Focusing on Sustainable Restructuring
“With the start of my work, I will strive to secure competitiveness and a sustainable future for the company and utilize our strengths,” said Kaher Kazem, GM Korea's new president and CEO while taking office on September 1. This means that president Kazem once brought a halt to concern about a possibility of the automaker’s withdrawal from Korea.
After taking office formally, president Kazem reportedly made a number of comments on "sustainability," as he was aware of withdrawal rumors, by e-mailing his employees and clarified his will for internal innovation and reforms.
President Kazem announced on the inauguration day that he will get rid of external worries by improving its financial structure while pinpointing GM Korea’s cumulative deficit of 2 trillion won (US$1.8 billion) in the past three years. "GM Korea has posted a huge cumulative loss over the third consecutive years," president Kazem said. "The deteriorating financial situation poses a serious threat to our sustainability."
"All our employees must change for a sustainable future," president Kazem continued. "It is a duty of all employees including me. We will be able to overcome challenging tasks for a sustainable future as a team if we continue to put our employees’ great capabilities, our strengths, and our customers at the center of all our activities."
Kazem is a restructuring specialist who finished GM’s withdrawal from India and selling off Indian production bases except for export car factories until May as head of GM India. So, it was said that Kazem might restructure GM Korea in South Korea.
Rumors about GM Korea’s withdrawal from Korea are nothing new but the approach of the day when GM will be able to freely sell off its stake in GM Korea is fueling the rumors. KDB which holds a 17.2 percent stake also discussed a possibility of GM’s withdrawal from Korea in an official report.
"Korea has strengthened its position as a global GM research and development base, and there has been no mention of Korea in recent continuous restructurings of its global business structure," Kazem said. "We exported one million vehicles and created 16,000 jobs and invest one trillion won (US$900 million) in Korea every year. Like these, we have had a big economic impact on Korean society."
However, although Kazem has emphasized “sustainability,” a dominant view in the industry is that nobody can predict how things will change depending on management environment variables. In particular, GM Headquarters in the US has pointed its finger at the rigid labor market structure of Korea as a risk factor.
This year, the labor and management of GM Korea have failed to hammer out a collective bargaining agreement. Their negotiation has deadlocked since the negotiation failed on July 21. Even though Kazem tried to break the ice with the labor unions by holding a meeting with them prior to his inauguration, the labor union has decided to stage this year’s first strike (a four-hour partial strike) on September 5 shortly after his inauguration.
Negotiation over Collective Bargaining Agreement Breaks Down
The labor and management of GM Korea tried to have the first collective bargaining agreement negotiation just after the appointment of Kazem as new CEO in the afternoon of the previous day, but the attempts were thwarted over the issue of changing an interpreter that the union requested. As Kazem did not accept it, the negotiation no longer proceeded. To Kazem, an Australian citizen, each of the interpreter’s words can really matter during negotiations. The labor union decided to stage a partial strike from September 14 to 18.
The negotiation garnered much attention as it was resumed in about 50 days since the failure of the collective bargaining agreement negotiation on July 24 but did not take place. The management has been embarrassed as not a major point of the negotiation but an unexpected happening broke off the negotiation.
Kazem had visited the union office in August prior to his official inauguration but the labor union went on a partial strike on September 5. The union began to turn down overtime work on September 14. A three-day partial strike was staged until September 18. The labor union also said that the strike is a warning to the management. Consequently, they went through 18 rounds of wage negotiations for this year with the management until July 24 but failed to reach an agreement.
Even if negotiations are resumed, the labor and management are expected to have difficulty hammering out an agreement as Kazem is placing his top priority on enhancing profitability and the labor union is demanding a pay raise.
Under the circumstances, Seoul High Court ruled on September 4 that GM Korea should pay approximately nine billion won (US$8.1 million) in back wages to the plaintiffs of its ordinary wage lawsuit consisting of 1,482 office workers and retirees. GM Korea has decided to include the regular bonuses in normal wages by accepting the Supreme Court's decision in 2014 so its labor cost burden has ballooned by nearly 500 billion won (US$450 million) over three years. Union members’ twelve lawsuits demanding for back pays are pending in courts." "The more serious a crisis is, the more mutual concessions, and cooperation between the labor and management will be needed," an automobile industry official said.
The litigation in question is divided into three cases. Two have been sent back by the Supreme Court and the other one is the second instance. When it comes to the former, the court told GM Korea to pay 6.5 billion won (US$5.8 million) and 500 million (US$450,000) each, ruling in favor of the plaintiffs with the only exception of 100 million won (90,000). In the second instance, the court told the company to pay 2.076 billion won (US$1.86 million) with 2.176 billion won (US$1.95 million) at stake.
The court ruled that the plaintiffs’ merit pay constitutes their ordinary wage paid in a uniform, regular and fixed manner. GM Korea has paid regular bonus and merit pay to manufacturing and office workers, respectively.
The company claimed that the principle of good faith should be taken into account based on the Supreme Court ruling on the case of KB AutoTech that was made in December 2013. However, the court turned down the claim, saying that GM Korea’s merit pay, unlike in the case of KB AutoTech’s regular bonus, is not based on the two sides’ agreement to exclude it from the scope of ordinary wage.
Official Denial Of Withdrawal
Under the internal and external pressures, Kazem officially denied the recent tumors that the company will pull out from the South Korean market for the first time since he has taken charge on September 1.
