After more than a year and a half of intense negotiations, last week GM finally put pen to paper to decide the fate of bankrupt Daewoo Motor Corporation. Given the significance of the deal, it was signed in far from ceremonious circumstances. GM chairman Jack Smith and Korea Development Bank (KDB) chairman Jung Keun-Jong were forced to change the venue after union members of Daewoo Motor Sales stormed the original hotel in protest. And sales networks elsewhere were left out too. Tony Pugliese looks at the deal and its strategic implications.

While the unions of the Korean manufacturing operations had grudgingly agreed to support the GM takeover after employment assurances by the US automaker, Daewoo Motor Sales' operations in South Korea surprisingly were not on GM's final shopping list. Nor were the sales networks of Daewoo's largest overseas markets, including the dealer networks in the UK, the US and Australia.

As with any major foreign takeover in South Korea, GM's acquisition of the main assets of what was once one of South Korea's main symbols of economic success is inevitably viewed with huge resentment. This will likely take some time to change, given the 'low' price GM is paying for the company's best assets. Last week saw the collapse of the bid by Micron of the US for the South Korean semiconductor manufacturer Hynix, against a backdrop of fierce union protests.


"The onus will be on GM to win the trust of the workforce and acceptance in the domestic marketplace. "
The onus will be on GM to win the trust of the workforce and acceptance in the domestic marketplace. The management will be looking at Renault-Samsung's recent success for encouragement. While Renault's role as a white knight was more clear-cut, GM will have to work hard to change its image from that of predator to rescuer.

An eventual acquisition of the Bupyong facility would go a long way in helping to build trust. The fact that the new company is pulling together the various administrative functions under one roof at the existing Bupyong administrative headquarters is a good sign, particularly given the militant tendencies of Korean trade unions.

Daewoo Motor Corporation went from being the world's fastest growing car company in the early 1990s to the world's fastest shrinking carmaker, crushed by debts as its misconceived global expansion programme failed to deliver the necessary revenue and earnings growth. The fatal blow was dealt by the 1997-98 Asian financial crisis, which decimated the domestic Korean car market.

Daewoo Motor Corporation was declared bankrupt in August 1999, with debts estimated at almost $17bn versus assets worth around $9bn. At the end of March 2002, debts stood at $19.2bn, after creditors agreed to disburse a further $2.2bn to keep the company operational under a new restructuring plan, while the value of the assets fell to around $8bn. Both GM and Ford had made preliminary offers for Daewoo Motor in the region of $6-7bn soon after creditors took control of the company in 1999, but these were quickly withdrawn as the extent of the Korean carmaker's liabilities became increasingly apparent.

The Deal

The deal signed last week is by far biggest move the US company has made yet to expand its presence in Asia. It provides GM with desperately needed low-cost production facilities, good R&D capabilities and an existing range of appropriate products to competitively supply the fragmented Asian markets. GM's own products so far have provided it with little more than a token presence in most of Asia's markets. GM's top management in Detroit expects the company's majority-owned assets to fulfil at least 10% of Asian vehicle demand in the long-term. GM has increasingly been relying on badging its partner's products, such as the Isuzu Panther in Indonesia and the Isuzu pickup in Thailand (from next year) to build up its market profile in the region. Further ahead, however, the Daewoo deal will allow GM to establish a much stronger identity in Asia, with a broad portfolio of affordable products sold under the Chevrolet brand.


"The inclusion of Daewoo among GM's assets will give the US car giant's ambitious regional market share targets a major boost from the onset"
The inclusion of Daewoo among GM's assets will give the US car giant's ambitious regional market share targets a major boost from the onset, even with Daewoo's currently depressed sales and market share levels. But even greater rewards are likely to come later on, as Daewoo's brand image is restored, its R&D programme is reactivated and low-cost product is fed into the GM-AutoWorld dealer network across the region. Combined with the potential to rebuild Daewoo's market presence in Europe, and feeding through product which GM currently doesn't have at its disposal into its North American network, the $251m price tag for GM's stake in the new company looks very low indeed.

