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Controversies Are Brewing Again over GM Korea
What Should Come First?
Controversies Are Brewing Again over GM Korea
  • By Jung Min-hee
  • February 12, 2018, 00:30
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The South Korean government may be forced to consider plan B such as purchase of GM Korea’s plant in Gunsan that may be left by GM.
The South Korean government may be forced to consider plan B such as purchase of GM Korea’s plant in Gunsan that may be left by GM.


A tug of war between the General Motors headquarters and the South Korean government over GM Korea’s survival has been resumed in nine years. GM is claiming that it has no choice but to withdraw from the South Korean market without the government’s support or unionized GM Korea worker’s concession. The South Korean government, in response, is claiming that GM should first disclose its data including transfer price. Experts point out that reasons for the poor management of GM Korea should be found out first.

R&D Expenditure Exceeding Operating Loss Sent to HQ

GM Korea has been regarded as an ATM of the HQ since 2009. At the very center is R&D costs. According to the Financial Supervisory Service, GM Korea spent no less than 614.1 billion won (US$550 million) on R&D in 2016 alone, when the company’s operating loss amounted to 521.9 billion won. From 2014 to 2016, the amounts were 1.858 trillion won (US$1.6 billion) and 1.346 trillion won (US$1.2 billion), respectively.

Its R&D expenditure increased more in the period when the company was in the red than when the company was in the black based on an increase in exports. Specifically, the expenditure was 1.7948 trillion won (US$1.6 billion) in 2011 to 2013, when its operating profit was close to one trillion won. This is why GM Korea’s cost ratio is as high as 93% with Hyundai Motor Group’s remaining at 80% for reference. “GM Korea sends its R&D cost to the HQ and handles it as expenses, but no one knows how the money is spent,” said an industry expert, adding, “The high cost-to-sales ratio is for this reason as well.” The R&D cost is not the only controversial part. In 2016 alone, GM Korea sent the HQ no less than 116.1 billion won (US$104 million) in royalties and business support costs.

Main Cause of Poor Performances

Some point out that the poor performance of GM Korea is not because of its high-cost structure attributable to high labor costs but because of the HQ’s global strategy. Unlike Hyundai Motor Company and Kia Motors, GM Korea focuses on exporting CKD products to the other GM subsidiaries. In 2013, when GM Korea posted an operating profit of 926.2 billion won (US$830 million), its CKD exports and finished car exports totaled 1,185,000 units and 629,000 units, respectively. During the period, Hyundai Motor Group’s CKD ratio was less than 10%.

The problem is that GM Korea’s sales have taken a direct hit since that year amid the HQ’s global business strategy overhaul such as the withdrawal of Chevrolet from Europe. Last year, GM Korea’s CKD exports fell to 543,000 units, down 54.2% compared to 2013, whereas its finished car exports reached 392,000 units, down 37.7% compared to 2013. In short, the CKD exports were a bigger cause of the poor management than the high-cost production of finished products.

Controversies over Transfer Price

GM Korea’s business model focusing on CKD has led to transfer price controversies, too. According to some insiders, the CKD products, which are characterized by costs being less detectable than in the case of finished products, have been supplied to the subsidiaries at low prices and sold at higher prices so that profits can flow to the HQ. Korea Development Bank (KDB), which is the second-largest shareholder in GM Korea, has repeatedly asked GM Korea to provide information on CKD supply prices and production costs, but GM Korea has refused to provide the information so far.

Large-scale High-interest Borrowings

Another controversy is over GM Korea’s huge borrowings. The subsidiary has borrowed 2.4 trillion won (US$2.1 billion) from the HQ for years, at an annual interest of 5%, mentioning the lack of operating funds. GM Korea paid as much as 462 billion won (US$415 million) in interest alone for four years until 2016. GM Korea is claiming that it had no other option with South Korean banks such as KDB refusing to lend money for its poor financial conditions. However, the claim cannot be convincing if the suspicions over the transfer price turns out to be true.

This is why many in the industry are urging the government to clear the suspicions before making a decision on financial assistance. “It seems that the South Korean government is losing its pace, afraid of large-scale unemployment,” said an industry source, continuing, “However, it should clear the suspicions first and, if that’s impossible, consider plan B such as purchase of GM Korea’s plant in Gunsan left by GM.”

GM Anticipates Positive Reply from S.Korean Government

GM International President Barry Engle, who visited South Korea in mid-January, recently flew to the country again. On February 11, he said at an interview that GM, looking forward to a reply without delay, would continue to discuss the matter with the South Korean government and the unionized workers.

This means that the ball is now in the court of the government. It is said that the Ministry of Trade, Industry & Energy is currently looking into GM Korea’s situations. For GM Korea’s survival, GM has requested funding through a debt-equity swap-based increase in capital, new loans, a tax cut through designation of GM Korea’s business site as a foreign investment zone, etc.

However, some say that no taxpayers’ money should be wasted for the company that cannot stand on its own. “The HQ is looking to handle the matter with ease by taking advantage of the South Korean government, but no government support should be provided until GM Korea gives a clear explanation on its structural problems and suspicions,” one of them commented.