Global Economics

GM Sees More Than the USA in a Chevrolet


While General Motors (GM) has been slashing and burning assets at home (as well as key alliances in Japan), its Korean unit, GM Daewoo Auto & Technology, is in full expansion mode. Consider that in early May, the Korean subsidiary began mass producing its first diesel engines. A few days earlier it rehired the last batch of more than 1,600 workers who were laid off by bankrupt Daewoo Motor -- taken over by GM in 2002.

All this follows the move last October by GM to buy back a plant -- capable of churning out 405,000 cars a year -- that wasn't included in the Daewoo acquisition. The common driver behind all the events: an ambitious effort to globalize the Chevrolet brand. The GM-Daewoo alliance is one of the more promising developments in a year in which the giant Detroit auto maker has teetered on the edge of the abyss.

The Korean unit is at the heart of GM's campaign to refashion Chevrolet from primarily an American brand to an international one. The four-year-old tie up is starting to show some meaningful results. GM Daewoo sold 1.16 million cars, almost triple the level three years earlier, in some 150 countries, in 2005. And the bulk of them sported the Chevrolet marque. "The substantial growth Chevrolet has seen in the last two years has basically been [due to] our products," says GM Daewoo Chief Executive Nick Reilly. "I would see that continuing."

EUROPEAN GROWTH. The rapid growth underpins GM's expansion in the Asia-Pacific as well. In the critical and fast-growing China market, GM Daewoo shipped 105,082 cars in the form of knockdown kits in the first four months of this year, more than double the 48,773 sent in the same 2005 period. The kits, assembled by GM's joint ventures with Shanghai Automotive Industry in China, account for about 70% of all GM vehicles sold there, including Buick Excelle sedans, Chevrolet Matiz minis, and Aveo subcompacts.

Now, GM Daewoo is gearing up to make an aggressive push in Europe, where it spent $50 million to promote the Chevy brand. "China and Europe will be the two fastest growing areas," predicts Reilly, who came to GM Daewoo from GM's Vauxhall unit in Britain. With the exception of a tiny number of Corvette sports cars, virtually all GM cars sold in Europe are now shipped by GM Daewoo with the Chevrolet badge. Reilly expects Chevrolet's sales in Europe will top 400,000 in a couple of years, against 230,000 last year and 180,000 in 2004.

The expansion steps taken recently at GM Daewoo are linked to its push in Europe. The new $270 million diesel engine plant in Gunsan, southwest of Seoul, is crucial for Chevrolet's inroads in Europe where more than half of all sales are of vehicles powered by diesel engines. The plant has an annual production capacity of 250,000, and the first diesel engines from the Gunsan facility will be mounted on the Winstorm, GM Daewoo's first sport utility vehicle, due to be launched in June in Korea and in September in Europe as the Chevrolet Captiva.

THIRD PLANT. The two-liter turbo diesel engines will also be offered on two sedans over the next year in Europe -- the Lacetti and the Epica. The Captiva SUV will also be equipped with a diesel engine. Meanwhile, the company is hoping for continued success with its gasoline-powered brands such as the Matiz minis and Aveo (called Kalos in some markets) subcompacts. Aveo has been the biggest export car for the Chevy brand so far in terms of revenues. Captiva is expected to be bigger by next year since its $20,000-plus price tag will be double that of Aveo.

Both the Captiva and Aveo are built at a recently purchased plant at Bupyeong, just west of Seoul. Of three Daewoo plants, that's the only one GM left out in its 2002 acquisition, although creditors fired 1,725 workers in the previous year to make it more attractive to them.

At the time, GM said it hoped to buy it by 2008 on conditions that it improve quality to GM's global average, boost productivity by at least 4% annually, end labor strife, and maintain two-shift operation for six months. The Bupyeong plant met all demands but the two-shift requirement, but GM bought it back ahead of schedule anyway because of faster than expected growth in exports, particularly for the Chevy brand.

"IDEAL FIT." South Korea is proving to be a vital driver of GM's recovery. Although Daewoo was a completely damaged auto maker, the Korean unit of the American company reported earnings of $70 million in its third year of operation last year on sales of $8.9 billion. Its exports jumped 60% in the January to April period this year to 439,912 cars. "GM and Daewoo have turned out to be an ideal fit," says Cho Chuel, auto expert at the state-funded think tank Korea Institute for Industrial Economics & Trade.

Last year, the Korean unit made 1 in every 10 vehicles sold by GM globally. Helped by GM Daewoo's products, GM's first-quarter profit in the Asia-Pacific region soared more than fivefold to $398 million on sales that doubled to $3.4 billion. That's in stark contrast to GM's North America loss of $987 million in the same period.

Of course, GM Daewoo could not have pulled off the stunning turnaround without its parent's help. It benefited from GM's global sales network that allowed the Korean unit to quickly boost exports. GM's engineering expertise and production and quality control systems were also vital to retooling Daewoo's lineup quickly.

The all-wheel-drive system of the Captiva SUV, for example, is drawn from the Saturn Vue and Chevrolet Equinox, although the vehicle's overall development in Korea will serve as a base for a new compact SUV to be built in the U.S. by a yet to be decided unit of GM.

CHALLENGES AHEAD. Last year, GM gave the Korean unit a vote of confidence by awarding it the right to develop platforms for all small cars worldwide for the group. That means GM Daewoo will develop the framework, suspension systems, heating, ventilation, air conditioning, and the technical solutions for crash performance for GM's small cars. GM Daewoo will have invested some $3 billion over three years as of 2007. That figure includes the diesel plant, a design center, a technical center and proving ground, and programs to widen Chevrolet's product range.

Despite its achievements, GM Daewoo faces some challenges. The biggest potential problem is the rising value of the Korean won, which could erode cost competitiveness of the exports that make up 90% of GM Daewoo's business. The won has strengthened by 25% in the past two years, slashing operating margins of Hyundai Motor, the country's largest carmaker, to 4.9% in the first quarter of this year from 7.2% two years earlier.

"If the won continues to rise at a similar pace, then the impact will be detrimental for Korea's auto industry," says Cho Yong Jun, car analyst at Shin Young Securities in Seoul.

BIG PAYBACK. Another challenge is burnishing its image on its home turf. Badly bruised by Daewoo's bankruptcy, GM Daewoo's domestic market share hovers below 10%, down from 16.8% in 2000. One problem -- the lack of SUVs and commercial vehicles -- could be eased with the introduction of Winstorm. Reilly believes it will probably take about five years to significantly buff up a damaged brand and a test would come in 2008 when he wants his company's share in Korea to rise to between 13 and 14%.

Nevertheless, few doubt GM Daewoo will crank out ever more cars for Chevrolet and other GM name plates. GM came to rescue the Korean company four years ago, but chances are this erstwhile problem child could turn out to be a godsend for the U.S. giant, which is reeling back at home.


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