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Daewoo: GM's Hot New Engine


Remember Daewoo Motor Co.? It's the Korean auto maker that hired college kids to hawk its cars, built factories in unlikely locales such as Uzbekistan, Vietnam, and Ukraine, and once tried to woo British buyers with an offer of a free trade-in for a new model after just six months of ownership. Daewoo invested billions building a global capacity of some 2 million cars annually -- a number it never even got close to producing -- before collapsing under more than $16 billion debt in 1999. Production plunged by half, 7,000 workers lost their jobs, and scores of suppliers went belly-up.

End of story? Hardly. Today, Daewoo is back, under new ownership, and is rolling like never before. Since General Motors Corp. (GM) bought a controlling interest in bankrupt Daewoo in October, 2002, the rechristened GM Daewoo Auto & Technology Co. has emerged as one of the most promising spots in the Detroit carmaker's empire. Even as Korea's home auto market has contracted by 30% over the past two years, GM Daewoo's sales are soaring. In the first 10 months of this year, it exported 632,000 cars and kits for assembly elsewhere, up 90% from the same period in 2003. It'll be tough to match that performance, but the company expects double-digit growth for several years to come. Although GM Daewoo declines to provide financial details, execs say the company remains in the red but that the earnings picture is improving rapidly. "We are confident we will achieve stable financial health and self-sustainability," says Joseph G. Peter, chief financial officer at GM Daewoo.

In fact, GM's Korean subsidiary is becoming a linchpin in its plans for global expansion. GM Daewoo's cars are sold in more than 140 countries. Across Asia, they have helped increase GM's market share to 5.2% -- up from 4.2% two years ago. And in Europe, the company's five models are being pitched as high-quality, low-cost alternatives to local brands. The Korean operation "gives General Motors the opportunity to truly grow sales in Asia and in the value-market segments in Europe," says Alan S. Batey, chief of GM Daewoo's marketing.

Just don't look for the Daewoo name. In most markets outside Korea, it's being phased out in favor of GM's Chevrolet marque -- a brand GM usually pitches as more American than the Stars and Stripes. Since last year, Daewoo's Kalos compact has been marketed as the Chevrolet Aveo in the U.S., Latin America, and Eastern Europe. The Aveo, which starts at about $10,000, has been the best-selling low-end compact car in the U.S. for the past three months, beating out such rivals as the Hyundai Excel and the Toyota (TMC) Echo. Today the cooperation is being stepped up, and Chevys sold in both Europe and Asia will come almost exclusively from GM Daewoo's factories. "No one but GM could have pulled off such a rapid recovery in sales for Daewoo," reckons Hanwha Securities Ltd. analyst Ahn Soo Woong.

GM knew the territory. The company owned half of Daewoo for 20 years, but in 1992 bailed out over management differences. A decade later, after Ford Motor Co. (F) took a pass on the bankrupt Daewoo, GM looked more closely and decided the company was worth the risk -- especially at the final price of just $400 million. GM thought that combining Daewoo's small-car smarts with GM's engineering and distribution could be a winning formula.

For their money, GM and two partners got 70% of an operation that included two modern factories capable of making a total of 475,000 vehicles a year and the company's smaller facility in Hanoi. It also has an option to purchase an older plant in Bupyung, just west of Seoul, with an annual capacity of 405,000 cars. GM says it hopes to buy the plant by 2008 but has demanded that managers at Bupyung boost productivity by at least 4% annually and improve quality to GM's global average -- conditions the plant has so far fulfilled.

ATTITUDE CHANGE

Considering the bargain-basement price, GM execs say they were "pleasantly surprised" by what they found at Daewoo. GM imported its production, supply, quality control, and information technology systems, but the workers needed relatively little retraining. Having seen the layoffs after the company's collapse, the remaining laborers were quick to adapt to the cost-cutting and efficiency-boosting measures GM implemented -- especially as exports took off. "Our attitude has changed to 'our factory' from 'their factory,' and we saw our sacked colleagues returning as we got more work to do," says Kim Sang Hyun, production manager at the Bupyung plant.

The big test will come next year in Europe -- GM Daewoo's biggest market. That's when all of GM's Korean-made cars will shed the Daewoo nameplate in favor of Chevy, which is being positioned as an entry-level marque that will feed into GM's more mainstream Opel brand. A big part of GM's thinking is that the Daewoo name is too tarnished to be buffed up as a European sales machine. Another consideration is that former Daewoo partners in Eastern Europe share the brand. The potential downside: "If Daewoo does too well, it could nip at the heels of Opel," says Colin Couchman, an analyst at researcher Global Insight Inc. in London. GM officials say that won't be a problem and that the Chevy models should give the company a lift in Eastern Europe. "Over time, the Opel brand won't have to cover every market segment," says GM-Europe Chairman Frederick A. Henderson.

Now, GM is retooling much of Daewoo's lineup. It has set aside $1.5 billion to build new transmission and engine plants and to develop a string of new models to be rolled out over the next two years. The first, a new Matiz minicar, is due out in Europe and Korea next spring. In 2006, GM Daewoo is planning a diesel-powered sport utility vehicle code-named S3X. And next April it's planning to unveil a new model at the Seoul Motor Show but hasn't released any details.

Despite the progress GM Daewoo has made, it could still face some headwinds. The biggest challenge remains its home turf. Although GM Daewoo has maintained its 9.5% share even as overall sales in Korea have hit the skids, that remains far below the 33% share Daewoo had in its heyday. Exports also could get nicked by the stronger Korean won, which has gained 9.4% against the dollar this year. And GM Daewoo faces rising labor costs. After boosting pay by 13.5% last year, this year it granted workers an 11% hike to put an end to a weeklong strike.

With GM reeling in the U.S. under the weight of pension and health-care costs, Daewoo will have to stand on its own feet. But shipments keep going up -- and the old Chevy nameplate could prove the unlikely rescuer of a troubled Korean brand.

By Moon Ihlwan in Seoul, with Gail Edmondson in Frankfurt and David Welch in Detroit


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