Response to Korean Gov’t Demand
GM Korea, which requested financial support from the Korean government, picked the "Gunsan Factory Closure" card on February 13. This move came only a day after the Ministry of Trade, Industry and Energy which GM Korea is using as a window for negotiating financial support asked for mid- to long-term management improvement measures.
On the day, GM Korea announced that it would desist from production at Gunsan Plant and shut down the plant by the end of May through a business restructuring plan. The Korean corporation of the US automaker is planning to finalize a process to restructure about 2,000 employees including contract workers. GM Korea expects that the restructuring of the plant including voluntary retirement will cost up to US$850 million.
Gunsan Plant, the Korean production base for the Cruz and the Orlando, has stagnated at a 20% utilization rate for the past three years. This fact has forced the management of GM Korea to consider the plant’s low productivity, and efficiency its grave problems. Even on weekdays that are closed due to a low utilization rate, workers are paid 80% of their average wages, leading the management to think that the plant needs open-heart surgery so is the first target to restructure. 80% of their average wages paid as holiday pays is 10% higher than the statutory payment rate of 70%. GM Korea believes that they lose more than 100 billion won in labor cost per year. GM Korea reportedly posted 1 trillion won in net loss last year, suffering from snowballing financial difficulty. In this case, the plant’s cumulative deficit over the past four years will top 3 trillion won (US$2.7 billion).
Killing Three Birds with One Stone
A lot of attention is being paid to why GM announced that GM Korea will close down its plant in Gunsan. Some analysis says that GM used a card to kill “three birds with one stone” –- showing the Korean government a possibility that they will leave Korea, putting pressure on the Korean government and the GM Korea Labor Union and enjoying pruning cost by shutting down Gunsan Plant. There is also concern about the voluntary retirement of about 2,000 employees and a conflict with the labor union. It is expected that the government will have more trouble.
The closure of Gunsan Plant is expected to bring about serious aftermaths. At the moment, first- and second-tier partners of Gunsan Plant total 35 and 100, respectively. It is estimated that the partners employ upwards of 10,000 workers. Including about 2000 employees of GM Korea, approximately 12,000 workers are working at Gunsan Plant and for GM Korea. Taking into consideration the workers and their families, the shutdown of the plant will have a huge negative impact on the local economy. Massive layoffs are expected to invoke strong resistance from the labor union.
On GM’s part, even if Gunsan Plant is shut down, GM will suffer little damage in sales in its major overseas markets. GM will enjoy a lot to benefits instead. First of all, GM will be able to slash fixed costs. Laying off 2,000 workers with a yearly salary of 87 million won (US$78,000) per person can immediately save GM 170 billion won (US$153 million). Moreover, if the plant site is sold, GM will be able to recover 1.30 trillion won (US$1.17 billion).
In a war of public opinion, no big support was given to cases for giving support to GM Korea.
This fact is one of the reasons why GM made the decision to shut down Gunsan Plant. After Barry Engle, president of GM International, asked Korean government officials for financial support for GM Korea, public voices to take issue with giving support to GM Korea with Korean taxpayer money were louder than those to insist that GM Korea should be saved.
Besides, the GM Korea Labor Union may oppose the plan of the GM Korea management. In fact, GM Korea unionists will hold an extended cadre meeting and decide on their future struggle policies and strategies on February 14. Then, they are scheduled to hold a pep rally against the shutdown of the plant and a restructuring at Gunsan Plant.
Korean Government Launches Due Diligence Inspection of GM Korea
The Korean government caught off guard has decided to accelerate reviewing work germane to additional support for GM Korea. The Korea Development Bank (KDB) agreed with GM on carrying out a due diligence inspection of GM Korea.
The government is also considering participating in capital increase and designating Bupyeong Plant as a foreign investment zone. It is said that earlier GM asked the Korean government to designate Bupyeong Plant as a foreign investment zone. Corporations in foreign-invested areas are free from corporate tax or income tax for 5 years and exempt from acquisition tax and property tax for up to 15 years.
This is because the Korean government has extremely limited options. With up to 300,000 jobs at stake, just waiting and seeing GM withdraw from Korea after closing down GM Korea is highly risky. Conversely, GM is pressing the Korean government through a war of public opinions with this point in mind. At present, it seems that GM is taking the lead and the Korean government is following GM.
Those inside and outside the Korean government predict that the Korean government will set its direction to give additional support to GM but have negotiations about details. Many analysts say that the Korean government will tell GM that the Korean government will take part in a capital increase for GM Korea or give support to GM Korea only if GM makes a definite promise to give GM Korea orders to produce new models and provide additional management information and data. This is because Korean government officials will be able to persuade the National Assembly and public opinions if they have a cause.
