(FORTUNE Magazine) – SOUTH KOREA'S long quest to be the next Japan seems right on schedule. The country's giant conglomerates are moving into every market on earth. Goldstar has bought a 5% stake in Zenith Electronics in the U.S. Hyundai cars are rolling into Europe. Samsung is pumping oil in Western Siberia and setting up television plants in Eastern Europe. Most dramatically, Daewoo Chairman Kim Woo-Choong has made deals to build factories in North Korea, finally bridging the heavily armed border of the Cold War's last divided nation. But look more closely. Much of that frenetic activity is aimed at countering South Korea's eroding competitiveness. It's not that the economy is in trouble; gross national product has grown an average 9% annually for the past four years and should rise nearly as much this year. Even so, the faltering of what has been a fabulous export machine has created a crisis atmosphere in Seoul. Says Park Seong-Yawng, chairman of the Kumho Group, a transportation conglomerate, in typical overstatement: ''The nation is inching toward an economic bust.'' The Korean share of American imports peaked in 1988 at 4.6% and last year fell to 3.5%. The trade deficit, mostly with Japan, was nearly $10 billion last year, more than double that of 1990. Part of the problem is that South Korea's role as a mass producer of low- priced consumer goods is being taken over by Southeast Asia, China, and Mexico. After military rule ended in 1987, an explosion of strikes led to the highest wages in Asia outside Japan. The Korean economy is now undergoing what President Roh Teh-Woo terms ''a grave transition.'' Says Kenneth Park, a thoughtful, American-educated economist and president of Samsung Petrochemicals: ''We had this fixation on becoming a second-rate Japan, but now we've got to stress originality.'' On top of that, the longstanding partnership between government and industry -- which sometimes made the industrial policies of Japan Inc. look laissez- faire -- is breaking down. Korea's big conglomerates, known as chaebol, grew rapidly after the Korean war on low-cost loans and other government incentives because political leaders wanted to build potent international competitors. In the new political climate, though, ordinary Koreans have come to see these companies, still largely run by founding families, as too powerful. The top five groups (see table) account for nearly 62% of GNP. Politicians, who have to face voters now, have responded with unprecedented chaebol bashing. As the big conglomerates fight back, new openings will develop for the West. The Koreans are looking for business allies, especially American companies willing to share technology. At the same time, South Korea is opening its domestic market and stock exchange wider and faster than Japan did. More good news for world business is that Korea, with a population of 43.2 million, has become a consumer society. Its roads are crammed with 2.26 million cars, nearly triple the number just four years ago. South Koreans, whose incomes average $6,500 a year, are hungry for U.S. products, including a few Cadillacs as well as a lot of sporting goods, cosmetics, and capital equipment for automating factories. And this is one growth market where Japan is handicapped: Koreans still resent Japanese colonial rule from 1910 to the end of World War II. There are also lessons for managers everywhere in the ways the chaebol, which rank among the world's biggest enterprises, are adapting to change. The Koreans are learning to operate amid conflicting demands -- boosting exports without going broke through deep price cutting, and motivating employees and raising efficiency without being authoritarian. Says Yoon Young-Suk, president of Daewoo's trading arm: ''Big business groups are the brains of our economy.'' STILL, the adjustments are wrenching. Hyundai, the largest automaker, is feeling the most pain from the breakdown of cozy government-business relations. Chung Ju-Yung, 76, Hyundai's irascible founder, a rice farmer's son who became a billionaire, has attacked President Roh for making the chaebol the whipping boys of his economic policies. Chung got slapped, he says unfairly, with a record $180 million bill for personal income taxes late last year. And Hyundai claims to be the target of a continuing barrage of official actions -- including intense tax audits and pressures on banks not to lend. Fighting back, Chung formed his own political party and quickly became an influential political figure. His party won 10% of the seats in recent parliamentary elections, part of a larger rejection of the government at the polls. Chung, who accused the Roh regime of collecting questionable political donations from corporations, may even run in the presidential election later this year. Evidently preparing the way, he has vowed to give up his shares in Hyundai's 14 public companies, a portfolio with an estimated value of $2.6 billion. His political triumph should ease government pressures on his conglomerate, which has complained in a petition: ''Normal management in Hyundai has become impossible.'' It may not be normal, but Hyundai and other chaebol are adapting well to new challenges. To hone their competitiveness, they are downsizing, decentralizing decisions, and even spinning off companies. Says Sean Goldrick, chief of research in Seoul for stockbroker James Capel: ''The chaebol are beginning to break themselves up for their own reasons.'' Samsung wants to concentrate on electronics and chemicals, so it has spun off its department store chain and paper manufacturing business. Lucky- Goldstar Chairman Koo Cha-Kyung has told key executives to run their own shows without bothering him. Hyundai Chairman Chung Se-Yung, 63, the founder's brother, describes himself as last man to boss the entire group. Says he: ''Hyundai no longer wants to have the bad image of a chaebol. It will change to an assembly of totally independent companies.'' . Ultimately the need for