SEOUL/PALO ALTO, U.S. -- While General Motors seeks South Korean assistance to prop up its cash-strapped local unit, Seoul insists on seeing a viable restructuring plan first, deepening a standoff that reflects the U.S. automaker's changing global strategy.
The South Korean government intends to audit GM Korea to gain a firmer grasp of the company's finances, and GM is prepared to cooperate, the automaker's Executive Vice President Barry Engle said Thursday after meeting with senior finance and commerce officials. Engle likely used the talks to make a direct appeal for government aid in restructuring the unit.
GM Korea said Feb. 12 that it would close a plant in Gunsan at the end of May and let 2,000 workers go, with the unit's chief calling the move a "necessary but difficult first step" in broader restructuring plans. Revenue has stagnated since peaking at 18.37 trillion won ($17 billion at current rates) in 2013. The unit's production volume fell 10% on the year to around 520,000 vehicles in 2017. Though full earnings for last year have yet to be announced, they apparently mark a fourth consecutive net loss.
South Korea hopes to stave off even deeper cuts. The automaker's plans apparently include scaling back a factory on the outskirts of Seoul capable of turning out 440,000 vehicles yearly, as well as eliminating several thousand of GM Korea's roughly 16,000 engineers and administrative workers through voluntary early retirement.
Engle told South Korean lawmakers Tuesday that GM would make no additional investments in the struggling unit without strong confidence in the results. It remains unclear exactly what the automaker seeks in terms of aid, but demands are thought to include having South Korean state-backed institutions to chip in through a debt-for-equity swap involving a roughly $2.7 billion in loans from GM headquarters.
GM likely wants preferential tax treatment as well, and may look for state-backed financial institutions to put up some of the money for investment.
But Seoul is leery of committing cash for a turnaround that may not pan out. The automaker first must provide a concrete plan to bring GM Korea into the black, said Ko Hyoung-kwon, first vice minister of strategy and finance, who met with Engle on Thursday.
The public, and particularly the labor unions that provide critical support for South Korean President Moon Jae-in, has urged the government to play hardball with the company. Many in the media blame GM Korea's losses partly on the roughly 5% interest rate the parent charges on loans to its troubled unit, turning opinion firmly against the automaker.
GM wants the government to respond by the end of February, a source familiar with the matter said, as the automaker aims to firm up global production plans in March. GM is dangling annual production of 500,000 vehicles and the rollout of two new models in return for Seoul's support.
Yet propping up the South Korean unit, formed in 2002 with GM's acquisition of the bankrupt Daewoo Motors, hardly fits with the automaker's broader strategy. The U.S. automaker has firmly stuck with the strategy of concentrating resources in fields offering high returns at low risk since CEO Mary Barra took charge in 2014. This led the company to sell German automaker Opel and end vehicle sales in India last year, two decisions that made GM Korea less strategically valuable as a base for exports to Europe and emerging markets.
GM instead built up its presence in major markets such as China and the U.S. while increasing involvement in Brazil, where the automaker sees strong growth prospects. The company also is devoting more resources to exploring technologies such as automated driving, in which it plans to invest roughly $1 billion this year, and to developing and selling membership-based services.
The automaker debuted a premium subscription service last year that lets users rent luxury Cadillacs, swapping models as they please. GM also intends to launch a ride-hailing service using autonomous vehicles when the technology is ready.