Business Today Egypt

There's fingerpointing all around as Daewoo's consumer electronics division severs its relationship with Egypt's Banha

Korea's Daewoo Electronics and domestic assembler Banha Electronics have broken up. Although both have since found new partners on the Egyptian market, they're not quite ready to bury the past and wish each other the best.

At the heart of the controversy: Reports in the local press that Daewoo lost $411.66 million in the course of its six-year partnership with Banha. The Egyptian company assembled components for Daewoo-branded television sets and other consumer electronics goods and sold them on the domestic market.

The relationship had been rocky almost from the start, and neither side is interested in publicly addressing the substance of their dispute, which is clearly heading to court.

Daewoo lawyer Atef Afifi said the dispute was "becoming critical" and that he would not comment as long as the case is before an Egyptian court. Afifi denied a report in Al Alam Al Youm, the nation's financial daily, which quoted him as saying Daewoo had lost in excess of $411 million, calling the figure "imprecise." He did acknowledge that the losses were significant.

A senior Daewoo official, who spoke only on condition that he not be named, says the loss figures quoted in Al-Alam Al-Youm were incorrect, but agrees with Afifi's suggestion that the losses were substantial. The official says Daewoo incurred the losses after Banha did not deliver the sales it promised when it ordered repeated shipments of components.

Banha Electronics' legal advisor failed to return repeated telephone requests for an interview in the two weeks before press time.

Daewoo inked its first four-year contract with Banha in March 1995 and renewed it in March 2001, two years after it had expired. A Daewoo source says the gap between expiry and renewal was due to long "governmental procedures" as well as the Korean company's need to review its relationship with Banha.

At renewal time, Banha, a public-sector company, had committed itself only to the minimum specified production level of 40,000 television sets per year, which fell short of Daewoo's hopes for the Egyptian market, says a senior source at Daewoo.

When the two sides renewed their deal in March 2001, the Daewoo source continues, Banha ordered components for 15,000 television sets it said it would manufacture before the end of the fiscal year in June 2001. The 15,000, the Egyptian company allegedly told Daewoo, would be part of the 40,000 units specified in its contract for that year.

The Korean source says Daewoo executives were surprised when Banha next opened a line of credit for enough components to make just 5000 sets.

"Daewoo understood their difficulties related to the availability of foreign currency and restrictions imposed on public-sector companies' imports, but the components stored in containers [in a Korean port] accumulated fines of $109,000," he says. When Daewoo tried to bill Banha for the fines, "Banha enraged Daewoo by replying that no one ever imposes fines on a government [company]," the source continues, adding that the letter from Banha to Daewoo was included in the Korean company's filing seeking damages in an Egyptian court.

Daewoo replied by ordering Banha to suspend manufacturing and sales activity under the Daewoo brand name.

Although Banha promised to address its problems, Daewoo claimed the Egyptian company made no progress - and that Banha soon had similar problems with the production of computer monitors and VCRs under the Daewoo brand. The Korean giant terminated the contract by fax in March 2002, offering to sell Banha components at a later date provided the finished goods were not sold under the Daewoo name.

The Daewoo source in Cairo claims the Korean company then inked an assembly deal with Egypt's International Group for Investments (IGI) on 25 April, but a statement posted on Daewoo's website says it first signed the deal with IGI on 16 January. IGI and Daewoo held a launch party for the new line of televisions in early June.

In a recently filed countersuit, Banha claims it took a $250,000 hit from lost sales and unfulfilled obligations to suppliers when Daewoo severed its contract.

Either way, Daewoo has managed a new start. W. Dong, Daewoo Middle East's managing director, was quoted as saying the new contract with IGI "will affect the current market equations and also see an aggressive marketing and promotional campaign by Daewoo in Egypt" for its television line.

Dong said IGI's electronics plant in Egypt, which it owns through subsidiary Inter-Tech, may also assemble Daewoo home entertainment products. The Korean company says IGI has manufacturing expertise and a broad distribution infrastructure for customer, industrial and petrochemical products.

Meanwhile, Daewoo has stood by its joint-venture with another Egyptian company, Olympic, with which it assembles Daewoo refrigerators. Daewoo has been providing Olympic with technical support to upgrade and modify its existing product lines. Olympic has since captured a 60% share of the domestic refrigerator market.

Although officials at the Korean embassy in Cairo refused to comment, calling it a dispute between two companies, not nations, the upcoming court battles will do little to assuage the concerns of Korean investors. Daewoo sources says other large Korean business conglomerates including Hyundai and Daesun Construction have had negative experiences working in Egypt.

With growing competition, a general economic slowdown and political instability in the region, it is vital that the court address the competing claims from Daewoo and Banha if it is to reassure foreign investors that Egypt is taking its problems seriously. bt