GM May Have Landed a Dandy Daewoo Deal

The carmaker is a good fit, and the price sure is right

Drive through most Asian cities and you'll encounter few vehicles built by General Motors Corp. (GM ). Despite its vow in 1994 to become a leading player in a region long dominated by the Japanese, the world's No. 1 auto maker remains an also-ran. Of every 100 cars sold in Asia, just four bear the GM marque.

Now, GM seems poised to change that. On Sept. 21, it agreed to buy control of Korea's Daewoo Motor Co. through a joint venture with at least one of GM's Japanese partners--Isuzu Motors, Fuji Heavy Industries, and Suzuki Motors. Before it was declared insolvent in 1999, Daewoo controlled a third of Korea's 1.2 million car market. It has been shopping for a buyer ever since. Under the deal, GM gets two factories in Korea, smaller plants in Egypt and Vietnam, and a chain of service centers it can use to support its own cars. Daewoo is a good fit because GM owned half of the Korean company from 1972 to 1992 and most Daewoo cars are still built on its platforms. Says Alan Perriton, GM's executive in charge of business development in Asia: "This gives us high-quality, low-cost products for the rest of Asia."

Moreover, by most accounts, GM is getting a steal. The company was able to strike a hard bargain because it was the only bidder; Ford Motor Co. backed out of a deal for Daewoo last year. GM will invest some $300 million to acquire Daewoo assets valued at $1.2 billion. GM and its partners will put $400 million into a joint venture that takes control of the Daewoo assets. Daewoo's creditors, meanwhile, will take a stake as well and receive $1.2 billion in preferred stock, paying 3.5%, in the new company. People close to the deal say GM has the option of buying back those preferred shares sometime after 2011. And there's more: The new company would assume just $830 million of Daewoo Motors' $17 billion in debt. All of this is a major comedown for a Korean government that had once hoped to get as much as $6 billion for Daewoo.

LABOR PACT. GM also made sure Daewoo's unions wouldn't be a problem. To appease them, GM agreed to sell cars built at Daewoo's oldest, least efficient plant, outside Seoul, on a contract basis for six years. While GM wouldn't actually take over the factory, its 5,000 workers would keep their jobs, paid by--who else?--the creditors, who will also absorb the losses if the cars don't sell.

Now for the hard part: Restoring the tarnished Daewoo brand will take time and money. Perriton says sales have been hit badly because Koreans weren't sure if Daewoo would survive. "We have to let customers know that the company is back in business and stands behind its products," he says. In 1998, Daewoo had 33% of Korea's passenger-vehicle market. Today, it has less than half that. GM Asia Pacific President Rudolf A. Schlais Jr. says: "We need to get back to 25% within two years."

To pull that off, the new Daewoo venture will have to roll out new models. Style-conscious Koreans are shunning dated Daewoos for flashier cars made by Hyundai and Kia Motors. Moreover, the two plants GM aims to take over specialize in small cars, with 1.5 liter or smaller engines. Perriton says a Daewoo sport utility built with GM knowhow and diesel engines designed by Fiat, GM's Italian partner, are a possibility.

Longer term, GM aims to use Daewoo as an Asian beachhead. Until now, the company has relied on its Europe-based Adam Opel subsidiary to develop small cars for emerging markets. But with that business struggling, GM would like to use Daewoo's small-vehicle expertise to create an Asia-based business. Schlais sees China, India, and Thailand, in addition to Korea, as key markets for the next 10 years.

GM has a lot at stake. If its game plan works out, the new Daewoo venture, for which it projects annual sales of $5 billion within a couple of years, could help GM put more distance between it and the No. 2 auto maker, Ford, which has been narrowing the gap. But first, GM must whip Daewoo into shape--and build cars people want to drive.

By Moon Ihlwan in Seoul and David Welch in Detroit

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