[NEWS IN FOCUS] SsangYong Motor deal might be only option

The request from Mahindra & Mahindra is simple: Please lend us 270 billion won ($229 million) for SsangYong Motor, our car-making subsidiary.

For Korea Development Bank (KDB), the local auto company’s main bank, it might just be worth approving the loan, even though the manufacturer has been in the red for almost three years, its stock has fallen more than 70 percent in four years and the company lacks a clear recovery plan.

It could be a bad bet worth taking.

Mahindra & Mahindra Managing Director Pawan Goenka said in a meeting with employees last week that SsangYong Motor needs 500 billion won over the next three years to return to black.

Goenka was in Seoul for discussions with KDB Chairman Lee Dong-gull to discuss how to get Mumbai-based Mahindra & Mahindra’s Korean car company back on track.

Mahindra & Mahindra will invest 230 billion won in SsangYong Motor if its board approves, which means the rest - 270 billion won - needs to come from other entities.

History doesn’t bode well for the bank’s participation.

When GM Korea was facing possible bankruptcy in 2018, and a permanent halt in operations in Korea was a possibility, the KDB poured in a total of 800 billion won into the Korean unit of General Motors, becoming the second-largest shareholder in the process.

General Motors promised in return that it would maintain its production volume and manufacturing facilities for more than 10 years. But the arrangement has been brought into question.

When GM Korea joined the Korea Automobile Importers & Distributors Association last year, the company seemed to be signaling a possible surrender of its domestic manufacturing business and a shift to becoming just an importer.

General Motors is engaged in global restructuring efforts to cut costs, which has made the end of GM Korea’s operations a possible outcome, a measure that could leave thousands of workers laid off.

As survival is in question, the KDB has been publicly criticized for wasting taxpayer money in saving a company that still might pull operations from the country and leave thousands unemployed.

The KDB doesn’t have any equity in the car company. Mahindra & Mahindra owns 72.85 percent of SsangYong Motor, and the rest is owned by smaller investors. In March 2011, the Indian company acquired a 70 percent stake of SsangYong Motor in bankruptcy proceedings for 523 billion won.

In 2019, SsangYong Motor sold a total of 135,235 vehicles, down 5.6 percent from 143,309 in 2018. The automaker’s earnings results are expected to be released in coming weeks. Analysts say it is almost certain that SsangYong Motor remained in red again last year.

SsangYong Motor reported a net loss of 107.9 billion won in the third quarter last year, with revenue falling 7.2 percent from 901.5 billion won in the same period a year earlier to 836.4 billion won.

The company has accumulated more than 300 billion won in losses and recorded net loss for 11 consecutive quarters.

A SsangYong Motor spokesperson said Thursday that the automaker has no plans for new models this year and has yet to commit to future business plans. The automaker is more focused on improving its financial structure and is only planning to release modified versions of its current lineup to the market.

He added that the only business initiative that remains under consideration for certain at this point is a plan for releasing electric vehicles between late this year and early next year.

The main factor in favor of the deal on the table is the threat of mass unemployment if SsangYong Motor shuts down. The possibility could be enough to convince the bank to sign on the dotted line.

If SsangYong Motor goes bankrupt and closes, its 5,013 employees could lose jobs immediately. It also has 240 subcontractors and suppliers, and the loss of SsangYong Motor business could force them to lay off employees.

Experts contend that the KDB will eventually have to pour in funds, as a decision not to help SsangYong Motor could hurt the ruling Democratic Party in the April general election.

“If considering how big the impact will be in terms of job losses and potential public backlash directed at the ruling party, the Korea Development Bank will have no choice but to throw in cash for SsangYong Motor,” said Kim Pil-soo, an automotive engineering professor at Daelim University.

“But if the funds are to be poured in, the money should be used to teach SsangYong Motor how to catch a fish, not just feeding fish to it.”

Kim said the KDB should be directing the possible investment toward enhancing SsangYong Motor’s research and development capabilities, which will help the cash-strapped automaker in developing new vehicles and broadening its product portfolio.

“Thankfully, the union and management for SsangYong Motor are together for survival and have no conflict issues, which could provide a boost for SsangYong Motor in launching new initiatives,” he added.

SsangYong Motor concluded wage agreements successfully for 10 years running, and considering financial difficulties of the automaker, its unionized workers have voluntarily been compromising on compensation.

BY KO JUN-TAE [ko.juntae@joongang.co.kr]