Daewoo Works Through Its Woes To Give Floundering GM a Boost [WSJ]
Korean Unit Plays Bigger Role By Churning Out Cars
By GINA CHON
April 4, 2006 2:32 p.m.
INCHEON, South Korea -- As General Motors Corp. struggles in the U.S., the world's largest auto maker is increasingly relying on a once-bankrupt Korean company to help it recover.
In this city's Bupyong district, 30 kilometers west of Seoul, workers at a factory run by GM Daewoo Auto & Technology Co. are cranking out ever more cars under five different brands. Posted on each windshield is a sign indicating the vehicle's destination. On a recent day, a red Suzuki hatchback was headed to Canada, a sapphire-blue Chevy Aveo was going to Hungary and a black Pontiac G3 was slated for Mexico.
Last year, for the first time ever, GM sold more vehicles outside North America than it did in its home market. GM Daewoo accounted for 13% of the total and in the process helped make GM the top car maker in China. In a sign of the Korean company's newfound prowess, GM has handed it some big projects, including responsibility for developing the framework for GM's new compact vehicles.
Daewoo got here by making cars quickly and inexpensively -- the antithesis of its parent company, which is known for its high costs and sclerotic management style. To aid the Korean company's turnaround, executives reused paper and workers washed their work gear at home. Labor costs are at least 20% lower than those of GM in the U.S., according to analysts.
In 2003, the Korean unit delivered the Aveo, its first product for the U.S., in about five months. GM thought it would take a year and a half. "That was a real eye-opener," says GM Daewoo Chief Executive Nick Reilly. "But then you realize that's the way it normally is." GM says it takes Daewoo four months less to go from drawing board to market, compared with any of its other divisions.
GM is on the ropes after racking up $10.6 billion in losses last year. Its sliding market share now stands at less than 25% in the U.S., and the company is also facing federal probes over its accounting. One of GM's problems is its mammoth bureaucracy, which requires endless meetings to make decisions. The company, as a result, has been slow to respond to shifts in consumer tastes.
David Lyon worked on full-size trucks at GM in Detroit before he came to South Korea in 2004 to take charge of Daewoo's design center. He says Korean designers aren't as constrained by GM's headquarters, leading to bolder, fresher designs.
"Here, we discuss it, and then we do it," Mr. Lyon says. "In North America, we would talk about it and talk about it until we talked ourselves out of it." (GM spokesman Edd Snyder says such a characterization is no longer true of GM, which he says is now a "nimble" company.)
GM, which owns 50.9% of Daewoo, has staked a big bet on the company. By the end of 2007, the U.S. giant will have invested about $3 billion in its Korean subsidiary and is hiring there while laying off workers in the U.S. GM is also trying to combine the expertise of both sides -- GM works better with computers, and Daewoo is better with hardware and prototypes -- to develop vehicles even faster than Daewoo. GM Daewoo is the third-largest Korean car maker behind Hyundai Motor Corp.'s Hyundai and Kia brands.
GM executives expect Asian auto sales to boom during the next decade, propelling growth they hope will keep GM ahead of archrival Toyota Motor Corp., currently the world's No. 2. Mr. Reilly says GM Daewoo could effectively become GM's Asian arm. That would allow GM to think and behave like an Asian company, selling products designed for the local market rather than simply peddling U.S. models.
The Korean company isn't big enough to solve GM's woes, and it could run into problems of its own. Like other South Korean companies, it is suffering from the rising value of the won. GM Daewoo has only a 10% market share in South Korea, compared with the 30% it commanded during the 1990s. Moreover, GM Daewoo is exposed to its parent's uncertain future because it relies on GM's distribution network, especially for exports, which make up more than 80% of the Korean company's business.
Until Daewoo turned the corner, GM Chairman and Chief Executive Officer Rick Wagoner had come under fire for his strategy of expanding into overseas markets. GM last year abandoned at substantial cost a failed partnership with Italy's Fiat SpA and a largely fruitless alliance with Japan's Subaru, owned by Fuji Heavy Industries Ltd. GM had bought financial stakes in players around the world, but the hoped-for synergies didn't pan out.
GM's first relationship with Daewoo, an automotive joint venture that began in 1978, was a fiasco. GM sold its stake in 1992, unhappy that the huge conglomerate was expanding into places such as India, where it was incurring millions of dollars in losses. Five years later, amid the 1997 Asian financial crisis, Daewoo went bust under the burden of $17 billion in debt.
After Daewoo's collapse, GM remained eager to expand in Asia. During three years of bruising negotiations, it eventually beat out Ford Motor Co. and Hyundai to reach an agreement to invest in Daewoo. Former GM Chairman John Smith canceled two trips to celebrate the signing of a final deal because Daewoo's creditors and unions were unhappy. There was also public opposition to selling what many Koreans viewed as a national treasure to foreigners.
GM and its partners eventually bought only 12 of 24 Daewoo units world-wide. Some were taken over by national governments; others were run under the control of creditors. The deal gave GM, Japan's Suzuki Motor Corp. and China's Shanghai Automotive Industry Co. a 67% stake in GM Daewoo, with creditors owning the remaining 33%. Last year, GM bought part of Suzuki's stake to take its total ownership past the 50% mark.
The new company got off to an inauspicious start. Union protests scuttled a signing ceremony in April 2002 at the Seoul Hilton Hotel. Mr. Smith, the GM chairman, was ushered out of the building as union workers stood on chairs meant for reporters and guests, shaking their fists and shouting anti-GM protests.
