GM, government start haggling over local unit

Negotiations that could determine the fate of GM Korea kicked off between the Korean government and the American automaker, 10 days after GM announced plans to shut down its Gunsan plant by May.

While the Korean government was reportedly open to the idea of $2.8 billion in new investments in the troubled local GM unit over the next 10 years, it reportedly shot down a proposal for a $2.7 billion debt-equity swap.

Korean Vice Minister of Strategy and Finance Ko Hyoung-kwon met with Barry Engle, executive vice president at GM, at the Seoul Plaza Hotel in downtown Seoul while Vice Minister of Trade, Industry and Energy Lee In-ho held a separate meeting with the GM executive in Seoul on Thursday.

Ko reportedly nixed a debt-to-equity swap proposed by GM on grounds that GM Korea’s woes are the result of management failure and there is no reason for Korea Development Bank (KDB), the second-largest shareholder in GM Korea with a 17-perent stake, to take part in the debt-to-equity swap requested by GM.

However, the government was open to GM’s proposal of new investment from existing shareholders, which it will decide after an independent audit of GM Korea’s books. The financial review could start as early as the end of this month.

Engle has asked for Korean government financial support as well as tax benefits in exchange for keeping GM Korea going, including converting $2.7 billion that GM Korea borrowed from its headquarters to equity.

Once the debt is converted to equity, GM wants KDB to buy 17 percent of it to maintain the existing ownership structure, which the government is resisting.

It wants the debt-to-equity swap to qualify as new investment, which would be eligible for tax breaks.

GM has also proposed new investment of $2.8 billion over the next 10 years by existing shareholders, and if its requests are met, it will start production of two new models at its plants in Buyeong and Changwon, raising the local unit’s annual output to more than 500,000 units.

The maximum production capacity is currently 910,000 units a year. But if the Gunsan plant closes down and a restructuring announced on Feb. 13 goes ahead, GM Korea estimated that annual production will be half of 910,000 units.

GM has requested that KDB, as the second-largest shareholder, invest 17 percent of the $2.8 billion.

Finance Minister Kim Dong-yeon reaffirmed to reporters in Sejong on Thursday the Korean government’s approach to the GM situation.

He said the government has set three principles: requiring stronger accountability on the majority stakeholder, which is GM, sharing the pain among all groups involved from management to labor unions and turning around operations.

“Vice Minister Ko has delivered these three principles in meeting with GM,” Kim said. “GM evaluated our principles as reasonable.”

Kim said GM also agreed to cooperate with the audit of GM Korea’s financial statement by an independent auditor and to decide on the production of the new models in March.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]