Kicking Tires In Seoul
There's an increasingly common sight in the lobbies of Seoul's hotels these days: car executives from Detroit. Ford Motor Co.'s Asia-Pacific executive director, Paul Drenkow, has visited South Korea twice in the past month. And General Motors Corp. has been to town, too, with a team led by Louis R. Hughes, executive vice-president for new business strategies. Both auto makers are bidding in a government auction to take over nearly insolvent Daewoo Motor Co. "We believe that to be a player in Asia, we have to be in Korea," says Rudolph A. Schlais Jr., head of GM's Asian operations. European carmakers, including DaimlerChrysler and Renault, are also sniffing around for tie-ups or acquisitions.
Why the sudden interest in a pack of auto companies long known for headstrong management, shoddy quality, parlous finances, and combative unions? After already having tried to forge alliances with Japanese carmakers--with mixed results--Western auto giants view South Korea as a new frontier for expanding in a recovering Asia.
Not only are producers such as Hyundai, Kia Motors, Daewoo, and Samsung sitting on tremendous manufacturing capacity at the doorstep of China and Japan, but the global reputation of Korean cars is also improving. In the tough U.S. market, where Korean auto makers have long been the laughingstock of annual quality ratings, Korean car sales soared by 83% last year, to 277,000 units, with 2000 expected to be another strong year. And in Korea itself, where Western auto makers have a minuscule share, car sales are expected to surge--on the back of 10% growth in 1999.
What's more, the chances of acquiring a Korean auto maker have never been better. Insolvent Daewoo Motor is on the block, as are the well-outfitted factories of Ssangyong Motor Co. and Samsung Motors Inc. All told, capacity for making 2 million cars annually in plants worldwide is up for grabs.
The looming question, of course, is whether taking over a risky company is worth it. Daewoo has $16.5 billion in debt--$5.3 billion more than it has in assets--and foreign bidders are seeking to have much of it written off. Creditors have agreed in principle to cut Daewoo's debts by $4.4 billion. But potential buyers are having to probe for hidden debts and decide whether assets are valued accurately. Samsung, for example, which first began making cars in 1998, halted production after selling just 50,000, and Ssangyong has lost money for five years in a row.
Also, foreign carmakers are concerned about Seoul's postponing the Daewoo sale until June. "Our concern is that this troubled company needs to be restructured," says GM Chairman John F. Smith Jr. "If that drags out, the company is worth a lot less."
68 CADILLACS. But the opportunity to gain a big market share inside Korea might be too tempting to ignore. With sales of 1.3 million cars in 1999, Korea is second only to Japan among Asia's markets. Yet GM sold only 68 Cadillacs, pricey at $61,000, in Korea last year, and Ford moved just 161 luxury cars off its showroom floors. All told, foreign carmakers sold just 0.2% of the nation's vehicles. Acquiring Daewoo, which has 25% of the market, would change that dramatically.
On top of that, the export capability built up by Korean carmakers over the years is formidable. They shipped 1.5 million vehicles abroad, 19% more than they sold at home. Now, the prospect of China lowering auto tariffs, from 100% to 25%, in five years to join the World Trade Organization provides yet more growth potential. With cars starting at $2,900, far below the prices of comparable models by Western joint ventures in China, the Koreans are well positioned. GM executives say acquiring Daewoo's 1.8 million-unit capacity in Korea and abroad would help it boost its Asian market share from 4% now to 10% by 2004. Ford wants to boost Asia sales from 1% now to 10% by 2005.
Korea has other attractions. Industry execs say that, apart from Japan, Korea is the only country in Asia with sufficient steel, well-established part suppliers, and skilled labor to be a major exporter. "One strength of the Koreans lies in making cheap, entry-level cars, which the likes of GM, Ford, and DaimlerChrysler are not so good at," says Cho Yong Jun, analyst at Shin Young Securities Co.
Korean carmakers, led by Hyundai Motor Co., the country's largest, have been improving their image. In the past, Korean cars were seen as cheap econo-boxes that wore out fast. Even though the Asia crisis caused the won to plunge, the Koreans didn't lower prices, which already were rock bottom. Instead, notes analyst James M. Hossack of AutoPacific Inc., a market researcher in Tustin, Calif., "they've packaged their vehicles [with more extras] to give the consumer a better value." For example, the company made air conditioning, formerly an $800 option, standard on the Elantra, its biggest U.S. seller.
NEW MODELS. To underscore quality gains, Hyundai offered an unprecedented 10-year warranty in the U.S. on its engines and transmissions. "We found ourselves in a situation where we knew our quality had improved, but we weren't getting any credit for it," says Finbarr J. O'Neill, CEO of Hyundai Motor America. Hyundai projects a 30% increase in U.S. car sales this year. Soon it will launch its first-ever sport-utility vehicle, the Santa Fe, priced at $20,000, and a four-door sedan that will start at $23,000.
Certainly, the Koreans' success is due partly to the booming U.S. economy. Low unemployment and rallying stocks are prompting even lower-income Americans to buy cars. But Hyundai is so confident of quality that it's inviting buyers to test-drive cloaked versions of its $15,000 EF Sonata alongside the Toyota Camry before buying it.
Also optimistic is Kia Motors Co., which was taken over by Hyundai when it collapsed in 1997. Kia's exports leaped more than 60% last year, allowing it to report its first profit in five years--of $168 million, on $7.7 billion in revenues. Kia Vice-President Chung Hak Jin figures the company boosted productivity and saved $360 million on materials by purchasing them in bulk together with Hyundai, which beat out GM and Ford in an auction for Kia in 1998. Kia doubled sales, to 853,000 vehicles, last year. "I'm sure we have a better year ahead," Chung brags.
That's the kind of turnaround Daewoo's suitors hope to pull off. Of course, an entry into Korea through Daewoo will be attractive only at the right price. But GM and Ford both want a chance to get behind the wheel.