(FORTUNE Magazine) – AFTER A LONG and highly successful run making cheap jogging shoes and consumer electronics, South Korea's giant conglomerates, or chaebol, have collided with the realities of the Nineties. Wages, averaging $1,144 a month, are now among the highest in Asia outside Japan. So, Korean factories can no longer compete with those in such low-wage countries as China and Indonesia. The World Competitiveness Report, an annual assessment of relative economic prowess by the Swiss research institute IMD and the World Economic Forum, last year ranked South Korea sixth among 15 newly industrializing economies -- behind even Malaysia and Chile. Moreover, the government, once so supportive of big business, has cut back on subsidies and export credits. The conglomerates are responding to this crisis in two ways -- increased investment in new technology and equipment, and a drive for higher quality. Says Jun Yongwook, a business professor at Chung-Ang University in Seoul: ''The only way out is for companies to strengthen their competitive advantage.'' That's not going to be easy. Confides Lee Kun Hee, chairman of Samsung, the largest non-Japanese conglomerate in Asia with $54 billion in sales last year: ''We are more retarded than I realized, in many respects 30 years behind Japan.'' To catch up, Korean companies this year plan to invest more than $35 billion, 47% more than just two years ago. The push for quality is more dramatic -- even startling. The chaebol are using techniques more reminiscent of Maoist China's mind-reform efforts than the reengineering notions of American management consultants. Says Yoon Yong- Nam, president of Daewoo Management Development Center: ''Japanese people act almost like machines, but Koreans are more emotional. We have to encourage employees to join the quality effort voluntarily and with enthusiasm.'' Still, many aspects of the Korean-style quality drives could work almost anywhere that top management has enough determination. SAMSUNG'S LEE, 52, is applying what he calls ''shock therapy.'' Last year he suddenly ordered senior executives of his Korean electronics operations to visit retailers in Los Angeles. Since he had already secretly done so himself, he knew they would hear harsh complaints about shoddy products, unappealing designs, and poor after-sales service. ''If we don't correct this,'' warns Lee, ''we won't be qualified to run a street-corner shop.'' Samsung's 24 companies earned $600 million last year, up from $376 million the previous year. But Lee is willing -- he seems almost eager -- to sacrifice short-term profits to improve quality. Sunkyong Group, a vertically integrated producer of petroleum products that also operates the Sheraton Walker Hill hotel in Seoul (1993 group revenues: $22 billion), is taking a different approach. Chairman Chey Jong-Hyon, 63, wants to maximize profits by attaining ''super-excellence -- the highest level of which humans are capable.'' It may sound like cheerleading, but in the past year Sunkyong has boosted the output of chemical plants by 30% to 40% without adding new equipment. Chey, who earned American degrees in both chemistry and economics, empowers employees at every level to use pae-gi, aggressive determination, to overcome obstacles. Many of the best ideas for improvements have come from factory workers. Says Chey: ''We get our competitive edge not through technology but by management of human resources.'' The Daewoo Group of 20 companies has made quality a selling point for its products. Bae Soon Hoon, 50, president of Daewoo Electronics, has become a TV celebrity in Korea by appearing in commercials that portray Daewoo Electronics' washing machines and TV sets as built like a tank -- sturdy, reliable, and without frills. The ads not only lift sales but also prod workers to make the tank concept a reality. Kim Woo-Choong, 57, chairman and founder of the group, spends an hour or so prowling the shop floor most nights looking for defects at Daewoo Motor, where quality problems contributed to the breakup of a joint venture with General Motors 15 months ago. Kim claims that Daewoo sub-compacts now roll off the assembly line with few more defects than comparable Japanese models. The challenge for Korea is especially daunting in autos. The country's Big Three -- Hyundai, Kia, and Daewoo -- plan to triple production by the turn of the century to a total of about six million cars a year. Samsung, a maker of utility trucks, may get into the car business too. Some of that huge output can be unloaded in the Third World, but a lot of it will have to go to the U.S. and Europe. And to accomplish that, the Koreans will have to build cars with consistently higher quality than they have ever attained before. HYUNDAI MOTOR, the biggest Korean automaker with nearly $9 billion in sales last year, learned about quality the hard way. After a stunning debut in the U.S. in 1986, Hyundai quickly lost momentum because its cars developed a rash of defects. Sales slipped from 170,000 that first year to fewer than 109,000 in 1993. The company attacked the problem by trying to reeducate everyone involved in making and delivering its cars. It even sent union leaders to the U.S. to see firsthand the intense competition. Suppliers got trips to America too, for what likely turned out to be in-your-face visits with dealers who had suffered through countless recalls. Every Hyundai car now is