General Motors is hoping that its latest bid for Daewoo Motors Corporation, or to be more precise parts thereof, will indeed be finalised as scheduled by the end of the year. The US giant has been in exclusive negotiations for the last twelve months with the Korean Development Bank (KDP), Daewoo Motors’ largest creditor, and has spent countless man-hours kicking tyres. Tony Pugliese reviews the latest developments in what has become a convoluted and seemingly interminable industry saga.

Earlier attempts by GM to take over the South Korean car company amounted to nothing; something the KDB and other creditors will look back on with deep regret. GM admitted that two years earlier it had made a preliminary bid worth in the region of $6bn for the debt-ridden South Korean car-maker, though admittedly before it had the privilege to study the finer details of the company’s book-keeping.

Ford froze on seeing Daewoo Motors’ debts

GM’s previous bid for Daewoo Motors was eventually withdrawn after creditors tried to squeeze out more from an eventual deal, and decided to put the company up for international auction. Ford, it is understood, offered around $7bn – but its feet froze once its accountants realised the extent of Daewoo Motors’ debts. The preliminary agreement announced last week clearly shows that General Motors is in the driving seat, with creditors such as the Korean Development Bank ready to accept any deal that would allow them to get shot of some, if not all, of the company. Since the debt-restructuring plan was announced in August 1999, creditors have injected $2.3bn to keep Daewoo Motor from collapsing. At last count, Daewoo’s debts are reported to be in the region of $17bn, which according to the preliminary deal will remain with the creditors and likely eventually to be written off.

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MOU is still to be finalised

Although the latest memorandum of understanding (MOU) is far from being finalised, it is the nearest GM has ever got to taking over the company. Going by the outline terms of the deal, the US giant will not be unhappy about the long wait. The deal that has been agreed in principle carries virtually no risk for GM, while offering a lot in return. If finalised it would be the automotive deal of the century, new or old, in favour of GM.

Under the new agreement a new joint venture company would be established which would be 67%-owned by GM and its affiliated companies, and 33%-owned by the KDB and around 60 other South Korean financial institutions. Although GM has hinted that Fiat is the likely partner for a small part of its 67%, it has made it clear that it is the strategic investor. Any other partner is along just for the ride. By keeping its direct holding at under 50%, GM will not have to consolidate the new company into its global accounts until it is good and ready to do so.

Bupyong plant is out of the frame

The new, still unnamed, joint venture company would be capitalised with $600m in fresh funds, $197m of which would come from existing creditors. GM and its affiliate(s) would pay in $400m. The new joint venture would assume full control of Daewoo Motors’ best domestic assets, the 240,000-unit-a-year Changwan plant, which makes the Matiz II, and the 320,000-unit Kunsan plant. It would also take over the domestic sales company Daewoo Motor Sales, which is said to be profitable. Daewoo Motor entire domestic operations too are said to have made profits for the last five months, after a restructuring plan involving nearly 10,000 job losses was implemented.

Overseas, the new GM-controlled company would take over two assembly plants only – in the highly protected markets of Vietnam and in Egypt. Both these operations are said to be well run and profitable, even though small by any standard. The proposed joint venture would also take over sales and distribution companies in 22 countries worldwide, leaving out possibly some of the smaller markets and operations in countries that are currently subjected to US economic sanctions. As part of the deal, the proposed joint venture would also assume ownership of up to $980m worth of inventory currently in the system, including cars in stock at its dealers and sales companies and aftermarket inventory. The only debt it would assume would be the $320m that key overseas subsidiaries are liable to.

Among the domestic operations, the new company would take control of the Bupyong technical centre, though not the 500,000-unit Bupyong assembly plant itself, which is old by most standards and thus considered inefficient. The joint venture would also own the rights to the Daewoo car brand. Overall, around 8,000 of the current 15,000-strong domestic workforce would be transferred over to the new GM-controlled joint venture. GM has agreed it would take delivery of vehicles produced at the Bupyong plant for the next five years, and has the unlikely option to buy the plant within the period in a separate deal. It is also committed to supplying the overseas plants it will not own with CKD kits as they are required, which is in its interest in any case.

