GM Korea becomes latest cost target

DETROIT — The aggressive cost-cutting measures that led General Motors to sell its European business and scale back operations in several other international markets are expected to continue in 2018.

The newest target: Korea, where the company is struggling with rising labor costs, excess capacity and declining domestic car sales.

"We're going to have to take actions going forward to have a viable business," CEO Mary Barra said during a conference call last week to discuss the automaker's fourth-quarter and 2017 results.

Barra said officials are in discussions with minority owners and union officials involved with GM Korea that could lead to "some rationalization actions or restructuring." She said it's too soon to tell what those actions will be.

A restructuring of GM's Korean operation could combine elements of its Australia and India strategies. In Australia, it quit manufacturing but remained in the consumer market. In India, it kept manufacturing for export, but it abandoned the consumer market.

GM Korea, which was established in 2002 with the acquisition of failing Daewoo Motors, employed about 16,000 people in 2017, roughly two-thirds of them hourly workers. The operations comprise local sales of Chevy and Cadillac products, four assembly plants that supply a sizable portion of global output for the Chevrolet brand, four powertrain plants, a proving ground and an advanced engineering and design center that has served as a launch pad for top designers on key products such as the Chevrolet Bolt electric vehicle.

Last year, the operation sold about 132,377 vehicles in Korea — down 27 percent from a year earlier — and exported about 900,000 complete vehicles and vehicle kits to about 120 markets around the world.

But GM Korea now is pinched between falling sales in the home market and a lack of export markets to absorb production, said Park Sangwon, director of automotive analysis at Heungkuk Securities in Seoul.

"The economic scale never recovered from GM's pullout of Europe," Park said. "They need to give GM Korea some other markets, even the U.S. But I don't see that happening."

"It seems they are just letting it die off little by little," he added.

The design studio is the type of crown jewel GM has sought to protect in previous restructurings. In Europe, for example, it sold its Opel/Vauxhall operations to PSA Group but retained its engineering center in Turin. In Australia, where it ending manufacturing last year, GM mostly kept its business operations, including a design studio and engineering center, intact. In Russia, GM ceased manufacturing, eliminated Opel brand distribution and limited its continuing business to luxury and performance cars.

Korea, Barra said, is one of several countries where GM is possibly looking to take such actions, although she gave no other examples.

GM, according to public filings, has spent billions of dollars on shrinking its international business operations as it looks ahead to long-term savings that it needs to plow back into investments in cutting-edge technology ventures.

For example, it incurred $6.2 billion in largely noncash charges to sell its European operations and $443 million to exit Russia.

And since 2013, GM reports it has spent $1.1 billion restructuring its continuing operations in Australia, Korea, India and South Africa. The restructuring costs cover employee separation, dealer termination, lease termination costs and contract cancellation.

Bank of America Merrill Lynch research analyst John Murphy called GM's swift actions in underperforming countries, including potentially restructuring operations in Korea, "encouraging."

"We believe GM could reassess its longer-term strategy/position in the Korea market and may take decisive action in the near/intermediate-term to restructure operations or wind down the footprint," he wrote last week in a note to investors.

Park said he doesn't expect any imminent GM pullout from South Korea, partly because he hasn't heard suppliers report interrupted parts orders. Suppliers usually take orders about two years in advance, he said.

GM declined to provide earnings for GM Korea. Its international operations — which oversees operations in India, Southeast Asia, South Korea and other markets — recorded earnings of $1.3 billion in 2017, including $416 million in the fourth quarter.

Overall, U.S. tax reform caused GM to report a loss of $4.9 billion for the fourth quarter, while the company achieved record operating profit for the period.

"The important aspect is to look at the operating results," GM CFO Chuck Stevens said last week with the release of the quarterly and full-year reports.

In the fourth quarter, GM's adjusted earnings, before interest and taxes — which the company considers the best measure of its performance — increased 19 percent to $3.09 billion, and its global margin increased 1.7 percentage points to 8.2 percent. Revenue declined 5.5 percent to $37.7 billion due to lower volumes in North America.

For the year, the automaker's adjusted EBIT equaled its $12.8 billion record from 2016, while net income plummeted 96 percent to $300 million largely due to the tax changes and a largely noncash charge of $6.2 billion from the sale of its European operations.

Hans Greimel contributed to this report.