“GM has entered the best markets in the perspective of growth potential and this includes South Korea,” Kazem said on September 6 in Bupyeong factory, Incheon, prior to giving a media tour of the carmaker’s design center, saying, “South Korea is GM’s fifth largest market and is one of the fastest growing.”
Instead, he stressed that he would improve the current situations in where the company posted more than 1 trillion won (US$884.02 million) in losses in the last three years. Kazem said, “The company and its partners will work together to raise the competitiveness and profitability of GM Korea. We are absolutely committed to turning around the Korean operations.” Market watchers believe that he will reform GM Korea through restructuring instead of shutting down.
On the same day, GM Korea gave a media tour of the carmaker’s design center in order to shut down the rumors. In fact, designers from each division directly introduced how they develop car concepts and colors. The design center is where they actually work, not just an exhibition center.
The design center is the only building equipped with state-of-the-art technology in the Bupyeong plant. GM Korea invested 40 billion won (US$35.37 million) in 2014 to expand the center by more than two times in size and install more advanced design facilities. It has three-dimensional (3D) printers that can create prototypes as well as virtual reality equipment that can see and experience developing cars in advance.
Stuart Norris, managing director of the GM Korea Design Center, said, “The design center in South Korea is the second largest one among GM’s six global design studios. Especially, it has been in charge of designing GM’s compact, sub-compact cars, compact sport utility vehicles and electric vehicles.”
Tightening Its Belt
Under the circumstances, Kazem is planning to cut costs in various ways and his measures are likely to include wage freeze as well as recently stopped TV and radio commercials.
GM Korea is expected to propose wage freeze for several years to unionized employees sooner or later. This is based on the fact that the company’s losses increased to two trillion won or so for the most recent three years and the situation is showing no signs of change this year.
The workers are unlikely to accept it. Wage negotiations between the management and the union, which resumed in 50 or so days on September 13, foundered immediately after the resumption. The union staged a partial strike on September 14 and 15 and is planning to do so again on September 18.
Kazem is known to be a restructuring expert. Before his recent appointment, he led GM’s withdrawal from India and sale of local manufacturing facilities. He is likely to focus on cost reduction in South Korea in that he emphasized on the importance of the South Korean market during his first speech as the president and CEO of GM Korea.
His last option will be a layoff if the negotiations do not go well. “The company is expected to do its utmost for the time being in order to persuade the union,” said an industry expert, adding, “However, restructuring is likely to follow if its efforts do not work
KDB’s Stake Not to Be Sold
The Korean government unveiled on September 28 it decided not to sell the Korea Development Bank (KDB)’s stake in GM Korea. The decision was made in order to prevent GM from withdrawing from the Korean market by arbitrarily applying for court receivership. However, when the veto right of the KDB’s stake expires on October 17, GM Korea may withdraw from Korea in a way to sell off its equities.
"Apart from its policy of selling-off stakes in non-financial firms under its management, the KDB is planning to retain its stake in GM Korea for the time being," said a high-ranking government official on September 28. Currently, 76.96% equities in GM Korea are held by GM affiliates including GM Invest and GM Asia Pacific Holdings. The KDB is the second largest shareholder with 17.02%, and Shanghai Automotive Industry Corporation holds a 6.02% stake. Although the KDB is the second largest shareholder, KDB secured a 15-year-long veto right against GM Korea’s sell-off of its equities in GM Korea during the process to take over Daewoo Motors, the predecessor of GM Korea, for job security reasons in 2002. But the veto right will be invalidated on October 17.
The government has set its direction to make the KDB retain its stake in GM Korea even if the veto right expires with the goal of preventing GM from arbitrarily applying for court receivership. "After October, no one can stop GM from selling its stake but the KDB will still have the power to refuse GM's application for court receivership," a government official said.
GM Korea has been suffering from financial difficulties with an operating loss of more than 1 trillion won (US$900 million) over the past three years. Some analysts say that if GM fails to find a buyer of its stake, it will be able to leave the Korean market via liquidation such as court receivership. This is because GM will be able to take some money even through liquidation. For example, the official land price of GM Korea’s Bupyeong factory site in Korea is more than 4 trillion won (US$3.6 billion). However, if the KDB maintains its position as the second largest shareholder, such a possibility will be discounted.
Of course, things will be different if GM Korea finds a third party to buy GM Korea’s stake. According to the government, GM and the KDB are under a dragger loan agreement which means that if GM sells off its stake in GM Korea to a third party, the KDB’s stake must be sold off to the third party, too. After October when the KDB’s veto right will disappear, GM will be able to leave the Korean market through the sale of its stake in GM Korea without taking steps to take over equities in GM Korea from the KDB.
At present, however, both GM Korea and the Korean government agree that riding out financial difficulties in Korea is GM Korea’s top priority rather than GM's withdrawal. "We are going to concentrate on enhancing GM's competitiveness and profitability," said Kaher Kazem, GM Korea's new president who recently met with reporters. "Korea is one of GM's five major markets. We will focus on boosting GM Korea’s competitiveness and profitability,” Kazem said. As a result, restructuring work is under way, including reducing GM Korea's ordinary expenditure. The government also plans to support GM Korea’s restructuring while keeping minimum measures to prevent its withdrawal from Korea. It is expected that this content will be included in the government’s plan to strengthen the competitiveness of the automobile industry which will be announced at the end of this year.