One year on from its formation following GM’s acquisition of selected assets from the failed Daewoo Motor, a strategy for GM-Daewoo (GMDAT) is now emerging. The company is now rebuilding sales in key markets and there’s a growth plan in place involving much needed investment in new models. Anthony Lewis recently caught up with GM-Daewoo CEO Nick Reilly in Seoul.
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Nick Reilly gives all the appearance of a kid with a new toy cupboard as he embarks on his third year in South Korea.
The former boss of Vauxhall Motors in the UK talks with enthusiasm about how Daewoo can play a pivotal role for General Motors, not just in the Far East, but globally, and of new models – including a ‘halo’ car to rival something like Mazda’s MX-5, perhaps.
But it so nearly didn’t happen. “We didn’t have an elegant exit strategy other than to get on a plane and run,” he says of the days in 2002 when negotiations frequently seemed to hit a brick wall.
But luck played its part, it seems.
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By GlobalData“There were several points in the first year of negotiations, two very critical, when I really thought the deal could not be done,” said Reilly.
“Negotiating tactics in Korea are a little different from what we are used to and you think something has been negotiated but it hasn’t.
“I was quite despondent at times but believed there was a strong intrinsic value in the company – if it hadn’t happened the outlook wasn’t very good for Daewoo. At one point we actually had a termination letter written.”
He recalls two particular incidents. One was when there was complete silence around the table after a day of negotiation had got nowhere. “Then all the lights in the room went out so we all left the room thinking there had been a power cut, but there hadn’t.
“A little later the lights came back on, it was all very spooky but that particular problem was solved very quickly.”
In March ’02, when negotiations had reached a critical stage, the Reilly household goods arrived in Seoul. “I told the shipping firm to leave it all unpacked, unsure how long we would be staying, we were at another critical stage.
“But by the beginning of the next week, this major problem was resolved. Word had obviously got back to the Daewoo negotiating team that I was serious about walking out!”
So, GM didn’t walk out. The company is now GM Daewoo Auto & Technology (GMDAT) and Reilly is president and chief executive heading team of less than 25 ex-pats.
“The thing Daewoo has is great strength in product design and manufacturing. We can be significantly faster at bringing products to market at lower costs than is typical within GM,” said Reilly, speaking as the first anniversary was celebrated in mid-October.
This is partly to do with the Korean “hurry, hurry” culture and partly to do with the way the company is organised. “We thought this would be the case, but now we know it is,” said Reilly.
The plan is to use the Daewoo brand everywhere in the world by maximising the existing distribution network. So Daewoos are sold as Chevrolets in Latin America, Pontiacs in Canada and Suzukis in the USA.
“It’s a great opportunity to build exports rapidly. We are offering these brands products that they don’t have, but to do this we must keep the product fresh. This has reduced the need for new investment in global distribution which was one of the problems of the old company.”
The Daewoo Matiz is sold as the Chevrolet Spark; Kalos is the Chevrolet Aveo, Suzuki Verona and Suzuki Swift (Canada); Nubira is the Optra and Suzuki Forenza while the larger Evanda/Magnus is the Chevrolet Epica.
But Daewoo will not be a GM clone. There are only 25 ex-pats from GM in a workforce of 17,000. GM Daewoo “will be a Korean company run and managed by Koreans,” said Reilly. At the moment it is run by an executive committee, 60 per cent Korean and 40 per cent ex-pat.
The Lacetti 5-door, which went on sale in Korea this autumn, was the first car that the new team was really able to influence, said Reilly. It arrives in the UK next spring.
Reilly is particularly pleased that GM Daewoo has been able to rehire many employees laid off by the old company – in all 2,500 extra workers have been added in the last four months to boost manufacturing and the design and technology team.
This means that three factories are now working two shifts and only one is still on single shift working. Full capacity of more than one million vehicles will be reached within three years – 800,00 CBU and 300,000 CKD which will include assembly in South America.
“CKD is a very important part of our business and we have a three-year deal to continue to supply parts to former Daewoo plants like Poland, Uzbekistan and Romania that are not part of GM Daewoo. Uzbekistan is very important because it can export duty free to Russia. It will produce 40,00 cars this year and 60,000 next year.
