General Motors’s recently announced R3,48-billion purchase of a 67 per cent stake in Daewoo Motor may look good on paper, but there is much work to be done before the South Korean manufacturer will become globally competitive, analysts say.
General Motors’s recently announced R3,48-billion purchase of a 67 per cent stake in Daewoo Motor may look good on paper, but there is much work to be done before the South Korean manufacturer will become globally competitive, analysts say.
GM, the world’s largest automotive group, paid a fraction of the almost R59,5-billion offered by arch-rival Ford a year ago, it will take control of Daewoo’s best assets. It will gain a tax exemption after South Korea’s deputy prime minister Jin Nyum recently lifted an excise tax on new cars for six months.
However, after almost a year in bankruptcy, turning Daewoo into a globally competitive manufacturer and integrating the marque into the GM group remains “a gargantuan task”, the Financial Times reported on Tuesday.
Many of Daewoo’s models – such as the Lanos and Nubira – have not been updated in the last five and seven years. In contrast, Hyundai Motor has revamped its entire line-up and has won 72 per cent of the South Korean market and a growing portion of the low-end market in the US.
Therefore, the overhaul of Daewoo’s model line-up should be GM’s first priority, an analyst said. "This company has not been investing anything in research and development. It does not have any competitive models," he added.
Daewoo’s supply chain also needs much attention. Unpaid parts manufacturers last week stopped shipping new products, forcing two factories, including one GM has bought, to shut down. The Kunsan and Pupyong plants reopened after a day, but suppliers claim they are still owed R5,5 billion.
GM will shoulder some of these obligations. "Some will get taken through court," says Alan Perriton, who oversees GM’s mergers and acquisitions in Asia and was chief negotiator on the deal. Parts constitute 60 to 70 per cent of the cost of producing a car and manufacturers typically rely heavily on suppliers during a cost-cutting drive. Therefore, the support from suppliers could prove to be crucial to GM’s success with Daewoo.
"It is all up to GM’s strategy," an analyst said. “In GM’s favour, it does have experience in the region. It has held a stake in Isuzu since 1971 and lifted this to 49 per cent in March 1999. It owns 10 per cent of Suzuki and nearly 20 per cent of Fuji Heavy Industries, which makes Subaru. Furthermore, GM owns an assembly plant in Thailand, while Fiat, the US company’s Italian partner, has manufacturing assets in Vietnam and India.”
Not all of these investments have been successful, the Financial Times reported. In spite of GM’s large stake, Isuzu reported pre-tax losses for three consecutive years. In the year ended in March, Isuzu’s net losses were R4,8 billion.
Last year, GM lost R909 million on Asia-Pacific operations, mainly due to restructuring costs at Isuzu. In the second quarter of this year, it made a modest R102 million gain, compared with a R1 billion loss in the same period last year.
GM’s strategy has always been based more on long-term potential than short-term gain, an analyst told Financial Times. It hopes to secure 10 per cent of the Asia-Pacific market by 2004 and Daewoo could prove useful in meeting that goal. If Fiat decides to participate, Daewoo could use GM or Fiat platforms to broaden its line-up. The South Korean manufacturer could also adapt GM vehicles being assembled in China.