General Motors has stepped up its Asia-Pacific campaign in the last year, with expansion programmes being implemented on many fronts. Long-standing alliances with Suzuki and Isuzu have been strengthened, and a new partnership with Fuji Heavy Industries – the maker of Subaru cars – is also beginning to bear fruit. But GM has only just begun to leverage the many synergies that are potentially available to it and its partners in the region. Tony Pugliese talked to Rudolf A Schlais, President, General Motors Asia-Pacific, about GM’s expansion plans for the region.
GM now owns 49% of the equity in Isuzu and 20% in each of Suzuki and Fuji Heavy Industries. The product-sharing projects launched so far have been the easiest to leverage, aimed at generating immediate gains in market share, economies of scale and brand promotion. The Chevrolet brand is replacing Opel as the main GM brand for the region. GM is at the centre of this coalition of companies, and has also been taking on the role as a deal broker.
At the Tokyo Motor Show, GM launched the Chevrolet Cruze – a sub-compact car based on the Suzuki Swift and produced at Suzuki’s Kosai plant in Japan. GM claims it has spent $US30 million on this project, including money spent on redesigning the vehicle. It is expecting to sell at least 20,000 of the Chevrolet-branded cars per year in Japan, mostly through the Suzuki Arena dealer network.
Two months earlier in Japan, Subaru launched the Traviq – a slightly adapted version of the seven-seat Chevrolet/Opel Zafira minivan produced at GM’s Rayong plant in Thailand. It expects to sell around 12,000 units a year. GM is also selling Subaru vehicles in its GM autoworld dealer networks across Asia, and may add other brands to the model line-up. It is also looking at sourcing products from its Alliance partners across the region for sale under the Chevrolet badge.
GM’s ultimate goal is for The Alliance Group to become the largest supplier of vehicles in the Asia-Pacific region, ahead of the Toyota-Daihatsu-Hino combine. It is targeting a combined regional market share of 20%, and 10% for the operations in which it controls most of the equity. To achieve this, the partners are studying opportunities to deepen their relationship, initially to focus on joint platform strategies for the region and in niche segments elsewhere, but ultimately it may involve co-development of global platforms for the large-volume segments.
Daewoo acquisition essential in GM’s regional strategy
|Rudolf A Schlais|
To achieve its market share targets for the Asia-Pacific region, it is essential that GM’s bid to acquire Daewoo Motor‘s best assets is successful. The deal itself looks extremely favourable to GM, with limited exposure to risk but with very significant opportunities for growth. With Ford withdrawing from acquisition talks in June 2000, the Korean Development Bank and numerous other domestic financial institutions have no choice but to accept the only offer on the table for the best of Daewoo Motor’s rapidly depreciating assets. It is evident that GM is not overpaying for these assets.
The deal would give GM immediate access to almost 20% of South Korea’s notoriously nationalistic 1.5 million-unit vehicle market, with the potential to return Daewoo’s market share to its previous heights of close to 30% in the medium term. One of the most attractive parts of the deal lies in the potential for GM to leverage Daewoo Motor’s low-cost production assets and supplier network in South Korea, along with its ‘technology adaptation’ expertise.
The biggest hurdle for western car companies to gain market share in Asia is cost-competitiveness, and GM stands to overcome this problem by using South Korea as its launch pad for regional expansion. Opportunities for growth outside the region will also improve as stability is returned to the company and as new products are made available.
|Main Daewoo Motor assets included in GM’s bid:|
|· 240,000-unit Changon plant which mainly makes the Matiz II minicar|
|· 320,000-unit Kunsan plant, which makes the Nubira II RVs|
|· Pupyong R&D centre|
|· Daewoo Motor Sales (national sales network in South Korea and 22 others overseas)|
|· Rights to the Daewoo Brand|
|· Assembly plants in Vietnam and Egypt|
In late October, Tony Pugliese met with Rudolph A Schlais, General Motors Group Vice-President and President of General Motors Asia-Pacific, to discuss the company’s prospects in the region.
GM has been carrying out internal re-organisation with senior personnel reshuffling in the Asia-Pacific region in the last few months. What is behind these moves? Is it reflective of GM’s changing business profile in the region?