The final deal that was signed last week is smaller in scope than the working agreement disclosed late last year, and legal technicalities (including bringing in minority partners) means that final incorporation will not take place for a few months yet. GM has remained selective in the production capacity it wants the new company to take on - bearing in mind its own overcapacity problems elsewhere in the world and the militancy of South Korea's trade unions should it bite off more than it can chew. But it has left the door open should it need more of Daewoo Motor's capacity.

The new joint venture company, named GM-Daewoo Auto & Technology Company (GMDAT), will be 42.1%-owned by GM which will pay $251m in cash for the stake. Daewoo's creditors will take a 33% stake in the new company for $197m in cash, while one or more of GM's global automotive partners (as yet unnamed) will purchase the remaining 24.9% holding for $149m. This gives the company a share capitalisation of just under $600m.

GM's stake will be much smaller than the 49% stake it had indicated in the MoU late last year, so it is likely to invite more than one partner. This could also be useful in using up any surplus in the capacity that may be acquired. GM has holdings in Fiat Auto of Italy and Suzuki Motor, Fuji Heavy Industries and Isuzu Motors of Japan. Fiat has its own restructuring priorities at the moment, so at least one of the partners is likely to be a Japanese automaker.

GMDAT will assume $573m in operational liabilities relating to the assets it is taking over and will acquire stocks of component and vehicles currently in the system to a value of $385m. Daewoo creditors will issue $1.2bn in convertible bonds against the company's assets, which will be used to provide long-term capital for the company. They will also open other lines of credit, giving GMDAT a total of $2bn in long-term working capital.

Heading the new company as CEO is Nick Reilly, the former chairman of Vauxhall Motors - GM's UK subsidiary. He will be supported by chief financial officer David Meline, formerly in charge of GM Brazil's finances, and by the former head of GM's Middle-East sales Alan Batey, who has been appointed vice-president in charge of sales and marketing.

As per the initial working agreement, the new company assumes control full control of the 320,000-unit Kunsan plant, which makes Daewoo's mid-sized cars such as the Nubira and its MPV derivatives, and the 240,000 Changwon plant, which makes the Matiz mini-car. The ageing Bupyong plant will remain under direct control of the creditors and run by the existing management. This plant is locked in a six-year deal to supply GMDAT and related dealer networks at home and overseas with vehicles, engines and gearboxes. GMDAT could well absorb this plant in the medium to long term, but not before significant restructuring and modernisation takes place.

The only overseas plant that GMDAT takes control of is in Vietnam, along with the sales and distribution network. The Egyptian plant has been dropped from the original MoU wish list released late last year. Most of the overseas sales companies of which GMDAT is assuming control are located in Europe, and include the networks in Austria, Benelux, France, Germany, Italy, Spain and Switzerland, as well as the components distribution operations in the Netherlands. The only non-European sales network that GMAT will control directly is in Puerto Rico.

The deal leaves out around 1m units in overseas assembly capacity, in addition to the 500,000-unit domestic Bupyong plant. Most of this capacity is located in Eastern Europe and Central Asia. GM executives have indicated to Just-Auto in past interviews that the capacity:market potential ratio in many of these countries was completely disproportionate and that GM was not willing to get involved directly. Daewoo Motor India, with 150,000 units in annual capacity and saddled with high debts, also comes under this category. GM is willing to allow CKD kits to be supplied, and rights to the Daewoo brand extended to the local companies on a deal by deal basis. Generally, these deals run three years and will be reviewed at the end of the term. Nevertheless, for many of these operations, the future looks very bleak indeed - something that the KDB, other creditors and the local partners will have to deal with on their own.