However, there is much concern about how effective a due diligence inspection that the government announced that it will conduct will be. It usually takes several months to carry out a credible due diligence inspection. GM, however, set the end of this month as the deadline for the due diligence inspection. "At the moment, I am not sure about whether or not a due diligence inspection will get the Korean government meaningful and useful information," said an official of the Korean government. “Both sides are expected to engage in a fierce war of words during the due diligence inspection.”
Bupyeong Plant and Changwon Plant May Face Grim Future, Too
"The closure of Gunsan Plant is the first step in our efforts for a business restructuring in Korea," said Kaher Kazem, president of GM Korea. This means that Gunsan Plant is the first step and GM Korea’s plants in Bupyeong, Changwon and Boryeong may be closed down.
"Based on the results of negotiations with the Korean government and the labor union, we will decide whether or not to shut down remaining plants such as those in Bupyeong, Changwon and Boryeong,” said GM's number two Dan Ammann who is president of GM in an interview with Reuters after announcing the plan on the closure of Gunsan Plant. Some analysis says that the results may come out as early as this month.
Will GM Korea Be Sustainable after Receiving Support?
As the government is under pressure to support GM Korea due to the closure of Gunsan Plant, many experts in the automobile industry say no to the basic question of “Will the remaining plants be are sustainable if the government supports them?” This is because GM Korea has suffered a total 3 trillion won in loss over the past three years and the loss is a big burden on GM Korea. Fortunately Bupyeong and Changwon Plants have better circumstances than Gunsan Plant. GM is saying that if the Korean government gives support to GM Korea, GM Korea will build a sustainable business structure where Bupyeong Plant will produce eco-friendly cars and Changwon Plant will become a base for small car production.
But industry experts do not think so. They say that GM Korea will not be sustainable unless a structural problem that GM Headquarters can make a change or change its mind whenever the headquarters want to. As seen in the case of Gunsan Plant which had been a sound export base, there is no breakwater against global market reorganization waves when such waves hit GM Korea.
Signs are already showing. A case in point is that GM Headquarters is not assigning new car production to GM Korea plants in Korea. GM Korea is planning to halt production of the mid-sized SUV Captiva in Bupyeong and import and sell the Equinox in March instead. GM Korea is scaling up the proportion of sales of import cars such as the Impala, the Volt EV, and the Equinox. Whether it is Bupyeong Plant or Changwon Plant, nobody can rule out a possibility of a sharp decline in production volume in GM Korea’s plants in Korea in the future.
GM Korea is expected to have difficulties in the near future. GM Korea has to sell a lot of cars in order to boost its profitability. However, the closure of Gunsan Plant has made Korean consumers more reluctant to purchase GM Korea vehicles. This is because GM Korea’s brand image was tarnished and many Korean consumers have become concerned over GM Korea’s future after-sales services. GM Korea is already suffering from big trouble due to rumors about GM’s withdrawal from the Korean market. GM Korea’s sales fell 30.3 percent in the Korean market last year.
Another problem is that GM Korea has a high-cost, low-efficiency labor union which is one of the big problems of the Korean automobile industry. "The allocation of new production volume depends on cost restructuring efforts to be made by GM Korea," said Dan Ammann, the number two man at GM in an interview with Reuters after announcing the plan on the closure of Gunsan Plant on February 13. GM Korea has to not only close down Gunsan Plant but destroy its high wage structure where an average employee annual salary is standing at 87 million won. But the labor union hampers a change in the high wage structure. Rather, it is highly likely that GM Korea’s high cost structure will further deteriorate due to repeated wage negotiations. In fact, wages of GM Korea’s production workers have increased 2.5 times since GM’s acquisition of the company 15 years ago. GM Headquarters can stop exporting cars from GM Korea without allocating new car production volume due to high cost. This makes GM Korea more likely to withdraw from Korea while wrangling over securing a profit structure first and making investment including the allocation of production volume by GM Headquarters. Therefore, it is analyzed that even if GM attempts to normalize GM Korea with the help of the government and the KDB, it will end up being a stopgap measure.
"Bupyeong Plant may follow in footsteps of Gunsan Plant about two years later Bupyeong put an end to production of the Trax for export," said a representative of the automobile industry. "Without the addition of additional production volume, Bupyeong Plant will face fundamental limitations and hardly survive.”
"The high cost structure of the Korean market and a radical labor union culture in Korea have impelled GM Headquarters to turn their eyes away from the Korean market," another representative said. "If GM does not promise to actively give GM Korea substantial production volume, the Korean government should not begin to give support to GM Korea."