How it is financed
Source: General Motors
GM plans to keep Daewoo's U.S. sales operations if its planned purchase of the bankrupt Korean carmaker goes through as expected. "There's no intention to shut down those operations," Alan Perriton, executive in charge of alliances and partnerships for GM Asia Pacific, said in a telephone interview after the deal was announced Friday, Sept. 21.
While Korean rivals Hyundai and Kia have posted sharp sales increases in recent years, Daewoo's young franchise has reversed course. After more than doubling its U.S. sales to 68,360 last year, Daewoo's volume has plunged 19.6 percent through August of this year. Hyundai, meanwhile, is up 35.0 percent and Kia is up 39.7 percent. Analysts say Daewoo needs to add to its product lineup, strengthen its dealer network and increase its marketing budget.
Stuck in the low end
Jeff Schuster, senior manager for forecasting and product planning at J.D. Power and Associates, notes that Daewoo is financially hamstrung while Hyundai and Kia run national TV commercials and expand their product lineup. And Daewoo is stuck in the extreme low end of the market, he said.
"There isn't much margin on those vehicles even if they are coming out of Korea," Schuster said.
Such views echo skeptical comments by GM CEO Rick Wagoner in June. Wagoner questioned whether Daewoo had a viable business in the United States. He said at the time that GM did not plan to sell rebadged Daewoos through GM dealers.
Daewoo Motor Chairman Lee Jong Dae later said Daewoo Motor America can break even selling 70,000 units a year. Through August, it had sold 38,002 vehicles in the United States this year.
So far GM has said little about Daewoo's future in the United States.
GM spokeswoman Toni Simonetti said Friday that it was premature to discuss how Daewoo would fit into U.S. dealership or product-development plans. Gaining entry to the virtually closed Korean market, where Daewoo holds a 17 percent share, was "probably the main driver behind this transaction," Simonetti said.
And Daewoo Motor America's Gary Connelly, senior vice president of marketing, said the U.S. arm had just received word that it would be included in the transaction. "We're pretty excited about it," he said. "It's a good deal for us."
GM gets largest stake
In the tentative deal signed last week, GM, one or more of its alliance partners, and the Korean carmaker's creditors plan to set up a company to take over key parts of Daewoo. GM will be the largest shareholder, although with less than 50 percent. With its partners, GM will own 67 percent of the company, which would have annual revenues of $5 billion.
"We will continue to support the global product supply," Perriton said, even though most of the Daewoo models sold in the United States are built at Daewoo's Pupyong plant, which GM is not purchasing.
Said Rudolph Schlais, president of GM Asia Pacific (Pte) Ltd."We see Daewoo Motor important not only for our Asia Pacific strategy but also for our global strategy."
Fitting Daewoo into GM's complex web of alliances is the trick. John Casesa, senior automotive analyst for Merrill Lynch in New York, says Daewoo could help GM and its partners develop small cars, but the brand is a weak competitor in North America.
"I don't think it has much value at all in North America," Casesa said. "GM is already overloaded with brands, and Daewoo has not established much of a market presence at all."
Daewoo makes more sense for GM in emerging markets, he said. Daewoo has an 8 percent share of worldwide production outside of North America, Europe and Japan, according to Casesa. But bringing a Korean company into GM's collection of product-development partners, which includes U.S., Japanese and European companies, will be a significant cultural challenge, he said.
The takeover deal involves some compromises for GM, particularly concerning the Pupyong plant. GM was unable to avoid any connection to the oldest of Daewoo's plants, where angry protests flared last winter after Daewoo laid off 1,750 employees.
The new company will buy vehicles, engines, transmissions and components from Pupyong in a contract assembly arrangement that is viewed as "ongoing and long-term," Perriton said. The arrangement is expected to continue for six years.
The takeover agreement includes a provision for the new concern to buy the Pupyong plant "should it be appropriate" - that is, competitive.
Although Daewoo has a few new products "ready to hit the street in the next few months," for the most part, "they had put on the slow burner spending on new products," Perriton said.
"We will increase the output of the current models" and then "see how do we leverage the product development and r&d of the global alliances GM has," he said.
Although originally GM and Italy's Fiat, owned 20 percent by GM, bid for Daewoo, Perriton said it hasn't been decided which GM alliance partners would take a stake in the venture. Other GM alliance partners include Suzuki Motor Corp., Subaru-maker Fuji Heavy Industries Ltd. and Isuzu Motors Ltd.
GM will conduct final due diligence on the takeover now that it has signed a memorandum of understanding with Daewoo and the Korea Development Bank, acting on behalf of Daewoo's creditors, in anticipation of signing a binding set of takeover agreements by year end.
During that process, "We will take time to evaluate any of the changes and adjustments that should be made" in Daewoo's U.S. dealer agreements, Perriton said.
Staff Reporter Joe Kohn contributed to this report