Daewoo: Stuck in Neutral

Why GM's buyout of Daewoo Motor can't get going

When General Motors Corp. (GM ) agreed to buy a controlling stake in South Korea's Daewoo Motor Co. last September, all parties concerned breathed a sigh of relief. Finally, it seemed, a drawn-out drama that had included an abortive takeover bid by Ford Motor Co. (F ), passionate union opposition to foreign ownership, and a storm of political controversy was approaching its denouement. GM would buy the best parts of Daewoo, and, in so doing, salvage what was left of the Korean auto maker--giving a boost to government efforts to force the sale of other distressed companies. GM, Daewoo, its hard-pressed creditors, and the Seoul government all expressed confidence that the transaction would be concluded by the end of last year.

But more than a month later, the deal remains undone. Negotiators are still arguing over how to value the assets and potential liabilities of two dozen Daewoo subsidiaries scattered around the world and find a formula to determine how Daewoo's sales networks will be used. The Daewoo Auto Workers Union still has issues with the takeover terms. As the arguing continues, Daewoo Motors, once the No. 2 Korean auto maker, is wasting away, and its suppliers are being pushed to the wall.

The Daewoo impasse is adding to a general sense of unease over the Korean government's asset-sale program. In recent months, foreign investors, fed up with high asking prices and a refusal to separate good assets from risky ones, have walked away from negotiations to buy majority stakes in Seoulbank, Hanbo Steel, and Korea Life Insurance. Last month, American International Group (AIG) pulled out of a U.S. consortium negotiating a $1.5 billion deal to take control of Hyundai Securities and two other financial units of ailing Hyundai Group. No one is more embarrassed by the sudden freeze than Finance & Economy Minister Jin Nyum, who has repeatedly cited the sale of the Hyundai units and Daewoo Motor to foreigners as proof that Korea is serious about corporate reform. "It's not desirable to delay sales of distressed assets," Jin now says. But, he adds, "you can't neglect important negotiations. Excessive demands won't be met."

People close to the GM-Daewoo talks figure the two sides can yet come to an understanding. GM badly needs Daewoo to establish a beachhead in the Asian market. And without GM, Daewoo Motors will simply collapse. Also, GM and Daewoo's creditors have agreed on the $400 million price, though the figure could be revised if, say, the U.S. auto maker finds things it doesn't like during due diligence. "GM is still strongly committed to buying Daewoo," says Kay Lee, a GM Korea executive. "But we have to bring an acceptable deal to the board of directors."

The trouble is, as the talks drag on, Daewoo Motor gets progressively weaker. In 1999, when it was declared insolvent, the company had a fifth of Korea's vehicle market and a third of passenger car sales. Last year, it built fewer than 12% of the 1.46 million vehicles sold in Korea, and today it is running at less than a third of its capacity. Daewoo hasn't released a new model since 1999. Two new passenger cars are to be released this year, but without GM in the driver's seat, they are not expected to do well. The longer the talks drag on, the harder it will be for GM to restore confidence in Daewoo Motor.

As the company weakens, its suppliers also are feeling the pinch. "We've been muddling through by relying on borrowing," says Joe Hang Kyun, CEO of Daeshin Machinery Industries Co., which supplies gearshift and hand-brake levers to Daewoo. "Many of us could go belly-up unless cash flow improves soon." Daeshin's December sales were about $300,000, half what they were in December, 2000. Joe, who heads an association of Daewoo parts suppliers, figures a quarter of his 212 members could be out of business by June.

Complicating the situation is Korea's peculiar billing system. When Daewoo Motor went into receivership in November, 2000, small suppliers such as Daeshin held $1.2 billion in IOUs from the auto maker. These became uncollectible when the courts froze debt payments. "Unless the money is paid, many of us can't get back on our feet, even if GM normalizes Daewoo's operation," says Joe. State banks have paid off a third of the promissory notes, and the GM joint venture that would buy Daewoo Motor has agreed in principle to assume some of the supplier debt.

But the suppliers will have to wait until a deal with GM is done--and that won't happen until the U.S. auto maker comes to terms with the unions. Radical unionists, despite being fired from Daewoo, still retain the leadership of the union and are demanding a say over the number of layoffs, plus the sale of Daewoo Motors assets. GM is having none of it and insists that the current collective bargaining agreement be rewritten to reflect its position.

At the moment, negotiations are deadlocked, and court-appointed management and union representatives have failed to bridge the differences. Apart from the battle over the collective bargaining contract, the union is demanding that some 400 of 1,700 workers laid off over the past year be rehired by the end of 2002, and the remainder by the end of next year. Daewoo execs won't commit to that, but have pledged to try and hire back some 200 by the end of next year. "The hope," says Han Dai Woo, Daewoo team manager at Korea Development Bank, the primary Daewoo creditor, "is that pragmatism will prevail among union members by the time creditors and GM agree on other pending issues."

That may yet happen. On Feb. 5, union boss Kim Il Seob and seven other sacked workers turned themselves in to police after conducting a year-long sit-in at a Roman Catholic church near Daewoo's oldest, least efficient plant in Bupyeong, a hotbed of labor militancy just west of Seoul. Kim, who faces charges of organizing illegal protests, has agreed to let his deputy, an active Daewoo employee, lead the negotiations. But few expect a breakthrough soon. The terms of Kim and other leaders don't end until September, when they're expected to be replaced by moderates.

One way to break the logjam in the meantime is for the government to mediate and offer a safety net and job retraining for laid-off workers. But with elections looming, says Bae Kiu Sik, research fellow at the state-backed Korea Labor Institute, "nobody in the government is willing to stick out his neck." Meanwhile, precious time is running out. The worst possible outcome: When finally all of the parties come to terms, Daewoo is so crippled that GM doesn't want it anymore.

By Moon Ihlwan in Seoul

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