new capital will convert family fiefdoms into public corporations. Traditionally, the chaebol have relied on bank loans rather than the sale of stock to raise cash. In an effort to curb what it sees as too much diversification, however, the government has pushed interest rates up as high as 20%. A shift to equity will create lots of blue-chip Korean stocks in a market finally opening for foreign investors. One important strategy for the chaebol has been formation of international alliances to acquire expertise and new technology. Lucky-Goldstar Group is a prime example. It was getting nowhere trailing the Japanese by a few years with me-too consumer products. Goldstar, its electronics company, lacked the technology for innovative new products, and no Japanese company was willing to help. So who might? How about the last American TV maker? Emboldened by advice from McKinsey & Co., Goldstar bought a share in Zenith last year. One result: Goldstar soon will make slim TV sets with large screens by using Zenith's patented ''flat tension mask'' color picture tube. The alliance also strengthens Zenith. It gets an infusion of cash for both equity and licensing, plus a Korean ally with plants in Europe, the Middle East, and Asia. EVEN ALLIANCES that turn sour can help a Korean company. Daewoo and General Motors are breaking up a $200 million joint venture in autos, but they still plan to work together. Daewoo Chairman Kim insists, ''This is a friendly divorce.'' After 14 years the partners have decided that their goals are too different. GM wanted to participate in the growing Korean domestic market and fill a niche in its U.S. product line with a Korean-built subcompact called Pontiac LeMans. But Kim had global ambitions. Ultimately his zeal for exports clashed with American concern for profits, a classic East-West business conflict. Kim is resolving the conflict by buying GM's half of Daewoo Motor while maintaining an alliance. The Korean automaker will continue supplying the LeMans to the U.S. market, at least for a few more years. GM is sticking with three other Daewoo joint ventures that profitably export auto components. Meanwhile Kim has made some headway in his home market with a minicar produced by another Daewoo company under license from Suzuki, a GM affiliate in Japan. The Cold War was particularly tough on South Korea, not only because it has had to spend up to 6% of GNP on defense but also because most of the old communist bloc countries rebuffed its companies out of solidarity with North Korea. Now South Korean manufacturers are finally able to reach eager customers in Eastern Europe, the former Soviet Union, and, increasingly, China. Samsung expects to boost trade with China and Russia, including sales of capital goods, by 50% this year, to $1.2 billion. The South Korean government, despite its tensions with the big companies, is promoting exports by making loans to Russia and Eastern Europe. Daewoo has signed up to build a large plant for making 1.6 million TV picture tubes annually in Hanoi, where workers cost $30 to $50 a month, vs. $1,500 monthly in South Korea. A nonaggression pact between North and South Korea opened the way early this year for Daewoo's Kim to negotiate nine joint venture export factories in North Korea to turn out garments, shoes, luggage, and kitchen utensils. Without fanfare, Samsung is also setting up an apparel plant in a suburb of Pyongyang, the North Korean capital. Its products will bear a Samsung label saying simply: ''Made in Korea.''

Many Korean executives have degrees from U.S. universities, but Chey Jong- Hyon, 62, chairman of Sunkyong, has found another way to tap into American management methods. Chey, who earned a master's degree in economics at the University of Chicago in 1961, set up what he calls the Office of the Chairman for Management and Planning (OCMP) in New York and hired 15 Americans headed by IBM veteran Ronald D. Olsen to staff it. Says Chey: ''Koreans think they understand America, but they don't know what they don't know.'' His Americans not only teach Korean managers to operate better in the U.S. but help Sunkyong get into new businesses in Korea. Steadily upgrading production machinery and the people who run it is an old Japanese strategy, but the Koreans are doing it with new vigor. Samsung, the chaebol with the most professional management, last year invested $1.2 billion -- 42% of its capital budget -- on equipment to raise efficiency. As a result, Samsung expects to raise productivity of both electronics factories and its shipyard an average 27% this year. On color TV assembly lines, each employee will turn out 21.8 sets this year, up from 16.7 last year. Samsung avoids layoffs by retraining workers for other jobs, a program that greatly enhances morale. In offices, Samsung is trying to increase efficiency by cutting out meetings and written reports. Though criticizing big business has populist appeal in Korea, it makes little economic sense. Bureaucrats claim that the constantly diversifying chaebol leave little opportunity for small and medium-size enterprises. In fact, these kinds of companies are often chaebol suppliers. Officials also argue that if conglomerates focused on no more than three core businesses, they would become more competitive globally. The answer to that is, diversity enables the corporate giants to use the cash flow from mature businesses for new industries, such as semiconductors. In any case, market forces are a more efficient regulator. FINALLY, many Koreans maintain that family control of ownership and management of the chaebol represents excessive concentration of power. Already, that supposed power is being diluted as companies go public and increasingly rely on professional managers -- just as America's pioneering capitalists did. Clearly, South Korea cannot afford to restrict its most successful corporations and exporters.

CHART: NOT AVAILABLE CREDIT: FORTUNE TABLE CAPTION: TOP FIVE KOREAN CONGLOMERATES