Korea’s GM crisis: What next?
The closure of GM Korea's plant in Gunsan is becoming a heated political potato but the roles the company, the government and the labor union will play in keeping the overall show on the road remain unclear
The urgency of loss-making GM Korea’s financial woes climaxed earlier this month as the American automaker announced it would shutter its manufacturing facility at Gunsan, in southwestern Korea.
This plant employs 2,000 of GM Korea’s 16,000 total workforce. Its demise is a major blow to the Moon Jae-in administration; to the city and region where thousands of jobs at parts-producing companies are also at risk; and of course to the labor union.
While auto unions are generally Korea’s most militant, GM Korea union leader Lim Han-taek has said it is willing to make concessions “if needed,” although it will strike if GM announced a complete withdrawal from Korea.
Opposition politicians lost no time in criticizing the Moon administration for its failure to protect the livelihoods of the Gunsan workers and those who depend on them. Moon responded that his administration would, “look into various measures, including the possibility of designating Gunsan an employment crisis area.” He also indicated that the government would take urgent measures to aid the affected workers in Gunsan, which, located in the oft-neglected Jeolla Province, has always been a location of concern for Korea’s left wing, which Moon represents.
But no measures suggested by GM itself offer a reprieve for Gunsan. GM came to Korea when it took over the auto arm of Daewoo Group, a giant conglomerate which went bankrupt in 1999. The plant has reportedly been operating at only 20% capacity in recent years.
Given that it is the newest of GM Korea’s three plants this seems odd, but the reason is global, not local. “The Gunsan plant was primarily producing vehicles for export to Europe under the Opel brand, which was sold to PSA Group of France several years ago,” said Peter Underwood of IRC Consulting in Seoul. “So, the major demand for these vehicles has been drying up as PSA has replaced them with vehicles made in its plants in Europe.”
The three principles commit GM to taking steps to normalize the company; the sharing of the burdens of the company’s recovery amongst all stakeholders, including creditors and the union; and long-term plans to ensure the company’s future
Seoul has been critical. “GM Korea had an opaque management process and the government was concerned about the high rate of profits to raw materials costs, the interest payments on loans to GM Korea that were provided by GM, and unfair financial support provided by GM Korea to GM,” said Trade Industry and Energy Minister Paik Un-gyu said.
The complaint about interest payments to GM on the US$2.7 billion in loans is understandable. However, Underwood points out: “Under Korean business regulations, loans to subsidiaries that are made by parent companies must be made at market-rate interest-rate levels.” Presumably, to stay in compliance with Korean regulations, GM had no choice but to set its loans to GM Korea at market rates.
The comment about unfair financial support to GM by GM Korea is apparently a reference to payments made by GM Korea for marketing, management and other services supplied from head office in the US.
GM has dispatched Executive Vice President Barry Engle to Korea, where he held discussions at the Ministry of Strategy and Finance and the Ministry of Trade, Industry and Energy on February 20. After these meetings, Deputy Prime Minister and Minister of Strategy and Finance Kim Dong-yeon announced a “3 Point Plan” and said that GM has indicated interest in further discussions on this plan. Negotiations will continue between the government, the creditors, the union and GM.
The three principles commit GM to taking steps to normalize the company; the sharing of the burdens of the company’s recovery amongst all stakeholders, including creditors and the union; and long-term plans to ensure the company’s future.
However, few details are available regarding plans for restructuring GM Korea as a whole.
GM has made some concessions. It has announced that it will defer the redemption of a loan of over 700 billion won (US$653 million) to GM that is coming due. It has indicated that it would be willing to convert the US$2.7 billion in loans that it has made to GM Korea to equity – but would need an additional 500 billion won in credit from state-run Korea Development Bank to do so. Sources report that KDB is unenthusiastic, but Seoul is encouraged by another offer GM has made, to pump an additional US$2.8 billion dollars into GM Korea over a ten-year period.
The Moon administration has a lot at stake as it deals with what is shaping into a crisis, and local elections in June will serve as a barometer of the administration’s popularity.
A satisfactory outcome from Moon’s perspective will be one that mitigates Gunsan job losses. In this day and age, Seoul cannot simply turn to Hyundai Motors and “ask” it to buy GM’s business in Korea – a typical solution in a prior era. So, Moon wants to see GM Korea on track for a recovery that will guarantee the long-term viability of the company.
Thus far there are no indications of a total withdrawal of GM from Korea. And indeed, any closure of GM’s operation in Korea would involve a much larger write-down than the US$850 million hit GM will take for the closure of the Gunsan plant.
Moreover, US President Donald Trump’s comment that the closure of Gunsan means investment in Detroit is bunk – at least, in the short term. GM wants to continue its presence in Korea, Underwood notes, “as a source of parts and components for its worldwide manufacturing operations.” These Korean suppliers ship parts that are configured for GM at competitive prices. GM’s global supply chain is a reality that cannot be undone.
Much depends on an audit to be completed next month. On the plus side, the continued existence of GM Korea looks on the cards. What remains to be seen is how much the Korean government and GM will cough up respectively, and whether the union, which has so far played softball, will continue to act so kindly towards the foreign investor that is pulling out and gutting Gunsan.