It’s official: Daewoo Motors is bankrupt. The company has been declared bankrupt after defaulting on $155m of debt and owes its creditors an estimated $10.6bn. Wholesale closure of operations and a ‘fire sale’ are closer now than ever before. The mood is not optimistic, with the labour unions and creditors seeming wide apart. Ultimately, GM may back off from its proposed purchase of the company.

Entrenched positions

The company’s creditors have agreed to declare the South Korean carmaker bankrupt after union leaders rejected moves to cut jobs. Earlier hopes that the unions would adopt a more conciliatory approach have been dashed and the prospect of industrial action now looms. Approval from the union to reduce its workforce was considered vital to making Daewoo suitable for a possible buyer. Daewoo is the third South Korean carmaker to go bankrupt since the Asian financial crisis of the late 1990s turned the industry upside down and decimated volumes in the Korean car industry. Kia Motors was declared insolvent in 1997 before being sold to Hyundai Motor, South Korea’s largest automaker. Samsung Motors went bankrupt last year.

Daewoo Motor‘s creditors have refused emergency loans of $400m, taking the view that any further loans had to be tied to cost-saving measures that would restore it to profitability by 2002. Bankruptcy could harm efforts to sell the carmaker to General Motors, while also threatening the survival of 6,500 subcontractors. Official support for the company looks weak, with Korea’s finance minister backing the hard line taken by the Korea Development Bank – Daewoo’s biggest creditor. The next step of court receivership – threatened by creditors – would likely lead to the withdrawal of GM’s bid for the whole company. Wholesale closure of some operations would likely follow. GM and its partner Fiat have completed preliminary due diligence of Daewoo and are reportedly reviewing the pros and cons of purchasing the carmaker.

Daewoo Motor sell-off has not been straightforward

Last year saw the complete financial collapse of the Daewoo Group, whose core 12 units had nearly $80 billion in debt – $26 billion more than its assets. Its banks rescued Daewoo in August 1999 and a debt rescheduling programme started, aimed at selling off the firm or its assets. Creditors looked for some divisions, including Daewoo Motor, to be sold off. The bidding for Daewoo Motor in the spring of this year saw three significant bids: from Ford, GM (a joint bid with Fiat) and DaimlerChrysler (with Hyundai). GM was seen as a front-runner because of a previous 15-year alliance with Daewoo that ended in 1992 over strategic and marketing differences. Daewoo was attractive to bidders on three main levels:

  • as a way to crack the notoriously difficult South Korean domestic car market where Daewoo holds around a quarter share;
  • as a springboard to further grow Asian market sales;
  • for its strong position in Central and Eastern Europe.

Daewoo’s manufacturing infrastructure was also seen as offering value, but the synergies from production on parts and platform consolidation were on an uncomfortably long time horizon. They would be at least five years out on most estimates. Ford was announced as the preferred bidder after it outbid rivals with a mammoth bid of US$6.9 billion. Against expectations, Ford pulled out of the purchase. Due diligence revealed some unpalatable elements in the purchase and the negotiating gap was deemed too wide for continued discussion.

Doubts for GM will intensify now

With Ford gone, GM (with partner Fiat) moved in with an offer subject to due diligence. Due diligence has gone relatively smoothly so far, but the latest developments can only cause doubts and worries in the GM camp to intensify. The domestic political backdrop to the whole thing may ultimately prove even more worrying than the nuts and bolts of the shaky finances. Industrial relations in Korea generally have been fraught since the onset of the financial crisis. Restructuring is controversial and the Korean labour unions have a reputation for bellicosity that makes French farmers look like teddy bears. The view from Detroit will be looking increasingly alarming. GM will hang in there for the time being, but court receivership would likely see a GM pull-out from the acquisition as it stands.

GM will also be looking at the assets with a view to what is attractive and what is not. Manufacturing capacity in Eastern Europe, for example, is likely to figure prominently in the ‘not’ column. GM may hang in there with a view to hoovering up the assets it wants if the situation deteriorates even further and the creditors are panicked into breaking the company into bite-sized chunks. There is nothing to lose by keeping a warm place at the table and the ‘buyer’s market’ is becoming ever more so.

But don’t rule out the bluster factor

The restructuring negotiations between the labour unions and Daewoo Motor creditors have been difficult and have certainly reached a critical impasse, but it is conceivable that the noises coming from both sides right now are part of negotiating tactics. A compromise could still be in the offing. The government would certainly not want to preside over mass job losses, the withdrawal of another partner and the humiliating break-up of a major company. They want a viable future with job losses minimised. Ultimately, that’s what all parties want.

Break-up is a serious option

The creditors will now look seriously at breaking up Daewoo Motor and its subsidiaries. If court receivership comes in, the process is speeded up in a way that is less sympathetic to the interests of the labour unions. It would be politically explosive if carried too far and if large areas of the company’s operations were ultimately forced to close. Indeed, the political backdrop to all of this should not be underestimated.

Industrial unrest and protest, while counter-productive, could be about to flare-up at Daewoo in response to the crisis. Opposition to the sell-off to a foreign owner has always been sizeable. Throughout the bidding process, South Korean labour unions have vigorously protested the proposed sale of Daewoo to a foreign automaker. Any solution has to go some way to satisfying their concerns. Balancing the concerns of creditors, managers, workers and a foreign partner in any solution will not be easy. We’re in the end game now.