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GM Korea Faces Biggest-ever Crisis Due to Triple Distresses
Crisis of GM Korea
GM Korea Faces Biggest-ever Crisis Due to Triple Distresses
  • By Jung Min-hee
  • July 7, 2017, 05:15
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GM Korea has faced the biggest crisis in history due to distresses from both inside and outside the company.
GM Korea has faced the biggest crisis in history due to distresses from both inside and outside the company.

 

GM Korea has faced the biggest crisis in history due to a rapid drop in domestic sales in June, resignation of president and a slow rate of negotiation with the labor union.

According to industry sources on July 6, GM Korea is in the state of uneasiness after president and CEO James Kim announced to resign on July 3. An official from the company said, “The CEO has announced to step down from his post in two days after he sent a letter to encourage employees to overcome the crisis together. Not only are the labor union but also employees at a loss for words.” Some industry sources say Kim’s resignation is largely due to sluggish sales and lack of progress in wage talks with the union.

Not only is the local union demanding major changes to the pay structure, but sales and exports have declined through 2017.

Earlier GM Korea announced that it sold a total of 43,692 units in June, including 11,455 units in the domestic market and 32,237 units in the global market. Both domestic sales and exports dropped 36.6 percent and 12.9 percent, respectively. Sales of GM Korea products in the first half of the year stood at 278,998 units, down 9 percent from the same period of last year.

Therefore, GM Korea’s labor union, which is currently in talks with its management, is more likely to go on a strike. The union workers started its vote on July 3 about whether they are going to stage a strike. The vote will last until July 7. The union has asked for a 154,883 won (US$134) raise in the basic monthly payment and a 500% performance-based bonus. It has also asked for the complete roll out of a two-shift 8-8 hour working system.

The management drew the line for the labor union's request. It sent a letter to it employees and executives on June 30, saying, “All the plants of GM around the world are currently in the middle of a whirlwind of great changes as the company cut down working hours at the assembly and transmission plants in North American and extended the shutdown of the plants as well as the recent global business restructuring. The sale of European division Opel will have both a direct and indirect impact on all of GM’s global businesses, including GM Korea, in their production levels and in new car planning.”

An official from the industry said, “GM Korea has racked up 2 trillion won (US$1.73 billion) in net losses over the past three years including the period after CEO James Kim has been in the position in 2015. Due the fact that GM pulled out its flagship brand, Chevrolet, from the European markets, GM Korea saw its exports significantly decrease. Moreover, the domestic demand dropped nearly 40 percent. GM Korea has faced the biggest crisis now.”

The situation has led to widespread rumors again that GM could withdraw its operations from the Korean market. Some say that Kim’s resignation is part of GM’s efforts to restructure its global businesses. Accordingly, there are concerns that the domestic manufacturing base will collapse and 300,000 jobs will disappear when GM Korea, which has an annual production capacity of 900,000 vehicles, shut down its business in the nation.

GM manages global markets by dividing into the North America, South America, Europe, China and International (GMI) regions. GM Korea belongs to the GMI along with India, Africa, Australia, Middle East and major Southeast countries. However, the GMI was officially disbanded in May.

Market watchers say that the GMI break-up is related to business reorganization which is under way in countries belonging to the GMI sector, mainly India and Africa. GM will pull out the Chevrolet brand from India by the end of this year. It also plans to sell its idle plant in Halul, India, to China’s Shanghai Automotive Industry Corp.

The situation is similar in Africa as well. GM will stop selling and manufacturing Chevrolet products by the end of the year. The group will sell its plant, which produces small commercial vehicles, to Isuzu, a Japanese company that supplies commercial trucks. It will also sell its 30 percent share in the joint venture established with Isuzu. GM also halted production in Australia and categorized Middle East under a separate organization. After all, GM Korea is the only one in the GMI that hasn’t carried out a specific global business restructuring.

GM Korea is categorized into the one with low core business competence and low earning potential. According to a recent in-house newsletter from GM Korea, the GM headquarters considered the GMI, including GM Korea, the sector which reduces investment due to low competence in core business and low profit potential like Chevrolet Europe and Chevrolet Russia. GM shut down its business in both Europe and Russia. This was due to the repetitive wage negotiations every year, a 50 percent wage increase in four years, sluggish sales and huge losses.

Industry sources believe that Kim’s resignation is a signal of the GM headquarters shutting down the GM Korea business. They also said the GM headquarters reached the limit of its patience as the labor union made various requests at the wage negotiations, preparing for the strike, at the moment when it posted more than 500 billion won (US$432.49 million) in losses last year.

Another reason why Kim’s resignation attracts attention is the Korea Development Bank (KDB) can sell its 17.02 percent of GM Korea in October this year. The KDB has become the second largest shareholder of GM Korea by securing the share while GM was acquiring Daewoo Motors in 2002. GM is required to secure the KDB’s share in order to pull out its business from the Korean market. Previously, Tim Lee, then GM's global business chief, met Kang Man-soo, then chairman of the KDB, to ask him to sell the share in October 2012 and GM expressed its intention to buy the KDB’s share through numerous channels in 2013 as well. The KDB also announced in November 2015 to sell its shares of five non-financial companies the bank owns more than 15 percent within three years. GM Korea is able to raise money to purchase the share. The officially assessed land price of GM Korea’s plants in Bupyeong, Gunsan, Changwon and Boryeong is 1.72 trillion won (US$1.48 billion) as of the end of last year, up 58 percent from 1.08 trillion won (US$938.24 million) of book value which the company initially paid. In terms of market price, GM Korea’s gains go up even further.

When GM shut down its business in Korea, not only domestic automobile industry but also manufacturing industry bases could collapse. GM Korea has an annual production capacity of 900,000 units – 440,000 units in Bupyeong, 250,000 units in Gunsan and 210,000 units in Changwon – at the four plants in the nation. They also employ about 300,000 workers. As there have been rumors over the pullout again, GM Korea’s labor union has established “Protecting Job Task Force Committee.”