In part, yes. Some of our staff have moved on, to take on new responsibilities. We have been carrying out some refocusing. In Japan, we formed a national sales company last year to take on direct responsibility for Opel and Chevrolet distribution. Previously it was Yanasee that carried out this task. Yanasee is still the importer and distributor for Cadillac and Saab. The Saturn brand has been phased out of Japan. We also launched GM AutoWorld in the region, which allows our dealers to offer a broader range of products, while remaining focused on consumer relationships.
GM’s partnerships with the Alliance partners in Japan – Isuzu, Suzuki and Subaru – have become considerably more mature. We have a number of synergy projects already underway, and we have staff working with us on this in Singapore, North America and Europe. We also have people working directly from within our alliance partners that have operating responsibilities and also act in an advisory capacity. We have been shifting people around to run this part of our business, as it has become a lot more active than it was in the past in this part of the world.
We also created a new entity, called GM Motors Asia-Pacific (Japan), which has become the administrative centre for our alliance activities. This has allowed us to separate these functions from GM Japan, so that company can focus on the national operations.
We have also brought our New Zealand and Australian operations closer to our Asean operations, to develop a strategy in light of the fact that the implementation of the ASEAN Free Trade Agreement (AFTA) is not moving very fast.
Are your ASEAN activities now controlled by the Australian unit Holden?
Yes. Our ASEAN, Australian and New Zealand operations are now headed by one person, Peter Hanenburger – who is also in charge of Holden. William Boswick, the head of GM Thailand, now has responsibility for the ASEAN region and reports to Peter Hanenburger.
Is there a danger that GM’s management will become over-stretched, with all this expansion activity going on in Asia? In addition to building alliances with the Japanese, you are also taking on a major acquisition in South Korea.
We’re always stretched. If you ask me whether we are busy here at GM, the answer is yes – we are very busy. We are in the process of implementing a strategy that has been set out. Our current focus is to get our brand strategy understood – we’ve introduced Chevrolet as the region brand. We are also focusing on getting our system understood, namely GM AutoWorld and how that fits in with individual country brands. Also, we are studying how we move products and platforms between regions and within the Asia-Pacific region itself. I would say that we are shifting now from a more entrepreneurial, acquisition-focused strategy towards running our businesses. We are focusing on generating products for the various markets in the region, and to make money.
GM’s strategy seems to have moved on very quickly in the last year or so. For instance, GM has had partnerships with Isuzu and Suzuki for many years, but only recently are these being reflected across Asia-Pacific. What has been the catalyst for this acceleration in synergy development?
We have been building relationships with our Japanese partners, and reaching a consensus on joint strategies for the Asia-Pacific. Our CEO has devoted a lot of time in participating in strategy sessions with our alliance partners. I have also dedicated a lot of time in this area. I’m on the board of directors at Isuzu Motors and Fuji Heavy Industries, and our Chairman Jack Smith is now on the board at Suzuki. I would say it is an evolution of these relationships, rather than any particular catalyst. But now that a lot of the pieces have fallen into place, our strategy implementation is moving ahead very rapidly at the moment. Besides, the global economic situation is such that we need one another, and that has been a driving force in the last year. If the boat goes down, and a group of us gets on a particular lifeboat, nobody’s going to rock it too hard!
Undoubtedly GM’s biggest expansion drive at the moment is to buy up some of Daewoo Motor’s best assets in the region. How do you see this company being integrated into GM’s global operations?
In the initial stages, I expect our strategy will be similar to what we are doing with our Japanese alliance partners. We have a strategic intent for Daewoo Motor, but initially we need to stabilise the existing business so it becomes a sustainable operation. Even though GM and its alliance partners will own most of the shares, it will still operate as an independent company. Our next step will be to carry out a strategic review of the company’s portfolio. By then Daewoo will be coming out with its own products that are currently in the development pipeline. Some of these will be very beneficial to General Motors both in this region and outside the region. We’ll do what we have done with Suzuki, Subaru and Isuzu, in terms of product sourcing. The products could be redesigned and sold by one or more brands within the GM Alliance group.
So GM and/or its partners will source products from South Korea for sale elsewhere?