The current Daewoo Motor Corporation will continue to exist and be run by creditors. The Bupyong plant would be the responsibility of DMC’s creditors, as would all the other plants located overseas. Ssangyong has been distancing itself from Daewoo Motor since late last year, and Daewoo Motor no longer holds any equity in the company. As such, it has not been included in any of the negotiations. Before its bankruptcy, Daewoo Motor expanded very aggressively in Eastern Europe, particularly in Poland, and Central and Southern Asia. These operations clearly have too much overlap with GM’s own operations.

GM is not interested in Daewoo Motor’s Indian operations

Somewhat surprisingly, GM is not interested in Daewoo Motor’s Indian operations, which has a significant chunk of the small car market in the country with the Matiz. It does have significant overcapacity in the mid-size segment, however, which overlaps with GM’s own Opel Astra operations. Daewoo Motors India is losing money, however, and GM has clearly elected to distance itself from anything that could prove problematic. In any case, GM has an indirect presence in India’s small car market through its affiliation with Suzuki. The new joint venture would continue to still supply CKD kits to DMI under existing agreements.

According to the MOU, the debt mountain would remain with the current company, and we expect that the creditors will eventually be forced to right off their claims. Efforts will inevitably be stepped up to sell the remaining assets, particularly the remaining overseas assembly plants. This may prove equally if not more problematic, given the deteriorating market conditions. The risk that some plants will be closed down altogether is increasing.

GM also said that the new joint venture company would assume normal operating liabilities, including severance, warranties and supplier obligations relating to the operations it is buying. It will cap these liabilities at $510m, and will cover unpaid fees for parts already supplied.

GM can expand in Korea, gain distribution in Asia and improve scale economies

Strategically, the deal would allow GM to expand into one of Asia’s largest vehicle markets, gain distribution in other markets where it does not have a presence, and eventually help it generate better economies of scale through component and platform sharing. Even though Daewoo’s market share has slumped to well below 20% last year, from peaks of just under 30% earlier in the 1990s, it still sold over 200,000 vehicles and has the potential to strengthen significantly from this low once a new product development programme is put in place using GM technology. Overseas, it sold twice that amount last year, with volumes around the 400,000-mark.

Building the ‘value driven’ Daewoo brand means learning from Volkswagen

Although the Daewoo brand does not have a premium image, and thus limited value, GM would seek inspiration from Volkswagen’s experience with the SEAT and Skoda brands. In both cases, these brands have contributed significantly to the creation of better economies of scale within the German automaker. The Bupyong technical centre will have at its disposal technology, platforms and off-the-shelf parts designs available from both GM’s European and US operations. In markets such as western Europe and North America, the Daewoo brand could be positioned in the “value-for-money” segments, where it has done reasonably well until a couple of years ago.

Will the Koreans be happy?

There are a couple of questions that remain unanswered. How would the South Korean market respond to foreign ownership of most of Daewoo Motors’ operations? The market is notoriously nationalistic, and GM will have to overcome these sensitivities. It is already suggesting that the company would essentially continue to be run by Korean nationals, with only a few key posts filled by expatriates. Obviously, GM will want to put in its own Chief Financial Officer, Chief Operational Officer and Chief Executive Officer. GM already has a “transition team” on the ground in South Korea. But the new company would also have an 8,000-strong Korean workforce, and this will be a strong party of its message.

Clearly, GM will have to tread very carefully in South Korea. Labour unions are also notoriously militant. GM Asia-Pacific’s head of public relations, Rob Leggat, said that on the whole GM is happy with the number of workers it is taking on, since the restructuring programme that was implemented last February. But this may not remain the case if the global automotive market continues to decline as sharply as it has in recent weeks. GM said it wants to put in place a collective bargaining system for its workforce, but further redundancies may carry a backlash.

Strategic Review-

General Motors

To view related research reports, please follow the links below:-

Automotive country report: South Korea

World automotive components: Market prospects to 2005

The world’s car manufacturers: A financial and operating review