GM Korea will close its troubled plant in Gunsan by the end of May, a spokesman confirms in an interview with WardsAuto.
GM International has a plan for bringing in new product to fill the lost capacity (Gunsan could build 250,000 vehicles annually) but needs an urgent demonstration of support from the Korean government and the company’s labor union before any product allocations can be made.
Gaining positive support for its turnaround plan is a hot button issue as production allocations to the various plants in GM’s global chain are set to be made in the first week in March.
Asked whether the Gunsan plant would be sold once operations have ended there, the spokesman says there is no disposition plan at this time.
Selling the plant to any other automaker would be virtually self-destructive, most analysts believe. Competition from all four of Korea’s other automakers has held GM Korea at or below a 10% market share ever since most of Daewoo Motors was acquired by GM in 2002. It was in exports that the operation shined, and that ended when GM decided to pull the Chevrolet brand out of Europe, beginning in 2014. Most of the European-bound vehicles were produced in the Gunsan plant.
Analysts say gaining support quickly for a turnaround plan is critical. For instance, some of the overseas markets supplied by GM Korea with completely built up and completely knocked down exports might instead become served by GM affiliates in other countries.
At present, GM Korea’s CKD vehicle export volume is equal in size to all of the completely built up models the company sells globally.
Possible closure of the Gunsan plant has been a hot topic for the past two years, during which time it has operated at less than 20% of its 250,000-vehicle annual capacity. Total vehicle production at the plant last year, including domestic sales, exports and CKD kit shipments was around 30,000 units.
The plant produces only two vehicles – the Cruze compact sedan and Orlando MPV. Together, they sold only 18,621 units in the domestic market in 2017.
Speculation on closure of the plant heated up last week when GM Chairman and CEO Mary Barra addressed the GM Korea problem in a telephone conference with analysts and said the company would have to take action to make the beleaguered subsidiary profitable and that restructuring was likely.
Closure of the Gunsan plant and severance for the employees will result in a one-time special charge against income of $850 million (920 billion won), according to a statement from the company. Of that amount, $375 million (406 billion won) will be a cash charge primarily for employee-related expenses. The other $475 million (514 million won) will be an accounting adjustment to reflect asset impairment.
The charges will be made against income in the first two quarters of 2018, which will significantly amplify the losses analysts anticipate for both of those reporting periods.
Selling Off Cruze, Orlando Inventories
Asked if the two models produced at the plant will be reallocated to one of the two assembly plants in the Incheon suburb of Bupyeong, the spokesman says, “We did not prepare a plan to reallocate production of the Cruze and Orlando into another plant. We will continue to sell the Cruze and Orlando out of current inventory.”
He says there are 3,000 units of the Cruze available and 2,000 units of the Orlando. If sales are restricted to the Korean market, that would be more than a three-month supply of both products.
After the inventory is sold out, there is no plan for continuance of the two models at this time.
The expansive Bupyeong complex has two vehicle assembly plants and houses the company’s headquarters, vehicle design and development and powertrain engineering. It currently produces the Aveo, Captiva, Malibu and Trax.
One of the two plants is running well below capacity, and the company is slated to soon lose its Trax European export business, following the selloff of GM’s Opel division to PSA.
GM Korea also produces the Spark small car and the Damas and Labos small commercial vehicles at its plant in the south coast port of Changwon, located close to Incheon. The company operates a transmission plant at Boryeong, which was added to the company’s manufacturing base as a greenfield operation some years after GM acquired the other plants from Daewoo.
At Gunsan, preparations are being made to compensate the 2,000 employees who will be affected. “They will receive a separation package, and there is a placement plan and there will be a transition service,” the spokesman says. “We will make sure there is an orderly and respectful transition of this plant.”
The separation package will be similar to the employee buyout plan that GM Korea has offered from time to time in recent years. Those packages provide a generous lump sum payment based upon rank and years of service, as well as other benefits.
The spokesman says the GM Branch of the Korean Metal Workers Union that represents blue-collar workers was advised of the decision to close the plant on the morning of Feb. 13. The company also advised the Korean government and other related stakeholders.
“This is a necessary but difficult first step in our efforts to restructure our operations in South Korea,” GM Korea President and CEO Kaher Kazem says in a statement.
“We recognize the contribution and support of our employees, the wider Gunsan and Jeonbuk communities and government leaders, particularly through the most recent difficult period,” Kazem says. “We are committed to supporting all of our affected employees through this transition.”
GM Korea also released a statement by Barry Engle, GM executive vice president and president of GM International:
“The performance of our operations in South Korea needs to be urgently addressed by GM Korea and its key stakeholders. As we are at a critical juncture of needing to make product allocation decisions, the ongoing discussions must demonstrate significant progress by the end of February, when GM will make important decisions on next steps.”
GM Seeking Aid; Union Support Questionable
Engle’s statement is directed toward ministries in the Korean government as well as the company’s labor union and minority shareholder Korea Development Bank (KDB), which holds a 17.2% stake in the company. GM Korea’s JV partner in China, Shanghai Automotive Industry Corp., holds a 6% stake, with GM owning the remaining 77%.
All of them have been presented with the GM plan for turning the company around, including allocation of vehicles for production in Korea.
The Korean government has not yet provided any support plan for the GM turnaround program, the spokesman says. “We will keep talking with them privately.”
The GM turnaround plan involves massive investments in product and other measures to streamline the faltering operations at the remaining three assembly plants for the long term. GM is seeking financial support from KDB.
There is a chicken and egg aspect to the situation, as Trade Minister Paik Un-gyu has publicly stated the government’s response depends upon the extent of GM’s own investments to make the company viable and profitable. Minister of Finance Kim Dong-yeon says his office regrets GM Korea made the Gunsan plant closing decision unilaterally without input from government agencies.
It is not clear how GM hopes to get the fiery metal workers union to buy into the plan. The union waged strikes against the company before finally accepting a new wage agreement in January.
The two sides met Feb.7 to discuss the turnaround plan and held a second meeting Feb. 8 with no results disclosed. A third meeting has not yet been scheduled.
The union did not issue a statement or launch public demonstrations to protest the plant closure, but analysts say the demonstrations are highly probable. The union recently demonstrated in front of the Seoul prosecutor’s office demanding that GM Korea’s Kazem be arrested for alleged illegal business practices. The union has said the company is losing money because it is borrowing from other GM subsidiaries at high interest rates to finance its operations and is sending large amounts of money to GM headquarters in the U.S.
This has been countered by GM Korea and KDB, both saying GM has no alternative but to borrow internally because Korea’s banks either will not finance or are asking extremely high interest rates with prohibitive conditions because of the company’s negative financial condition and the possibility that GM may pull the operations out of Korea.
The spokesman says vehicle production allocations would be made by GM International at the beginning of March, so it is urgent for all GM stakeholders to demonstrate positive support for the turnaround plan before then. That probably means some form of financial support from the government and guarantees from the labor union that they will work with the plan and not throw wrenches into it.
“To secure products that provide balance for future manufacturing in Korea, we all have to work together to make the business viable and profitable,” the spokesman says. “The product allocation decision is very critical for GM Korea in the long term.”
On Feb. 9, Finance Minister Kim told lawmakers in the national assembly that the government is considering several options. He also told reporters that GM’s Engle had met with him two times in January, and they had discussed the company’s financial problems. A deputy to Kim said the two had discussed possible financial support for the company.
