General Motors stabilizes its operations in Korea – for now
Despite closing a major plant, the company has reached an agreement with its union and been thrown a financial lifeline by Seoul, but it still needs winning new products
Policymakers and auto workers in Korea can heave a sigh of relief. This past weekend, Barry Engle, executive vice-president of General Motors in the US, visited Korea and announced a new commitment to moves to restore the financially troubled GM Korea to a fully competitive and profitable status.
Engle said that GM Korea would be investing $50 million in its plant in the Bupyeong district of Incheon, the port city serving Seoul, to enable it to increase annual production of SUVs to 75,000 units. That takes the total production capacity of the plant to about 390,000 units.
GM Korea would also be hiring 100 additional engineering staff and this would take the employment level at the Bupyeong facility to over 3,000 in total. The newly hired engineers will be assigned to a new unit, the Engineering Services Unit, which the company plans to establish at the plant to enable it to design and engineer products intended for GM’s global markets.
Commenting on these new GM Korea investments, Engle said: “Both of these new investments (the plant capacity expansion and the new engineering-design unit) are in addition to $2.8 billion in investment that was announced in May to build new vehicles in Korea, as well as the $2.8 billion to restore the company’s balance sheet, which has already been completed.”
Amid dire rumors, Seoul steps in with finance
The latest announcements from GM Korea should quash rumors earlier this year that the company was teetering on the edge – and might even exit the Korean market. At the end of May, GM Korea closed its plant in Gunsan, in Korea’s southwest, to considerable local consternation.
However, prior to the closure, GM Korea struck a deal with its labor union, offering provisions that cover the nearly 700 staff of the Gunsan plant. They have been offered early retirement incentives or a transfer to GM Korea’s other two plants in Incheon and Changwon.
With the union secure, state-run Korea Development Bank offered GM Korea a US$500-million loan, a much-needed injection of fresh funds that it can use to pay its suppliers and staff, and to begin preparing for the production of a new range of vehicles. This was needed to fully restore the group’s balance sheet, Engle noted.
The KDB loan is noteworthy as it is, essentially, a lifeline handed by the Korean government to a foreign company. But if GM is an overseas player, the staff and assets managed by GM Korea are at least semi-native: They were originally Daewoo Motor, which went bankrupt in 1999, when the giant Daewoo Group imploded at the tail-end of the 1997-8 Asian financial crisis. GM acquired Daewoo Motor in one of the flagship deals of the crisis.
GM Korea’s recovery will require the capital from KDB to enable it to produce a new line of cars in Korea, but according to Dr. Tony Michell of Euro Asia Consulting in Seoul, “KDB will definitely come through with this funding since it is a way for the Korean government to demonstrate its commitment to keeping workers employed in major industries.” KDB also holds a 17% stake in GM Korea, so it has much to gain if the company can return to profitability.
Upgrades stabilize company
“Through the latest agreement, GM Korea will be a competitive manufacturing company,” Chief Executive Kaher Kazem said.
Industry experts appeared to concur. “GM needs to produce its new product lines in the most cost-effective and competitive countries, and with the concessions that have been made by GM Korea’s union and the additional capital being made available by KDB, GM has a good chance to be successful again in Korea,” said Peter Underwood, managing director of IRC Consulting in Seoul.
Exports will be key. “GM Korea will be dependent upon achieving success in export sales as there is no prospect that it will come anywhere near displacing the domestic market dominance of Hyundai and Kia within Korea,” Underwood said.
Indeed: GM Korea’s sales in the domestic market in 2017 were just over 132,000 vehicles, down over 26% from the previous year. Exports were also down last year, to just over 392,000 vehicles shipped from its Korean plants, a decline of 6% over shipments in 2016.
But more recently sales have been improving substantially, Kazem said. “We have almost doubled our market share in the past 3 months.” Figures released by GM Korea show that in June, it sold 9,529 units in Korea and exported 37,017 for a combined sales total of 46,546 units, an increase of over 24% over the previous month.
But above all, the company needs winning new cars, and doubts will continue to overhang GM Korea until the new product line is introduced and selling well at home and abroad.
This suggests the financial stabilization at GM Korea is just a temporary reprieve, that all depends upon the company’s designers and engineers.
Still, the recent commitments to redevelop production capacity and R&D in Korea are highly positive. For now, at least, the crisis is over.