Potentially, yes, and the products could be made in other facilities elsewhere. The other important area is to introduce our global processes, which is a win-win strategy. We will look at what GM has in terms of assets that can help Daewoo Motor improve its performance. But we will also look at what Daewoo has that could help GM. The benefits of this are likely to come through faster than the product portfolio synergies.
What we have said so far is that GM and its partner take a 67% stake in the new company, and GM itself will take less than 50% of the equity. The remaining 18-19% will be available to our alliance partners. They will need to make a decision on whether to join us or not. These discussions have not been completed, and will probably not be until the final shape of the new company becomes more apparent.
Do you expect one of your partners to be a strategic investor, that will want to make use of capacity and product sharing opportunities, or could it be just a financial investor?
We already have financial investors, in the form of the current Daewoo Motor creditors that will have 33% of the company. We don’t need another financial investor with another set of objectives – things could get too complicated.
GM is taking on an additional annual production capacity of 560,000 vehicles in South Korea. There is already significant overcapacity at these operations. With global demand weakening sharply at the moment, what is the outlook for the new company’s operating performance?
First of all, we have devised a business plan based on realistic demand estimates. We will have to concentrate our thoughts on ways to improve capacity utilisation, or if need be, take capacity out. But we have not mentioned any intent to eliminate any capacity. If you look at the demand trend in the region, it continues to grow. So it is a matter of how we use the capacity.
There are three major reasons why we are buying these assets. The first is to target the South Korean market. So far, it has been a closed market for us. Daewoo has also lost significant market share at home, and we intend to reverse this. I’m not sure which company will have excess capacity when the programme is over, whether it will be Hyundai or Daewoo. I expect it will be a little bit of each.
The benefit of this deal is that Daewoo does have a global footprint. We can leverage the assets of 22 national sales networks across the world. We will be selling Daewoo vehicles on a global basis. The third benefit is Daewoo’s extremely good product development capabilities. Each new vehicle has been a vast improvement on previous models. Daewoo is also a low-cost producer of vehicles, and a producer of quality products at the same time. When you have all these pieces together, you have to figure out how to make the most of them.
In what state of financial health are these 22 national sales networks around the world? Will they need to be revamped?
Some are in good health, some are not. We will have to take a look at them individually and establish what needs to be done.
Daewoo Motor Corporation has significant capacity outside of South Korea, particularly in Eastern Europe and Central Asia. Does GM see some value in any of these facilities, perhaps to expand into these markets at a later stage?
Our intent is to continue to supply CKD kits to these plants, to those facilities that continue to operate and choose to assemble Daewoo vehicles. But what we have done is put a business plan together that will allow us to establish a viable company, which includes the assets that have been announced. If we keep adding other assets, which in most cases are very under-performing assets, we don’t think the new company would be in a position to sustain itself. We know it has not been able to sustain itself in its current form. So our bid reflects what we think will work. We will make the Daewoo brand available to the other operations for a period of 3-4 years, after which they will have to look at other options elsewhere. That is part of the agreement – it is not in our interest to give away the brand in perpetuity. We will take another look at this later on. But what we have decided so far is that we will not buy any additional assets.
Shifting focus onto your alliances with the Japanese car companies, the focus so far has been fairly superficial product cross-sourcing. Most of these are mutually beneficial projects aimed at filling portfolio gaps mostly in niche market segments, and to help improve economies of scale in niche technology areas. Is it GM’s intention to deepen collaboration with your partners, perhaps in joint global platform strategies for the volume segments? Is a shared compact car platform on the cards between Suzuki and GM?
The answer is yes. The product synergies been developed so far are those that could be harnessed in a short period of time. We have a longer-term strategy as well, along the lines you mentioned. We need to have Asian-based platforms, and our Japanese alliance partners in combination with Daewoo will help us do that. We need to have products that make significant use of Asian-made components and platforms that address Asian market requirements. Instead of having to do a complete redesign of a North American or European platform, we can use platforms that were originally designed for these markets in particular. But we are also discussing sharing a global compact car platform as well. Whether in the end it can be agreed upon, I don’t know. But we will continue to work through any hurdles.
Turning to what GM is doing at national level in Asia; in India you have a number of opportunities to strengthen your presence in this market. GM’s success so far in terms of volumes has been limited. Is there a potential to mirror what you have done in association with Suzuki in Japan, with the Cruze small car? Are you looking to source small cars from Maruti Udyog?
