Daewoo: GM's Korean Success Story

The takeover of the once-bankrupt automaker is paying off for General Motors, but continued growth is vital in the face of GM's falling U.S. share

by Moon Ihlwan

Will General Motors (GM) benefit from purchasing a struggling Chrysler from DaimlerChrysler (DCX)? That question hasn't been answered yet. But in South Korea, GM executives have shown how to make an acquisition of a money-losing operation work.

GM took over bankrupt Daewoo Auto & Technology, Korea's second-largest automaker, in 2002. Since then, GM Daewoo has almost quadrupled its sales. The division has turned into the black ahead of schedule by at least a year. It also hired back workers Daewoo had laid off before GM's arrival, and has become a key driver of growth for the American giant in critical markets like China and Europe.

An important turning point for GM Daewoo occured in the tough domestic market last year. The company is still No. 3 in Korea, behind market leader Hyundai and No. 2 Kia. But by rolling out its first sport-utility vehicle and launching a new diesel engine plant, it became the only Korea-based automaker to increase market share on its home turf, which remained flat at 1.15 million vehicles. GM Daewoo's share last year grew 1.5 percentage points to 11%; as recently as 2000, the carmaker's domestic share had peaked at 16.8%. "We did have a terrific success in Korea last year," says Rick Labelle, vice-president in charge of global sales and marketing.

Regaining Daewoo's reputation at home required new products because the image of the old lineup was badly damaged by Daewoo's bankruptcy. GM Daewoo last year delivered two new vehicles—the compact Winstorm SUV and the Tosca midsize sedan sporting an L6 engine—which were developed with the help of GM's engineering expertise. The two new models represented 42% of all GM Daewoo sales in Korea last year.

Increase in Exports

To underscore the renewed commitment to quality in these vehicles, GM Daewoo let unsatisfied buyers return their cars for a full refund during the first month of ownership or if the cars had less than 1,500 kilometers on them. Moreover, the Tosca was the first Korean-made sedan with a six-cylinder engine and five-gear automatic transmission in the 2.0-liter sedan class, the most popular segment in Korea. The Tosca also is about $400 cheaper than its main rival, the Hyundai Sonata. The Winstorm, meanwhile, was the first compact SUV with the "active-on-demand" feature that automatically shifts into four-wheel-drive mode when road conditions get slippery.

A much bigger achievement, however, came from exports. Shipments of vehicles abroad, including those exported in the form of knocked-down kits that were assembled overseas, jumped 33% to 1.4 million units. The vehicles go to 150 countries, with China, Europe, and North America serving as the biggest markets. Together with sales in Korea of 128,300 units, GM Daewoo's overall sales of 1.53 million accounted for some 15% of GM's global production in 2006, up from about 10% a year earlier.

That means the Korean division has played an important role in GM's ongoing battle against Toyota to keep bragging rights as the worldwide No. 1 automaker. "The acquisition of Daewoo Motor was probably the most important strategic decision GM made in recent years," says Stephen Ahn, auto analyst at Woori Investment & Securities in Seoul. "Without the 1.5 million-plus vehicles, GM would have been overtaken by Toyota last year."

Korean Advantages

GM executives acknowledge that the Korean unit was crucial in the introduction of the Chevrolet brand in Europe, China, and elsewhere. GM Daewoo produced all of the 280,000 Chevrolet cars sold in Europe last year, and the Korean company also shipped 312,400 vehicles to China in the form of kits in 2006. "Significant parts of growth in Latin America and the Middle East also came from GM Daewoo," says Nick Reilly, GM president heading the Asia-Pacific region. "Certainly, GM Daewoo has been an important contributor to the globalization of Chevrolet."