Daewoo Motor's overseas capacity by plant, 2001
==================================================================================
Country            Company Name                  Investment year      Capacity*
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Poland             Daewoo-FSO                           1996             200,000
Poland             Daewoo Motor  Poland                  1995             120,000
Romania            Daewoo Automobile Romania SA     1994             100,000
Czech Republic   Daewoo-Avia AS  1995  25,000
Uzbekistan  UZ-Daewoo Auto Company  1994             200,000
Ukraine  Avto-Vaz Daewoo   1998             150,000
China  Guilin-Daewoo Bus  1994              10,000
India  Daewoo Motors India  1994             150,000
Vietnam**  Vietnam-Daewoo Motors  1995              25,000
Philippines  Filipinas Daewoo Industries  1993              10,000
Iran  Kerman Motor Corp  1995              40,000
Egypt  Daewoo Motor Egypt  1997              20,000
==================================================================================
Total overseas capacity    1,050,000
==================================================================================
*Annual capacity.
**Included in the GMDAT deal.
Sources: Daewoo Motor Corporation; industry sources.


Strategy

The initial focus of the new company will be to stabilise the current operations, and attempt to reverse the sales decline in its key markets. Many outsourcing bills are also well overdue, and component suppliers will be very relieved to be dealing with a more financially stable company. Daewoo's domestic market share has fallen off a cliff since its bankruptcy in 1999, from around 27% in the mid-1990s to around 10% in March. The company has not benefited much from the strong post-crisis recovery in the domestic market, which is expected to top 1.5m units this year. With the new company unlikely to become operational until at least July, and with the tax incentives introduced by the government in January due to expire in June, GMDAT will have missed out on most of this year's domestic market growth.

GMDAT is therefore likely to face a stagnant domestic market in its first 12 months of existence - and very strong domestic competition. Buyers abroad have also lost confidence in the company, and most key overseas markets are at best stagnant at the moment. The fact that the company and the brand will have strong support from the world's largest car manufacturers should at least stem the market share decline by instilling renewed confidence. But marketing expenditure will have to be boosted, and products repackaged. Capacity utilisation at GMDAT's two plants is low, particularly at the Kunsan plant where utilisation is less than a third. Changwon is currently running at two-thirds capacity. Insiders have indicated that GMDAT is unlikely to become profitable for at least two years.

The working capital will also be used to revitalise Daewoo Motor's R&D programme, which stalled during the protracted takeover discussions. The R&D centre at Bupyong, also included in the deal, will resume development of new products, but the focus is likely to gradually change to adapting and including more of GM's own technology. Some degree of reorganisation will inevitably take place as GMDAT centralises and integrates the operations it has taken over, but GM is adamant that there is no more need for redundancies as the heavy job cuts have already been made. If anything, GMDAT is likely to become a global low-cost production base for GM components (and for independent suppliers) as well as vehicles, and the workforce may well increase over time.

GM has not officially released details of the overseas marketing strategy for Daewoo, which leaves many overseas distributors feeling very uneasy about their future prospects.  Just-Auto has learnt the general outline of the global distribution and marketing strategy, however.


"The Daewoo brand will be maintained in Europe, with sales made through the existing network "
The Daewoo brand will be maintained in Europe, with sales made through the existing network independently from GM's existing operations. The UK dealer network will remain independent and responsible for the sales of Daewoo cars in the country. GM is working with the existing distributor to move away from the existing system based on direct sales and outsourcing aftersales and servicing, towards a network of franchise dealers offering full service and financing. The Daewoo brand will also be maintained in Australia, with Daewoo cars likely to continue to be sold be the existing Daewoo dealers rather than by Holden.

In the Middle East, GMDAT will look at markets individually and decide whether the Daewoo brand is strong enough to justify keeping it, or whether to badge the products as Chevrolets. In Asia, GMDAT will continue to supply Daewoo Motor India with CKDs for sale as required. Daewoo's dealer network in most other Asian countries has all but disintegrated, so Daewoo vehicles will be sold under the Chevrolet badge throughout the GM-AutoWorld network.

The main disappointment will be in North America, where the Daewoo brand will be killed off, and Daewoo products will be sold as Chevrolets within GM's existing network. This strategy will be extended to GM's Mexican operations. But this will leave the existing 527 dealers at Daewoo Motor America in the worst possible position - without any products to sell. Insiders say that even the Bupyong plant, which will not be part of the GMDAT joint venture, will also not supply any of the DMA dealers. The US dealers' association and DMA have threatened legal action, though against who remains unclear. It may well be another mess left for the Korean creditors to clear up.