BUSINESSWEEK ONLINE : AUGUST 30, 1999 ISSUE
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INTERNATIONAL -- ASIAN BUSINESS

How Daewoo Ran Itself Off the Road (int'l edition)
In its global drive, it refused to quit when it was behind

Kim Woo Choong thought he'd scored quite a coup in 1993. That year, his Daewoo Motor Co. got the green light to assemble cars in Vietnam, a booming economy of 70 million people. It has been a brutal slog ever since. An additional 10 competitors piled in. Meanwhile, the economy stalled, and demand for cars plunged by one-third, to just 5,200 units annually. Daewoo's sales shriveled to 423 vehicles in 1998. Undaunted, Daewoo launched a new car, the Matiz, at the bargain price of $8,800. Sales in Vietnam are now growing at a pace to double this year. But rivals doubt Daewoo's total $33 million investment is paying off. ''There's no way they could make money at this price,'' says a foreign auto executive in Hanoi.

The Vietnam quagmire helps explain why Korea's Daewoo Group is in such a mess that creditors are trying to force its breakup--and why it is negotiating with General Motors Corp. to sell pieces of its car company. From the U.S. to India, Daewoo Chairman Kim is stumbling in his quest to build a 21st-century global automotive giant. In most places, the reasons are similar: plunging into dicey countries, selling at a loss to gain share, and refusing to retreat when the cause is hopeless.

GM is vague on what it wants out of Daewoo Motor. The two companies formed an auto-making venture in the late 1970s but parted ways in 1992 over management disputes, including Daewoo's desire to export its own cars to GM markets abroad. This time around, says GM President G. Richard Wagoner Jr., ''we're looking at specific assets.'' Analysts suspect GM, which hopes to boost its share of the Asian auto market from the current 4% to 10%, would like Daewoo's new plant in the Korean city of Kunsan, and perhaps its plant in Poland. Executives don't rule out forging a broader alliance. But ''nothing is imminent,'' says GM CEO John F. Smith Jr. Daewoo declined requests for interviews.

MYSTERIOUS. GM may have a hard time pricing any deal with Daewoo. The company discloses little about how much of its assets have been pledged as collateral to its myriad creditors--or how much of its debts are guaranteed by Daewoo sister companies. ''It's hard to know what Daewoo Motor is really worth,'' says Wilbur L. Ross Jr., executive managing director of Rothschild Inc., which invests in distressed securities. Analysts say GM probably will refuse to take on Daewoo Motor's $10 billion in debts. ''GM is no white knight here,'' says Hank Morris, a Seoul industrial consultant.

Clearly, Daewoo Motor is overstretched. Between 1993 and 1998, it invested in car plants in Poland, India, Ukraine, Vietnam, Romania, and Uzbekistan. It is believed to be operating far below its global capacity of 3.3 million units. Daewoo Motor says it eked out a $14.5 million profit on sales of $4.2 billion last year. Some observers believe the company is using other affiliates to hide losses, which Daewoo denies.

By plunging into emerging markets, Kim's goal was to gain the critical mass Daewoo needed to emerge as a global automotive heavyweight. He hoped to gain a foothold in the U.S. and Western Europe, too. At first, Daewoo seemed to be making inroads.

Big problems came when Kim stepped on the accelerator after Korea's economy crashed. In January, 1998, it bulked up even more by acquiring Korea's troubled Ssangyong Motor Co. As car sales plunged by 56% in Korea last year, Daewoo pumped up in Europe and the U.S. In Britain, Daewoo offered to let its first 1,000 customers trade in their cars after six months for new models at no charge. Last fall in the U.S., Daewoo launched three models, starting with the $9,000 Lanos hatchback, aimed at college students.

But Daewoo's gains in the West may be fleeting. Daewoo sales in Britain spurted 39%, to 30,400 units, in 1998. ''In my view, this is unsustainable'' because the success depends too heavily on cut-rate pricing, says Automotive Industry Data Ltd. analyst Peter Schmidt. Daewoo's overall impact since arriving in Britain is ''greatly disappointing,'' he says.

The push in America has been a bigger letdown. Kim's strategy of relying on a sales force of college students produced sales of just 14,000 cars in the first six months of 1999--less than one-third of its target. Now, Daewoo is trying to build a national dealership network, and it's offering rebates of $750 on the Lanos models and up to $1,500 on its more expensive Nubira and Leganza models.

BACK HOME. Besides its troubles in Vietnam, Daewoo's emerging-market hopes have deflated in India, which it entered in 1995. Soon afterward, Ford Motor Co. and GM piled in, too. Local player Maruti dramatically boosted its competitiveness with new models. Daewoo cut $2,500 off the original price of its Cielo passenger cars, now selling for $13,000, and $1,200 off the cheaper Matiz. Its reputation as a discount carmaker hurt, however. Analysts figure Daewoo is losing more than $30 million a year in India.

Back home in Korea, Daewoo lags behind both Hyundai Motor Co. and Kia Motor Co. Hyundai has a more extensive lineup, launches new models more quickly, and has a better reputation for quality. Daewoo's cost structure is a weakness, too: It imports its engines from GM's Holden unit in Australia and its transmissions from Japan, whereas Hyundai makes its own locally. The crash in the Korean won makes imported components more expensive. To maintain its 25% market share, moreover, Daewoo is offering car loans that are interest-free for up to 30 months. ''It's good for the consumer--but it's killing the company,'' says Chung Mong Gyu, former chairman of Hyundai Motor. ''I don't think they can manage their cash-flow problems.''

Chairman Kim's game plan for extricating Daewoo Motor from its financial straits is unclear. A restructuring plan released on Aug. 11 by creditors calls for Daewoo Group to sell off six of its 25 units--but to keep the car company. Still, most analysts agree it will be hard for Kim to salvage Daewoo Motor without surrendering control. Says a U.S. investment banker: ''If GM offers a reasonable deal, the banks and the government would tear Kim's arms and legs off if he said no.'' Daewoo's chief has bounced over many potholes of the global economy in years past. But the end of his journey finally looks near.

By Jennifer Veale in Seoul, with Larry Armstrong in Los Angeles, Heidi Dawley in London, Joann Muller in Detroit, and bureau reports

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