Will Renault Go For Broke In Asia?

It may grab Samsung Motors, but it's a risky move

It's tempting. France's Renault has the inside track to take over South Korea's ailing Samsung Motors. For the expansion-minded Renault, a deal offers access to Korea's closed passenger car market, the second-largest in Asia after Japan. As an added plus, Samsung relies heavily on technology from Japan's Nissan Motor, where Renault is now running the show. And while General Motors and Ford face opposition to their competing bids to enter Korea by taking control of Daewoo Motor, the welcome mat is out for Renault. "A takeover by Renault appears to be the only way out," says Son Cheul Gyu, a Samsung deputy general manager.

The risk is that the golden opportunity turns into a black hole. Renault is already locked into a huge turnaround program at Nissan, having paid $5 billion last May for a 36.8% stake and having installed its own management, led by fix-it man Carlos Ghosn. He has vowed to resign if Nissan, which has $23 billion in debt and has lost $2.8 billion over the last six years, does not show a net profit by March, 2001. That's one tough job. For Renault, whose profits fell an estimated 40% last year, to $900 million, to take on another turnaround assignment may be asking too much. Samsung has been in trouble ever since it rolled out its first cars at its $3 billion plant in Pusan in 1998, just as the Asian crisis hit. Since then, Samsung has sold only 50,000 cars while losing $1.5 billion.

MISSED GOAL. The news coming out of Nissan is not good. Honda last year replaced Nissan as Japan's No. 2 auto maker in worldwide production behind Toyota. And this month, Nissan warned that its operating profit in the fiscal year ending in March would miss its forecast of $826 million. Analysts also doubt Nissan can meet its goal of selling 800,000 cars in Japan this year.

Against that gloomy backdrop, Renault is negotiating with Samsung Motors. The Korean company has been in court receivership since last year. Its Pusan plant has the capacity to build 240,000 cars a year but is turning out only 70 a day. No other prospective foreign buyer will find it very useful because of a prohibitive license agreement with Nissan. The plant produces a version of Nissan's Maxima sedan, the SM5, priced at $12,200. Owners say the car's quality is good, but its styling is considered dull.

The French, sensing their advantage, are taking a tough line, refusing to assume any of Samsung's $3.8 billion debt. To help the sale, Samsung Group Chairman Lee Kun Hee has promised to pay off $2.5 billion of the debt, with much of the remainder to be absorbed by other Samsung affiliates. Analysts estimate that Renault would pay a bargain price--between $500 million and $720 million for an 80% stake--but not get a return on its investment for years. Samsung Group has agreed to keep a stake of 20% or so. It will also help sell Renaults in the Korean market, where foreign cars accounted for only 0.2% of 1.3 million vehicles sold in 1999.

GOOD TIMING. Others are willing to lend a hand to get a deal done. "We have assured Renault executives that they will get all legally possible support from us," says Souk Tae Ho, an official at Pusan's economic promotion bureau. Workers are ready to help, too. "We just want to work full speed, whether we have a foreign or local CEO," says Ahn Hyon Min, a 28-year-old engineer. Even national politics is playing in Renault's favor. With parliamentary elections due on Apr. 13, President Kim Dae Jung's Millennium Democratic Party feels the pressure to find a way to save Samsung Motors.

If Renault does take on Samsung, it could serve as a new production base in a recovering Asia. Its workforce has been cut to 2,000 from 6,100 in 1998, but the Korean company badly needs new models and a stronger supplier network. "It's a big risk for a big reward," says Gaetan Toulemonde, an analyst at Deutsche Bank Alex. Brown in Paris. A Renault that has already shown a willingness to think big in Japan may just go for it in Korea, too.

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