GM Korea a Sacrificial Lamb for Dine-and-Dash GM: Our Union’s Fight for Another Five Years

Lee Seong-jae
[former 19th Chair of the Daewoo Auto Workers Union (currently GM Korea Branch)]

[Editor’s Note] GM Korea and its union reached a tentative agreement on April 23, one hour before the deadline to file for court receivership (the first step in declaring bankruptcy). Both parties agreed to resolve the issue of the remaining 680 workers in the Gunsan plant by redispatching them to local plants  and encouraging them to retire. In exchange, the union accepted a freeze on wages, cancellation of bonuses, and a cut in benefits totaling 100 billion won. Since both parties ostensibly shared the burden of stabilizing operations, the Korean government is expected to approve GM Korea’s request for bailout funds once GM headquarters proves its commitment to long-term operation of GM Korea. GM Korea’s case is a representative example of corporations that make great profits then extort governments for taxpayer money bailouts to keep plants and jobs. This article was written on April 18, before the agreement was reached in order to explore the cause of GM Korea’s situation and its future needs.

“It’s like robbery in broad daylight except without a gun.” That’s the perfect description for U.S.’s General Motor’s actions. Just ahead of South Korea’s Jun. 13 local elections, GM is outright extorting the Korean government to provide financial assistance and shorten the due diligence investigation on suspicions surrounding management of the rapidly deteriorating GM Korea.

It’s not the first time that GM is dine-and-dashing. After the 2008 world financial crisis, the Australian government bailed out GM with 150 million Australian dollars (AD) (130 billion won). After getting a taste, GM threatened to stop its Australian production of compact cars and demanded R&D funds. In 2012, the Australian government forked out 275 million AD (230 billion won). GM’s greed continued. In 2013, it demanded 265 million AD just ahead of the Sep. general elections. Then in Dec., it demanded an extra 150 million AD. However, once power switched to the conservatives after the general election, the new government announced in disgust that they would not fund GM. Immediately, GM announced its closure. In addition to the R&D funds, the government had provided 2 billion AD (1.7 trillion won) from 2001 to 2012. Even after 2 trillion won in assistance, GM dine-and-dashed Australia.

Currently GM has three demands: that after GM issues its 2.7 trillion won loan to GM Korea as stocks, KDB purchase 500 billion won worth of these stocks; that the KDB provide 500 billion won to introduce a new SUV and CUV model for production at Bupyeong 1 plant and Changwon plant; that the Bupyeong and Changwon plants be designated a Foreign Investment Zone exempt from corporate taxes for at least 5 years. The Korean government responded with three principles: major shareholders must take responsibility for the current situation, burden must be shared between all the stakeholders (shareholders, creditors, trade unions etc.), and solutions must be developed for normal long-term operations. Yet, if we examine GM’s demands, it is only asking for benefits without sharing any responsibility. Furthermore, the KDB (the government) is ignoring their  failure to monitor and oversee GM. GM Korea’s union is taking initiative in resolving the current situation. We volunteered to forgo a pay raise and bonuses this year and didn’t oppose restructuring through voluntary resignations. However, we are demanding job security for the 680 workers in the Gunsan factory, the allocation of a new model and an electric car model in the Bupyeong plant, and the withdrawal of GM’s plans to outsource after service.

The Historic Relationship Between GM Korea and GM
Despite its over 50 year bond, GM and GM Korea have had an ill-fated relationship. GM Korea was born in 1972 from a 50:50 investment between GM and the the newly emerging Korean Shinjin Auto. After the 1980s world economic crisis, KDB acquired these shares. In 1983, after Daewoo Group acquired the KDB shares, GM Korea became Daewoo Auto.  In 1987, Daewoo Auto was set to enter a golden period with the production of GM’s Le Mans model based on its then- acquired German Opel’s Cadet model. However, in 1992, GM’s exorbitant auto parts and technology fees forced Daewoo President Kim Woo-jung to end Daewoo’s partnership with GM [1]. Then in 1998, when Korea was struck by the Southeast Asian IMF economic crisis due to transnational capital’s neoliberalist globalization, Daewoo Auto went bankrupt after the restructuring of Daewoo Group, at the time Korea’s second largest conglomerate. A failed acquisition by Ford, left Daewoo Auto to be easily acquired by GM for a mere 400 million dollars. Daewoo Auto became GM Daewoo.

At that time, GM had focused mostly on North America and on large trucks. After acquiring Daewoo Auto, GM set-up factories on every continent and became a full fledged global company. GM Daewoo did so well that at the 2005 North American Motor Show, GM President Rick Wagoner stated GM Daewoo had become economically self-sufficient after just two years [2] and that in the future it would be “GM Group’s cash cow.”

In 2008, following the 2008 financial crisis, GM declared bankruptcy was bailed out and became New GM. GM Daewoo single handedly drove GM’s recovery at the beginning. At the time, oil cost 100 US dollars a barrel, and the world was hungry for more fuel efficient compact cars. GM Daewoo’s production lines and technology allowed GM to produce compact cars it did not have. GM Daewoo’s sales were almost 40% that of GM’s best-selling car the Chevrolet sedan.

Four Years Later, GM is Wrecked and Trashed
While GM Korea was a legally independent company, its great dependence on GM headquarters for technology and parts made the relationship more like that of a franchise chain beholden to the decisions of the headquarters. However, dark clouds gathered around the successful GM Daewoo. After GM set up factories on every continent, GM Daewoo, which had exported over 85% of its cars suddenly became a burden. “After the hunt, the hunter ate his hunting dog.”

