The bell tolls for GM Korea

GM Korea said it was closing down the underused Gunsan plant in North Jeolla province by the end of May as a part of its restructuring plan. “This is a necessary but difficult first step in our efforts to restructure our operations in Korea,” said Kaher Kazem, CEO of GM Korea. General Motors, which had been reorganizing underperforming global operations, indicated that the closure of one out four factories may just be the beginning.

The option of pulling out of Korea had been rumored with losses at GM Korea snowballing to 3 trillion won ($2.7 billion). Moreover, state-run Korea Development Bank (KDB) in October lost its veto power against any major management decisions over GM Korea after it sold its majority stake in Daewoo Motor to GM Korea in 2002.

GM, now free to do whatever it wants with the Korean unit, decided to shutter the Gunsan plant, which has been running at about 20 percent capacity over the past three years. It demands that the Korean government offer it financial aid, plus cover its purchase of new shares, in a 3 trillion won recapitalization scheme. From the statement, GM has set the deadline for the end of this month. It is pressuring the liberal government, whose campaign and policy priority have been increasing jobs and wages ahead of the June gubernatorial and mayoral elections. It is more or less threatening that it could take similar actions with three other factories across the nation.

GM Korea is in a pitiful state because of poor management. The cost system is structured to benefit GM headquarters. GM Korea has borrowed 2.7 trillion won from the headquarters and paid 7 percent in interest rate in 2016. There is suspicion that parts it got from Korean suppliers were shipped back to Detroit to make the Korean unit buy them back for 30 percent more. Cost against revenue took up 93.8 percent for GM Korea in 2016, about 10 percentage points higher than the other carmakers in Korea. The government said it will investigate the situation before deciding whether to give any aid.

The union also is partly to blame. GM Korea workers are paid 87 million won on average a year, or 6.4 million won more than Volkswagen employees. Workers at GM Korea’s four factories are also notoriously militant. Yet Korea’s productivity is near the bottom. It has lost its long-held fifth place in automobile output to India in 2016 and was barely ahead of Mexico, at seventh, last year. The closure of GM Korea’s Gunsan plant should be a wake-up call to the entire Korean automaking industry.

JoongAng Ilbo, Feb. 14, Page 26