has confidence the cutting tool will last for 20 minutes, then he (or she) can forecast their productivity. They know and can control their business."

DAEGU GOES TO BAT FOR THE HOME TEAM Six years on, TaeguTec's combination of high-quality advanced product, international image, logistical support and "hands-on" sales approach has paid off. After growing at the rate of 35 percent annually, revenues are now running at 200 billion won per year, double the level at the time of the takeover. Employment has grown by 12 percent over the last two years to 900, just short of the pretakeover level of 1,000. Exports, however, contribute 55 percent of all revenues, 10 percentage points shy of the five-year goal of 65 percent. "We're not there yet but we're on the way," said Mr. Sharon.

Asked as to what experiences have been different from his expectations during his three-year tenure in Korea, Mr. Sharon replied it had been the company's performance.

"Our growth has been pleasantly surprising," he said. "It has been very rapid and is mostly thanks to the quality and innovative nature of the product." The image problems of the past and the "Made in Korea" label no longer inhibits the intelligent customer from using any tool he or she feels has an advantage, he said. The upshot is Iscar is taking advantage of the situation to invest progressively more into TaeguTec.

"The company is successful and growing and we feel that this is a good business environment that is investorfriendly,'" said Mr. Sharon. The city of Daegu came to the assistance of TaeguTec in January this year when the company was faced with huge charges by state power monopoly, KEPCO (Korea Electric Power Co.) when it applied to have electricity supplied to a new factory being built on its current plant site. KEPCO claimed the charges were warranted since a new connection was required. The company, on the other hand, disputed this assertion and counter claimed that the existing connection was sufficient. On learning construction on the new factory had been halted, Daegu mayor, Cho Hae-Nyung visited Mr. Sharon at his office to pledge his support. Mayor Cho successfully intervened with KEPCO on TaeguTec's behalf with the result KEPCO dropped its demand and construction on the expansion continued.

TaeguTec's contribution to the local community through its stunning makeover of the former KTC has won it friends who are committed to supporting the company in the face of external challenges such as the one from KEPCO. Taking a step into the unknown through the acquisition, Iscar's confidence in its technology, management techniques and in Korea have been rewarded by the formation of a solid, mutually rewarding partnership that might serve as a worthy example for all companies regardless of size who seek opportunity here in Asia's most promising market.

by Charles Duerden (cduerden@kotra.or.kr)