That year, GM Daewoo sold 410,000 vehicles, a marked decline from the 756,000 it moved just two years earlier. Its products were old, its reputation was damaged and morale among workers was at rock bottom. Employees feared GM would strip the company and use Daewoo simply as a manufacturing facility.
Mr. Reilly came to GM Daewoo from GM's Vauxhall unit in the U.K., where he had also dealt with fierce labor disputes. "The employees were shellshocked," Mr. Reilly recalls. "So we didn't sugarcoat anything. We told them what the plans were and that the first year would be very difficult."
Over two days in a training center at GM Daewoo's Gunsan plant, managers talked about their cultural differences, Mr. Reilly and others recall. The Koreans said the Westerners were too bureaucratic and took too long making decisions, but they admired Western organizational skills. The Westerners said they liked the Korean work ethic but frowned upon their habit of hiding problems until the last minute.
Strapped for resources, the company was pinching pennies. Workers made photocopies on used paper. Executives, including roughly 20 who came from GM, scrounged for office furniture from colleagues.
At the Bupyong plant, which had been left out of the GM deal, workers wanted to show they could contribute. A clause in the GM-Daewoo deal said the plant could be bought back into the GM-owned company if productivity and labor relations improved. At the time, the plant, which was owned by creditors, was operating at less than half capacity.
Previously, work gloves were thrown away after the end of each shift. To save costs, employees began taking them home to be washed so they could be reused. Welding-gun components that were once trashed after each use are now reground. The efforts, while small, created a sense of shared sacrifice and began to add up, eventually totaling $4 million in annual savings.
"Everybody knew our situation was not good," says Ik Soo Han, manager of the Bupyong plant when GM took over and now a managing director. "We knew if we couldn't turn this into a competitive company, we could not survive. So we tried our best." He eventually wrote a book about his GM Daewoo experience, which loosely translates as "We Changed Ourselves."
Daewoo employees soon wanted to know if GM was going to increase their salaries, which had been paid intermittently in previous years. Mr. Reilly said his goal was to raise pay over a three-year period, but he said he couldn't fix the problem overnight.
Korean union members were used to being kept in the dark about company plans. But Mr. Reilly met with union leaders once every two weeks. Persuaded he was telling the truth, the unions agreed to wait. In another sign of a thaw, concrete barriers with anti-GM graffiti outside the union office were removed toward the end of 2002.
Among the former union dissidents was Sung Jae Lee, one of thousands of Daewoo workers who voiced their anger in the lead-up to the GM deal. After he and more than 1,700 workers were fired in February 2001 to make Daewoo look more attractive to GM, he participated in dozens of anti-GM protests and wore a red bandanna around his head, an emblem of labor militancy.
Mr. Lee was rehired in 2003 and became head of the Daewoo union. Gradually, Mr. Lee and other union members softened their approach, in part to ensure that the Bupyong plant could be bought back into the fold. "We realized any small mistake, any misstep [on the union's part] could be considered extreme and tip the balance" Mr. Lee says.
Daewoo engineers, designers and manufacturing staff worked weekends and nights to develop new products. Exports started to pick up within six months. GM Daewoo took advantage of GM's distribution channels, which gave it access to new export markets, notably in China.
As soon as GM took over, suppliers, who themselves were still recovering from the late-1990s financial crisis, wanted to increase prices by as much as 40%. GM Daewoo resisted. Instead, it offered to accelerate payment terms and increase the amount it was buying in return for holding prices in check.
As Western executives encouraged the staff to talk about problems, Korean workers began speaking up at meetings when previously they sat quietly. "When GM started relying on us more, we started to feel confident and embraced all of it," said Ki Joon Yu, vice president of engineering at GM Daewoo, who is now spending a year at GM's technical center in Warren, Michigan.
Since GM took over the company, GM Daewoo has avoided a major strike for each of its annual wage negotiations. In 2005, union members ratified a 6.7% increase in base wages on the first vote, a rare occurrence in South Korea.
In January 2005, GM Daewoo management and union leaders, including Messrs. Reilly and Lee, participated in a local New Year's tradition and took a two-hour trek up Bongcheon mountain in Incheon. When they reached the peak, the unlikely group gave three cheers for the prosperity of GM Daewoo, the union and Korea.
Mr. Reilly thought GM Daewoo would simply break even in 2005. Instead, the Korean company posted a net profit of $66.7 million on revenue of $8.5 billion. It sold more than one million vehicles for the first time, with exports going to 150 countries. This year, the company expects a 30% increase in sales.
GM Daewoo acquired the Bupyong plant ahead of schedule in October 2005. A second shift will soon be added.
In March, Mr. Lee, the union leader, participated in a different sort of gathering. At a news conference suggested by the union, Mr. Lee wore a vest sporting the union's logo; the bandanna was gone. He and Mr. Reilly announced that all workers laid off five years ago will have been rehired by May. The two men sat next to each other in an auditorium at GM Daewoo's Incheon headquarters, answering reporters' questions.
"We've put the dark past behind us," Mr. Lee said at the event.
In a later interview, however, he confessed to a concern. Mr. Lee says he thinks Toyota is a nimbler competitor and that Daewoo therefore needs to run even faster -- without being hindered by GM's bureaucratic ways. "So I would like to ask GM management to not force us to accept GM culture and GM ways," Mr. Lee says. |