“There’s good business there and we are working hard to make it profitable.
“There is no need to build cars elsewhere for at least three years and we will make that decision in early 2005 – it would be possible to use existing GM plants,” said Reilly.
Plans for Europe see sales of 200,000 in 2004, back to the old company’s best performance which was in 2000.
Much time over the last year has been spent building morale and a big effort has gone into industrial relations. Reilly takes obvious satisfaction from the fact that GM Daewoo concluded this year’s wage negotiations without industrial action – a rare event in Korea.
Wages were 17-40% behind competitive rates paid elsewhere in the auto industry and the unions “recognised we couldn’t catch up straight away so we have loyalty here.”
Reilly estimates that build cars in Korea gives GM a 20% cost advantage some of which are intangible so we will keep that advantage for some time.
One of those intangibles is that “you get more value for your time in Korea. It’s a 42-hour working week and the expectation is that when you’re at work you work all the time.
“If, for example, the production line stops in a European plant, people go off and have a smoke or read the paper. Here they do other things like clean up their work areas or fill up the parts bins.
“We are typically getting jobs done here in half the time it takes in the US and Europe – if someone knows a job has to be done they’ll work through the night or weekends to get it done.”
As an example of loyalty, Reilly gives the example of an autumn typhoon at the small car plant in Changwon which damaged 1,000 cars and some of the buildings.
“Half the workforce turned up, voluntarily, to repair the damage so that work could start as normal on Monday morning,” he said.
Components in Korea are 15% cheaper like for like and GM has already placed $300m a year worth of business with Korean suppliers. “We have cheaper design, but I don’t think we are losing out because of it.
“We can bring cars to market 15% cheaper than Opel, VW or PSA. I want to keep that advantage but build the brand image.
“It’s virtually impossible for us to import other GM products here at a competitive price,” said Reilly. The cost of producing a car in South Korea compares well with China, although China has lower wages.
“We can produce and make a profit at a price typically 20% less than we can in Europe or the US.”
His views are support by Professor Jun Son Yang, an economics expert, who believes that Korea can compete with China on the higher quality of its workforce and its infrastructure.
“We have an advantage because of our skill with complex manufacturing issues but to remain competitive we must increase productivity.”
One of the big talking points over the last couple of years has been the culture clash, not so much Koreans v. Americans or Europeans, more Daewoo v GM, said Reilly.
“What we don’t like about Koreans is that they won’t admit there’s a problem, they hope it will go away or wait and wait until it’s almost too late.
“There’s quite a blame culture in Korea. This makes them very good at handling crisis, but we want them to avoid the crisis in the first place. So I’ve starting going in saying I have a problem or that I’ve made a mistake and so their attitude is slowly changing.
“They thought we took too long to make decisions and are too bureaucratic – they should try working in other parts of GM! But they like the way we analyse problems and data before we make decisions so we should be able to make faster and better decisions.”
As an example, Reilly says that GM DAT is already under 24 months from design freeze to start of production while the rest of GM is still trying to get there.
To help ease the culture clash, Reilly takes his management team off-site for a couple of days at a time “to discuss how we could improve.”
One of the priorities for improvement is to grow GM DAT’s share of the domestic marker from its current 10%. This increased to 11.4% in July, but one of the problems is that where Daewoo used to compete in 65% of the market segments, it now only competes in 40% – giving added urgency to the product drive.
There’s been almost no investment in domestic plants for the last four years and GM DAT plans to double investment in 2004 and will launch an SUV, a new large car and a replacement Matiz in Korea by the end of the year.
Diesel engines, sourced from within GM, most likely the Fiat alliance, will join the line-up in 2005, when South Korea lifts its ban on diesel engined passenger cars.
“There were lots of uncertainties and we weren’t sure what we would find but our financial results so far are ahead of our business plan.
“We still have an awful lot to do and it’s nowhere near time to call victory,” said Reilly, an avid rugby fan. There are, he said, a challenging couple of years ahead. Indeed.
