Saturday, July 25, 2009

Daewoo: General Motor's Korea Problem

The automaker's Korean subsidiary, GM Daewoo, is losing money and facing a liquidity crisis. But it's too important to GM's future to jettison
By Moon Ihlwan

Seoul - Even as Asia remains a bright spot for General Motors (GM), its Korean subsidiary looks more like the hapless parent company than GM's fast-growing Chinese operations. GM Daewoo Auto & Technology lost $702 million in 2008, and this year its sales are off by nearly half, to 261,000 vehicles in the first six months. Now the Korean unit says it's on the cusp of a critical liquidity crunch. "Things look ugly at GM Daewoo," says Stephen Ahn, head of research at brokerage LIG Investment & Securities in Seoul.

GM Daewoo's woes stem largely from its close ties to the rest of the global auto giant. The unit made about 900,000 cars and shipped kits for an additional 1 million vehicles for assembly at factories in other countries last year, accounting for about a quarter of all GM auto sales worldwide. But some 90% of those cars are branded as Chevrolets, Buicks, and other GM nameplates that have seen sales plummet.

Given the losses, why doesn't Detroit just jettison GM Daewoo? It's too important to GM's future. The unit is a key developer of small cars for GM's global lineup; it's a vital source for engineering and parts for the China operation; and it makes a new Chevy compact due to face off with the Toyota (TMC) Corolla and the Honda (HMC) Civic. "GM Daewoo will play a more important role in the New GM's global business strategy," says Michael A. Grimaldi, president of the Korean operation.

That has left GM Daewoo scrambling to strengthen its finances. In December it had total debts of $6.8 billion. Since February, when it exhausted $2 billion in credit lines, the carmaker has sought new loans from the Korea Development Bank. The government-run lender arranged GM's takeover of bankrupt Daewoo Motor in 2002 and still holds a 28% stake. In May the KDB let GM Daewoo defer $500 million in payments. Before handing over more cash, the bank wants GM to commit to maintaining a big presence in Korea. The two sides are negotiating conditions for fresh loans, but both say they have yet to reach any resolution.

Seoul wants a guarantee because it's worried about Korea's position in the auto world. The country now offers a good compromise between high-cost, high-quality Japan and low-cost China, whose automakers have a reputation for building shoddy vehicles. But that advantage "could end in just a few years as China catches up," frets Lee Hang Koo, an analyst at the Korea Institute for Industrial Economics & Trade, a government-funded think tank.

The KDB is also seeking collateral such as more shares in GM Daewoo—something GM had resisted but is now considering. Another debt-stricken Korean carmaker, Ssangyong Motor (controlled by China's Shanghai Automotive Industry Corp.), sought receivership in February after the KDB refused to shore it up. Bailing out GM Daewoo and getting nothing in return could raise cries of unequal treatment.

Still, given the importance of GM Daewoo to both GM and the Korean economy, some kind of deal is likely. GM needs the Koreans' design chops, and Seoul doesn't want to lose the tens of thousands of jobs provided by the company and its hundreds of suppliers. "Something will be worked out eventually," says Suh Sung Moon, auto analyst at brokerage Korea Investment & Securities in Seoul. "Neither the U.S. nor Korea can afford to let it go."

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