Sharing platforms with Maruti could happen. We have not initiated any such programme, but we would not be opposed to it if it were beneficial to Maruti and to us at the same time.
Is the government’s 50% stake in Maruti an issue for this to go forward?
I think the Indian government has been making efforts to divest its stake in Maruti, but so far its intentions appear a bit fuzzy. If the government did decide to go ahead with the sale, I’m sure Suzuki would be interested. But the decision is purely down to the Indian government. We are having discussions with Suzuki to establish whether there are platforms that we could use. On the other hand, there could be a platform built in our own plant that Maruti could sell across its own network. There is no agreement on anything of this sort at this stage, however, so it is still speculation whether anything like this will actually happen.
Is the situation in China similar? Are there products that you could share?
We are placed in the upper parts of the market segment, while Suzuki is placed at the lower end. Obviously, there could be some component sharing. But our Chinese partners are very different, and probably not very compatible. Once certain decisions have been made, it is difficult to change direction because of the different Chinese partners.
In the ASEAN, synergies with your alliance partners are beginning to move ahead. You are already moving forward with Isuzu with a shared pick-up platform in Thailand.
It’s a bit more than that. We are going to build pickups for Isuzu so it can transfer capacity for these models away from Japan.
This represents a new product segment for GM, moving into the pickup sector. Are you planning to follow Ford’s footsteps and establish a global pickup truck operation in Thailand?
Let me go back a bit. The pickups that are to be built at GM’s Rayong plant will be Isuzu pickups. We will be building them on their behalf, for them to distribute and market.
Will there not be a Chevrolet pickup built at the plant?
I don’t think that any such announcement has been made.
The pickup is the largest vehicle segment in the ASEAN, followed by the utility vehicle segment in Indonesia. It is known that GM is planning to enter the utility vehicle segment using the Isuzu Panther. Will the two models be very different?
Yes. That is the case. It will be a petrol-powered model. There will be some styling cues, but not much.
Is this not a segment in which GM would like to have a stronger presence? Is GM not planning to follow Ford and Toyota’s lead in developing utility vehicles and pickup trucks based on the same platform and with additional component standardisation?
I think Toyota’s low-cost SUV has a lot of potential in the region. We are discussing with Isuzu potential opportunities in this regard, and whether it is appropriate for our network.
At the same time, you’re looking to sell the Suzuki Grand Vitara under the Chevrolet badge in Indonesia. Is this a short-term solution to expand sales volumes?
Yes, we’re looking at that. I’m not ready to discuss this subject further.
Your Australian unit Holden is a very important engineering centre for GM. In terms of its vehicle assembly operations, do you see a long future for them, or do you eventually expect them to be priced out of this activity?
First of all, Holden makes upper-segment products, so this helps. It is also very focused on the Australian market. In Australia, Holden sells around 45,000 imports and 135,000 locally made products annually. It also exports around 35,000 units a year. Our intention is to change this ratio to 50:50, that is to produce 50% for the domestic market and 50% for export markets. That would be sufficient to sustain annual output of 200,000-215,000 units per year, at which level economies of scale are good.
The weak Australian dollar has obviously helped Holden’s export drive. Do you expect that to change much going forward?
Not in the short term, but in the long term it will. We will have to deal with currencies’ exchange rates – they will always be an issue for Australia. Analysts are forecasting quite a weak Australian dollar for quite a few years yet. When the euro eventually strengthens, this will become a major issue for Australia.
What is GM’s short-term outlook for vehicle demand in the region? Has it changed significantly in the past two months or so?
We still have a major issue with trying to understand the demand outlook for Japan. If you look at the rest of the region, it has declined but not by that much. I don’t think we will see a major decline in demand in the short-term, but the effects are likely to be more long term on the region’s export-driven economies. For 2002, I don’t expect vehicle demand will decline by more than 10%, it will probably be closer to 4-5% for the whole region. Japan is the wild card when predicting the short-term demand outlook in the region.
Is GM expecting the Asia-Pacific region to become a major contributor to GM’s global earnings?
Our goals for the Asia-Pacific region are no different from those we have for Europe, North America and South America. That is a 5% net return on sales.