Desperate Efforts to Reduce Losses
GM Korea Co. is reducing the production volume of Bupyeong 2 General Assembly Shop due to sluggish sales in the domestic market. As the sales of its flagship Chevrolet Malibu are lower than expected and its losses are snowballing, the company has made the ultimate decision to reduce the rate of operation to the 20 percent range.
GM Korea is planning to start lowering the level of jobs per hour (JPH) from 30 units to 20 units at Bupyeong 2 in March at the earliest, according to auto industry sources on Feb. 14.
The company is implementing a “job down” measure because its inventory-sales ratio is getting higher. Bupyeong 2 has an annual production capacity of 170,000 units. However, the Chevrolet Malibu sold 17,052 units in the domestic market last year, down 48.8 percent from a year earlier, while the Chevrolet Aveo had the combined sales of 6,843 units in both the domestic and global markets. The sales of the two car models accounted for only 14 percent of the total capacity at Bupyeong 2. Given that the company maintained an operation rate of 30 percent at Bupyeong 2, its inventory is believed to have exceeded 30,000 units last year. GM Korea will produce its new sport utility vehicle (SUV) model at the Bupyeong 1 plant starting from next year and continuously down the jobs until the Chevrolet Trax compact SUV is shifted from Bupyeong 1 to Bupyeong 2.
Accordingly, auto parts suppliers are facing a crisis. Renault Samsung Motors has already decided to stop consignment production of the Nissan Rogue, which takes up half of its total production, in September. To make matters worse, GM Korea will reduce the utilization rate at Bupyeong 2 to the level of the Gunsan plant right before its shutdown.
The problem is that GM Korea will have no new car model to produce in South Korea this year. GM Korea will unveil its new SUV for the domestic and global markets next year and start its production at Bupyeong 1 at the end of the year. Bupyeong 1 will be able to transfer the production of the Trax to Bupyeong 2 only when it begins to roll out the new SUV model. Bupyeong 2 produces only the Malibu, which sells 17,052 units, 10 percent of the total annual production capacity, and the Aveo, which sells 6,843 units, about 4 percent of the total. When it produces 60,000 units a year at a utilization rate of 30 percent, over 30,000 units go to the inventory, leading to higher costs and more losses in the end. This is why Bupyeong 2 has decided to reduce its losses by dropping its utilization rate to 20 percent and reduce production by more than 20,000 units until it takes over production of the Trax at the end of the year.
With GM Korea’s cutback in production, suppliers are expected to struggle throughout this year. An increasing number of suppliers have been already experiencing critical situations. As GM Korea’s suppliers have faced a crisis, the financial industry is withdrawing loans, “taking away umbrellas from them when it is raining.” The government decided to extend the maturity of loans and guarantees of GM Korea’s suppliers worth 1.2 trillion won (US$1.06 billion) at the end of last year. However, banks appear to be reluctant to implement the government’s policy. A CEO at one of the suppliers said, “Banks seem to go against the government’s measures. They not collect loans with a high hand like they used to but they do not give out additional loans even with guarantees.”
The local economy is also reeling from the shock. The business survey index of 150 manufacturers in Incheon where suppliers of GM Korea are clustered stood at 66 in the first quarter of this year, which was lower than 82 at the fourth quarter of last year and way below the standard of 100, according to the Incheon Chamber of Commerce and Industry. The figure of the auto and component industry stood at 50. GM Korea and its suppliers employ 53,000 people, accounting for about 15 percent of the total number of employees in the manufacturing industry in Incheon.
Meanwhile, Renault Samsung also has 300 suppliers and 50,000 direct and indirect employees. However, the company will stop consignment production of the Nissan Rogue in September this year. The top-selling SUV takes up 47.1 percent, or 107,245 units, of Renault Samsung’s total production last year. As the labor union stays out on strike, demanding pay raises, Renault Group of France said, “We may not renew a consignment contract for the production of a new model.” An official from a supplier said, “Renault Samsung’s suppliers are producing components according to the company’s production capacity of 200,000 units. If the supply volume gets lower, we cannot help but face a crisis.”