Made-in-Korea Chevys for GM

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Bo Andersson, GM Group vice-president in charge of global purchasing and supply chain, expressed satisfaction at the quality of Korean parts during his recent trip to Seoul and said his team would keep increasing purchases from Korea.

To build up the Korean unit's capabilities, GM has made serious investments. The company has spent more than $3 billion in the past three years to set up or increase GM Daewoo's engine plants, state-of-the-art transmission plants, and a comprehensive proving ground housing six laboratories, including wind tunnels and severe-temperature test facilities. In the past five years, the company has more than doubled the number of designers, from 70 to 150, and boosted the number of engineers from 1,500 to 2,900. GM Daewoo will spend another $3 billion over the next two years to develop and build new small cars.

Daewoo Bolsters China Presence

Already, the Korean unit has helped GM broaden its global reach. While its U.S. sales plunged 6.1%, to 4.51 million last year, GM's global sales rose about 3%, to 9.37 million vehicles, making it neck-and-neck with Toyota (TM). Of those, as much as 20%, or 1.89 million, came from GM Daewoo in one way or another and were sold in 150 countries. "Without the Korean unit, GM would have certainly looked much weaker," says Lee Hang Koo, auto sector researcher at government-funded think tank Korea Institute for Industrial Economics & Trade. "GM Daewoo makes the biggest difference between GM and Ford (F)."

The Detroit company has taken advantage of Korea's small-car strength to globalize its Chevrolet brand. Until three years ago, Chevy was best known for big trucks like the brawny Silverado pickup and gas-guzzling Suburban SUV in North America. But in the past couple of years, it has managed to eke out a presence in Europe, China, Russia, and other emerging markets with smaller vehicles, many provided by GM Daewoo. Last year, the Korean unit accounted for 53% of 1.84 million vehicles sold outside North America under the Chevy brand. It also shipped some two thirds of GM cars sold in China, in the form of component kits, in the past couple of years.

A big question is whether GM Daewoo can stay competitive against the fast-growing auto industry in China and other low-cost economies. Company executives say they now have a core designing and engineering expertise in Korea, where engineering is some 40% cheaper than in the U.S. A bigger and more immediate challenge comes from manufacturing. "GM Daewoo's most dangerous competitor is GM's Shanghai operation," says Kim Ki Chan, a business school professor specializing in the auto industry at the Catholic University of Korea. "If GM Shanghai's quality and productivity catch up with GM Daewoo's, then manufacturing jobs in Korea will be under threat."

Third Consecutive Year of Net Profits

Another challenge for GM in Korea is to increase its market share in the tough domestic market. The company is still No. 3 in Korea where Hyundai Motor and its affiliate Kia Motors dominate with a combined three quarters market share. Grimaldi set a goal of increasing his company's share to between 15% and 20% in 2012, from just more than 10% now, by completely replacing a current lineup of vehicles, some of which are still associated with bankrupt Daewoo.

So far, GM Daewoo has been a huge success story despite its lackluster presence in Korea. Thanks to GM's global strategy and growing consumer appetite for small cars, exports account for more than 90% of the Korean unit's sales. Although its primary role was to supply vehicles to other GM brands at razor-thin margins, GM Daewoo managed to post a third consecutive year of net profit in 2007, amounting to $532 million, down 8% from 2006, on sales of $12.3 billion, up 30%. "We have made a significant contribution supporting GM," says Grimaldi, "now we have to…strengthen our capabilities and competitiveness."

See BusinessWeek.com's slide show for more on GM Daewoo's recent efforts.

Moon is BusinessWeek's Seoul bureau chief.