inspected and test-driven at least three times before reaching customers: first at the Korean factory, then at the U.S. port of entry, and finally by American dealers. Fixes are made when required at all those points, even if it's just touching up scratched paint. As a result, Hyundai is probably the most improved automaker, moving up in the J.D. Power Consumer Satisfaction Index from last place in 1992 to the middle ranks. The company still has a way to go in winning back consumers. Says Bruce Campbell, a senior vice president of Hyundai Motor's U.S. sales subsidiary: ''The reality of our cars is now better than our image.'' At Samsung, Chairman Lee tells his 180,000 employees, ''Change everything but your wives and children.'' The company certainly is doing most things differently. Workers often stayed as late as 10 P.M., so Samsung decreed that they must leave at 4 P.M., after eight hours. Lee thinks the relatively shorter day will actually improve efficiency and enhance morale. Executives are now required to spend a lot more time with suppliers and customers. They also have to do a bit of work on assembly lines. To draw from a larger talent pool, the company is actively recruiting women managers, a rarity in male chauvinist Korea. Above all, Lee insists with almost religious fervor that employees undergo ''mind reformation'' to become more creative and global in their outlook. Lee wants to shake off what he calls the Samsung diseases, notably a preoccupation with expanding volume regardless of quality. The result, he says, is that some 6,000 Samsung employees are kept busy repairing 20,000 defective products annually produced by 30,000 other Samsung workers: ''You can find no comparable inefficiency in the world.'' Making defective products, adds Lee, ''is cancerous and a criminal act on the part of management.'' Samsung, among other things, has adopted the Japanese practice of stopping + assembly lines when defects occur. Another disease, Lee says, is ''inflexible thinking'' fostered by the authoritarian leadership style of Samsung's late founder, his father Lee Byung-Chull. So far, the greatest change may be in Lee himself, who has gone from being a remote, hands-off chairman to a bold activist. After succeeding his father in 1987, Lee often sat home watching TV, leaving details of Samsung's highly diversified operations to others. Apparently he was nursing old psychological wounds from battles with his father. Says he: ''In his final years, I suffered mentally and financially.'' Having recovered his self-confidence -- and become a billionaire with the appreciation of his inherited stock and real estate -- Lee is overthrowing the bureaucracy that ran Samsung. Says one of his senior executives: ''We now have a powerful leader -- with a powerful ego.'' Standing Samsung on its head to stress quality, says Lee, ''was not a premeditated strategy'' but evolved from a personal sense of crisis. Samsung faced eroding competitiveness in many fields, he says, and was doing little about it. With Korea steadily opening its protected home market, Lee told his executives that the company would have to compete head-on with Sony, Matsushita, Philips, and General Electric. They listened respectfully but took little action. OUT OF FRUSTRATION, Lee last year began summoning Samsung executives to join him in Los Angeles, Tokyo, and Frankfurt for tours of retailers -- and lectures that lasted up to 12 hours. He spoke with 1,800 senior managers over an eight-week period, recording the sessions on 300 hours of videotape and 750 hours of audiotape. Lee says he discovered that his own senior staffers often distorted his policies in the process of disseminating his words to employees at large, expressing ''quite the opposite of what I tried to say.'' The manager of the chairman's office, and half the 200-person staff, have been moved to other jobs. The audiotapes and videotapes have been made available to all employees. During those eight weeks, Lee recalls being so disturbed he could barely eat or sleep. The gist of his speeches: Samsung needs a ''quality-first management'' that can show results fast. If curtailing production to assure quality caused a Samsung company to lose money, he said he would make up the difference out of his own pocket. He also promised to donate 70% to 80% of his personal fortune (a figure he won't disclose) to a foundation benefiting Samsung employees if the effort brings tangible results by 1997. Otherwise, he added, he would resign as chairman and keep his money. As Lee puts it, ''I have staked my honor, my life, and my assets on these changes.'' Can shock treatment jolt a corporation into quality consciousness? Says Professor Jun, author of a new book in the Korean language on Samsung: ''It's a calculated gamble, but Lee had no choice but to create a kind of controlled chaos, a big bang.'' Jun thinks the Samsung revolution has a 60% to 70% chance of success. The biggest stumbling blocks are older managers who recall the company's high-growth period. Lee threatens to fire ''those shameless fellows who are always in the way of others'' unless they change. He's helping them do so through a six-month course called the ''21st-Century CEO Program'' that all middle managers eventually will take. It includes foreign language instruction and a chance to study management in the U.S. and Japan. Samsung's most enthusiastic agents of change are younger