South Korea Softens Its Stand Against Hyundai : Economy: Officials don’t want to hurt the company, which accounts for 17% of national output. They will still go after its founder, however.

Officials of Hyundai, South Korea’s second-largest conglomerate, acknowledge that a feud between the company’s founder and its traditional partner, the government, has caused difficulties for the conglomerate in recent months.

But the government seems to be walking a fine line between punishing Hyundai founder Chung Ju Yung, 76, and doing serious and lasting harm to the business group, or chaebol, whose 41 companies claim annual sales of $47 billion--17% of the nation’s gross national product.

Chung accused President Roh Tae Woo of threatening to “destroy” Hyundai after Chung set out to “destroy” Roh’s ruling party by plunging into politics as South Korea’s “Ross Perot” candidate for the presidency.

An influential ruling Democratic Liberal Party leader confirmed that the government is pursuing a new strategy of easing up on the companies but continuing to hammer away at Chung and his relatives. As such, the worst for the Hyundai group may be over.

But the party leader said that as long as Chung continued his quest for political power, the Hyundai companies “are out of their minds if they think they are going to get any favors from this government.”

He added, however, that the group, “which used to get lots of favors,” would not be subjected to special abuse.

“Watch the rock in Gibraltar. As long as the rock stands there, we’ll stand,” said Chung Hoon Mok, chairman of Hyundai Construction & Engineering Co. He said the political feud has given the group a “difficult few months,” including difficulty raising capital.

That situation has improved only “a little,” Chung Hoon Mok said. Government restrictions on borrowing and fund-raising are “easing . . . but (the problem) has not been solved,” he added.

Hyundai will still be forced to curtail investments and draw heavily from its only source of internal cash flow--its prosperous shipbuilding wing, said a top analyst at a South Korean credit rating company who asked not to be identified.

So far, founder Chung and Hyundai have been hit with:

* A $180-million fine for evading inheritance taxes on the sale of Chung-held stocks to his sons and relatives.

* A freeze on access to financing through issuance of stocks, corporate bonds and bank loans so severe that chief executives of Hyundai companies petitioned the minister of finance in February to lift restrictions on loans.

* A $35-million penalty assessed on Hyundai Merchant Marine Co. and indictments on charges of tax evasion against five of its executives, including the founder’s fifth son, Chung Mong Hon, who was arrested and jailed.

* Record low prices of stocks of Hyundai Group companies listed on the Seoul Stock Exchange.

* An order, now pending, to recover $262 million that Hyundai loaned to founder Chung, or face a halt to all new loans and a ban on buying land and making new investments.

The group “hit the bottom--and survived,” the analyst said. “If that had happened to Daewoo (South Korea’s third-largest conglomerate), it would have gone bankrupt in a month.”

The turning point came April 25 when the chiefs of the nation’s five largest chaebol met with Roh. Included was Hyundai’s Chung Se Yung, who apologized for the “trouble” his brother had caused.

Alarmed by Roh’s policy of trying to minimize the conglomerates’ influence on the Korean economy, “the chaebol chairmen tried to act as a mediator,” the analyst said. For his part, Roh had been shaken by criticism likening his Hyundai vendetta to “burning the house to roast a pig.”

A week after the summit, a Hyundai hard-liner in the battle with the government was removed from his post as coordinator of the conglomerate’s activities. Billionaire Chung declared that he would stop exploding “bombshells” against the government. The government, for its part, shelved sanctions it had planned against Hyundai Electronics.

Suh Sang Mok, chairman of the ruling party’s policy coordination board, said Hyundai promised to keep the conglomerate and its “army” of 174,000 employees out of politics.

“But when election time nears, I’m sure the Hyundai Group will be working 200% for Chung,” Suh said. “I don’t think (Chung’s) Unification National Party can campaign without Hyundai.”

Indeed, Hyundai employees were heavily involved in a National Assembly campaign in March. One Hyundai auto showroom on the first floor of the building that houses the ruling party headquarters displayed signs lambasting a former Hyundai executive as a “traitor” for resigning to run--successfully--as a ruling party candidate.

After the election in which Chung’s party won 31 seats, or 10% of the total, a Hyundai salesman “had the gall to come upstairs and try to sell Grandeurs to Democratic Liberal Party members,” Suh said. The Grandeur is Hyundai’s top-of-the-line passenger car.

Chung Hoon Mok, nonetheless, insisted that employees are not taking orders from Chung Ju Yung. “That charge is not correct.”

A final resolution appears to rest on one of three scenarios: founder Chung Ju Yung giving up his race for the presidency, losing his bid in a December election or winning the election.

If he wins, South Korea would be transformed into a “Hyundai republic,” Suh said.

Suh said the feud began after the government launched a squeeze on credit and stringent enforcement of inheritance tax laws. The moves were applied equally to all the conglomerates, he said.

Hyundai, however, asked “for special favors, and the government wasn’t giving any,” he added. Communication between Hyundai and the government broke down, “something went wrong somewhere. It should have been worked out . . . but things got emotional,” resulting in the fallout, Suh said.

“It’s bad for Hyundai, it’s bad for the country, it’s bad for the ruling party,” Suh said. “You cannot destroy Hyundai. That would mean destroying the Korean economy. But their activities could shrink,” he said, citing the large number of heavy industry and construction contracts Hyundai gets from the government.

Hyundai Construction’s Chung refused to discuss the feud except to say that the rags-to-riches magnate “for some time had been critical of the government’s economic policy,” but he volunteered financial information about the group to provide assurance that the conglomerate is surviving.

“My wish,” he said, is to keep Hyundai out of politics and stick to business.