This was the start of GM’s restructuring of GM Daewoo. To ensure a future closure of GM Daewoo would not birth a separate independent competing company, GM eliminated Daewoo from its brand. GM Daewoo became GM Korea. Daewoo model cars were branded Chevrolets. It then began a full-fledged downsizing of GM Korea. Production and sales plummeted while losses and debt skyrocketed, plunging GM Korea into a state of impaired capital.

As can be seen in the graph above, revenue plummeted from 15 trillion won in 2012 to 10 trillion in 2017 [3]. Debt became an extraordinary 84.9%—the annual losses not only consumed the previously accumulated profits but even cut into its initial capital. For four years, from 2014 to 2017, the accumulated losses amounted to 3.1 trillion won.

What happened?

The first reason for these skyrocketing losses was GM’s 2013 unilateral decision to pull-out Chevrolet sales in Europe despite positive profits. At the time, after the United States, Europe was GM’s second largest export market. GM Korea Board of Directors’ adoption of the decision to pull out of Europe was like cutting off its own leg.  

The second reason was GM’s exorbitant research and development fees. Research and development is necessary for an auto company, however GM Korea’s research and development was problematic for two reasons: First, despite GM Korea funding its own research and development, ownership of the resulting technology went to GM. GM then turned around and charged GM Korea for royalties. It was an abuse of power. Secondly, the high patent fees increased the cost of production. While in similar auto companies, on average, production makes up 82% of the final price, GM Korea’s production costs made up 93% of its final price. This ate into GM Korea’s profits, contributing to its accumulating losses.

To understand the magnitude of GM Korea’s patent fees to GM, we can compare it to Kia Auto, a company three times the size. In the past 15 years, GM Korea’s average annual revenue was 11.8 trillion won. Four percent (480.2 billion won) of these revenues were used to pay patent fees. Kia’s average annual revenue was 30.2 trillion won. Around three percent (873 billion won) was used to pay for patent fees [4].

Abuse of power continued with GM forcing GM Korea to incur additional costs. While it initially refused to pay in 2013, GM Korea’s Board of Directors eventually paid GM 85.9 billion won in 2014 for operations support. This was despite the fact that Daewoo already had sufficient operating system and despite the fact that the operating system overhaul were part of GM’s attempts for greater uniformity between factories around the world. Ultimately, GM made the decision to pull out Chevrolets from Europe and Russia, but GM Korea was left to suffer the consequences.

We Can’t Trust GM, But We Need Another 5 Years
The majority of GM Korea’s workers and the public want GM Korea’s independence. After watching GM’s behavior for over 50 years in Korea and GM’s rapid closure of plants around the world, the phrase “Eat when it’s sweet and spit when it’s bitter” comes to mind.

But what can we do? We cannot yet operate independently (e.g. no Daewoo brand, no independent distribution network, dependence on GM technology). GM may be sticking around because there’s still meat to gnaw on at  GM Korea. Nonetheless, GM’s departure would also mean that the full burden of the current situation would be borne by GM Korea, the subcontracting parts manufacturers, the Korean auto industry and the government.

Currently GM announced it planned on filing court receivership (the beginning of bankruptcy) on April 20th. The Korean government (KDB) and GM will have a last negotiation. However, there are concerns that negotiation between GM Korea and the trade union might become an obstacle. GM Korea and the trade union went through bankruptcy and court receivership in 2000 so they know its impacts and the burden of damage. Given the worst case scenarios of Kumho Tire or STX Offshore and Shipbuilding, GM Korea’s workers expect that there will be efforts to sidestep a catastrophic situation.

We, at the GM Korea union, demand job security for 680 workers at the Gunsan factory scheduled to close in May; the additional input of new cars; the withdrawal of plans to outsource after service; and the return to normal operations for Bupyeong 2 plant currently in danger of being closed next year. We are fighting to ensure at least another 5 years.  

It is Society’s Fault For Not Learning Anything from the 2001 Giveaway of Daewoo Auto
Korean society needs to also be held responsible for not learning anything from 2001. Trade union and experts had demanded the conversion of Daewoo Auto into a “temporary public company” or “national company.” Disparaging Daewoo had no competitiveness, many scholars and experts, media and even the government insisted selling it abroad was only solution. So they are responsible for today’s situation. Yet, what kind of company is GM? Given the 80 billion dollar public bailout, it should be known not as General Motors but as Government Motors.

Furthermore, starting 2013, there have been over 10 reports and suspicions that GM Korea would withdraw. Every time GM denied them and we all – trade union, GM Korea, scholars, media, the government and KDB – believed their false denials too easily. Thus, we are also collectively responsible.

We Have to Prepare to Stand Alone in Five Years
Even if GM Korea remains, many think that there is a high possibility it will close after 3 to 5 years. We have to prepare GM Korea to be a company that leads the Korean auto industry ahead of other companies in terms of employment and growth even after GM leaves. This means that not only GM Korea’s trade union and management, but also the auto parts companies, affiliated companies and local communities, and the government should be involved in setting the short and long term plan. When it is done, we won’t be tricked again by GM.

Notes:

1. Despite the high sales of the Le Mans, the high costs that GM was charging for parts and technology resulted in overall low profits for Daewoo.
2. Ultimately, Daewoo Auto’s bankruptcy was not due to any problems in its production, but rather to the impact of the IMF crisis on Daewoo Group’s financial investments.
3. from audit report in 2017
4. 화식열전(Hwasikyeoljeon) by Hong Gil-yong, Herald Economy, 2018.2.21.