employees and women managers. Says Joo Hea Kyung, 43, a woman who is a general manager at Samsung Data Systems: ''Before, employees were just goofing around, reading newspapers, and chatting on the phone. They had the misconception that staying in the office longer meant they were working harder. Now we do things more efficiently and get home for dinner with our families.'' Samsung limits meetings to an hour and reports to a page or so. For all his new assertiveness, Lee insists that corporate dictators -- which are common in Korea -- cannot create quality. Says he: ''There should be no boss or subordinates during a discussion. We must do away with the tendency to stubbornly insist our own ideas are always right.'' Lee blames ''this backwardness'' on decades of military rule in Korea. As he puts it, ''We are accustomed to taking orders rather than thinking together and finding solutions together.'' Along with granting greater freedom, though, Samsung's revolution is making senior executives more responsible for their decisions. To assure accountability, the chairman wants every important company meeting tape-recorded. The tapes are stored and made available to anyone in the company who needs them. With less upheaval, other Korean conglomerates are also striving for excellence. At Sunkyong, the petroleum products producer, the quality program is called Supex, for super-excellence. In ''can'' (as in ''can-do'') meetings, employees are taught to think about adding value to their jobs by identifying the ''KFS'' -- key factors for success. Brainstorming sessions are held either before or after working hours as needed. Says Chairman Chey: ''Everyone is brought into management, which makes people happier. They get together, use their minds, and see their ideas used.'' Initial results look impressive. One plant that makes polyester raw materials using American technology acquired from Eastman Chemical claims to get more output at less cost than the U.S. company does from the same process. Sunkyong made small adjustments to speed production. For example, the Korean company has reduced sediment in pipes so that work stops for cleaning them only every five months, instead of the usual one or two months. Many such changes enabled the plant last year to produce 260,000 tons, far beyond its designed capacity of 208,000 tons. Says Chey: ''The big difference comes from managing the plant so that we get brain engagement from all the workers.'' Employees are expected to set -- and achieve -- a standard of performance that matches the best companies worldwide in their industry. At a lubricant plant, for instance, brainstormers set a goal to make products with zero defects. The workers did it by getting the product right at each stage of manufacturing rather than by relying on a quality-control test at the end of the process to spot errors. Says Chey: ''If we merely try to be excellent, our gap with the world's top companies will remain because they keep improving. Only by seeking super-excellence can we reach their level or overtake them.'' Daewoo is taking a fairly straightforward approach to raising quality. The group is reassigning -- or laying off -- unproductive paper shufflers and demanding cash refunds from suppliers of shoddy components. It has also sent 2,000 auto workers for three-month stints in Japan at plants of Isuzu or Suzuki, companies with which it has business ties. The idea is to give the Koreans a little on-the-job infusion of Japanese quality methods. This strategy, though less grandiose than those of its Korean rivals, pays off. Daewoo's profits last year leaped 55%, to $580 million, while sales increased 35%, to $34 billion. Dramatically reducing product defects has helped Daewoo Electronics expand domestic sales at the expense of bigger competitors like Samsung. In the past four years, for example, Daewoo claims that its share of the Korean market for washing machines has climbed from 11% to 35%. A CRUCIAL ELEMENT in Daewoo's quality drive is the personal involvement of Chairman Kim. Early this year Kim literally moved into Daewoo Motor -- the only big division that is losing money. He spends most days in a borrowed office at the automaker's headquarters, then often visits the factory floor during the night shift before going home around midnight. His presence sends a potent signal to workers at Daewoo Motor, which has installed three levels of quality control.

First, each unit of a dozen or so assembly workers includes a quality monitor who wears a bright green vest for easy identification. At the end of the line another group called the Q-point (for quality) checks for defects, which have dropped 65% in the past two years. Finally, ''customer satisfaction'' inspectors pull out a 2% sample of the cars and spend 3 1/2 hours on each checking 188 different aspects -- from paint job to the fit of doors. Kim's goal is to sell Daewoo cars, now mainly exported to Third World markets, in the U.S. He insists the quality will be high enough by 1996. Even the most spirited efforts of the Koreans will take some years to yield significant results. South Korea, among other things, needs to revamp an educational system that concentrates on filling heads with memorized facts rather than developing creative and analytical skills. As the Japanese have demonstrated, quality products depend on workers capable of making gradual, steady improvements that never end.