GM’s Exit Strategy?
According to industry sources on February 8, GM recently told the South Korean government and Korea Development Bank (KDB) that it would increase its capital. Specifically, GM’s target is at least 4 trillion won (US$3.6 billion) and GM is hoping that the GM headquarters and KDB will make an investment in proportion to their shareholdings. At present, GM and KDB have 76.96% and 17.02% of GM Korea, respectively. The rest is owned by SAIC Motor, which is in partnership with GM. In order to meet the target, GM and SAIC Motor have to bear 3.4 trillion won (US$3.0 billion) and KDB has to bear 700 billion won (US$630 million) approximately.
The problem is how to carry it out. It is said that GM will prepare most of the money through a debt-equity swap of GM Korea’s borrowings from the HQ. As of the end of last year, the borrowings totaled 3.2 trillion won. The total increase in capital exceeds four trillion won when the borrowings are swapped without exception. Due to its impaired capital and low credit rating, GM Korea had to borrow the money from the GM headquarters, instead of local banks, at an annual interest of no less than 5%. In other words, KDB is likely to be the only part of the capital increase that bears the burden in that case.
Rumors about GM’s withdrawal from South Korea have been circulating since last year as the company has failed to make a profit in the South Korean market. GM Korea’s cumulative losses have reached approximately 3 trillion won (US$2.7 billion) in four years due to its sluggish sales in South Korea and Chevrolet’s withdrawal from Europe. Nonetheless, GM Korea’s labor cost per worker rose from 73 million won (US$65,700) to 87 million won (US$78,300) between 2013 and last year, led by its militant union. In short, GM Korea is a high-cost and low-efficiency company.
Background of Capital Increase
Still, the HQ proposed no plan concerning GM Korea. No one was willing to take over the company that has four manufacturing plants with an annual production capacity of 900,000 cars, land, buildings and machinery equivalent to trillions of won, a debt of no less than 7.512 trillion won (US$6.76 billion) as of 2016, and the militant labor union to boot.
It seems that the HQ has changed its strategy under the circumstances. Given the current condition of GM Korea, the annual interest of 5% is unlikely to be collected, not to mention the principal that amounted to 3.2 trillion won (US$2.8 billion) until the end of last year. With GM Korea collapsing, it seems that the HQ is trying to prevent further losses by making up its mind. New funds are urgently required in order to do so. This is why GM has come up with a capital increase plan based on the swap.
The HQ’s pretext is obvious. According to union members, about 300,000 jobs can disappear once GM Korea leaves the local market, and then the Moon Jae-in administration’s job-first policy can take a direct hit.
Previous Cases of Withdrawal of GM
If the HQ increases the capital by 3.2 trillion won (US$2.8 billion) based on its 76.96% shares in GM Korea, the total capital increase reaches 4.15 trillion won (US$3.73 billion) and KDB may have to provide more than 700 billion won (US$630 million) in accordance with its shareholding. This is very burdensome on KDB’s part. Besides, SAIC Motor may refuse to take part in the capital increase or GM may leave the South Korean market in spite of KDB’s funding. KDB’s rights to veto the withdrawal already disappeared in October last year.
Experts point out that the South Korean government needs to take a lesson from Australia and India, where GM shut down its business earlier. Both Australian and Indian governments provided funds while GM was secretly preparing to leave. According to the experts, GM Korea’s recovery is indeed important but the government should not repeat the same mistake as in the case of shipbuilders in doing so. This is because even more taxpayers’ money will be needed if GM Korea recovers without an ability to stand on its own.
“It is true that the HQ’s debt-equity swap will lead to some financial room with GM Korea’s burden limited to operating cost preparation,” said an industry insider, adding, “Still, the massive funding it requires as a prerequisite seems to imply that the HQ will apply high raw material and auto parts costs to GM Korea while not being responsible for the adverse business conditions triggered by its withdrawal from Europe.”