Daewoo: Let the Bidding Begin

The world's automotive powerhouses, in an effort to grow mightier, have dedicated teams of experts and major resources to answer one important question: What is the deal with Korea?

General Motors Corp. and Ford Motor Co. are leading the charge into the largest country in Asia as-yet untouched by the West, with their interest in the purchase of the insolvent Daewoo Motor Co. Ltd.

South Korea's No.2 automaker narrowly averted bankruptcy in 1999 by government bailout. Now in the hands of domestic creditors, it prepares to head to the auction block. Ford and GM hope to be the lucky winner of this unlikely object of desire.

Renault SA says it is interested in purchasing the assets of Samsung Motors Inc., a one-car, one-plant bankrupt company that proved to be a short-lived, bad idea by South Korea's powerful Samsung Group.

On the surface, neither automaker seems like a prized possession. Daewoo Motor has carried a debt load as high as $16 billion. The interested foreign contenders themselves still aren't sure if jumping into Korea is a good idea - and the answer seems to be getting foggier by the day as foreign automakers get first-hand experience about South Korea's whimsical and protectionist business practices. But these major automotive players think access to Korea is worth their best shot.

"What we really don't know is much about the Daewoo situation," says Ford Chief Financial Officer Henry Wallace. "But we think we owe it to ourselves, we owe it to our shareholders that we go and look and see if there are opportunities."

The benefits, the automakers say, could play out to be enormous for the first Western company to penetrate the highly protectionist country. Korea is a vital car market, second in size only to Japan in Asia. Last year, in an economy still emerging from Asia's financial crisis, South Korea sold some 910,000 automobiles. It's worth noting that foreign automakers sold only 2,401 cars in Korea, a mere 0.2% of total market share. The only logical way for foreign car companies to access a projected sales volume of 1 million-plus units this year, then, is to operate in conjunction with homegrown badges. Purchasing a company, they hope at a fire-sale price, would open all doors. The U.S. or European companies have an edge over any Japanese automaker due to historical bad blood between the two Asian nations.

Korea also is geographically well positioned in Asia, projected to be the largest growth market over the next few years. GM has targeted a 10% market share by 2005 for all of Asia; it could hit its bull's eye with ownership of Daewoo, which sold 245,908 units domestically in 1999.

Ford, which relies heavily on its controlling stake in Mazda Motor Corp. for its Asian business connections, feels pressure to keep up. Either of the Big Two could use the conveniently located Asian nation as an export base for the rest of the region. Korea easily can ship product to key markets and can reach China by train. "Daewoo's strength lies in those areas where growth is most likely to occur," says a Ford spokesman.

Given that these companies want to create a strong presence in the region, it would take a lot less effort to buy capacity than build it. Daewoo has five domestic plants and 12 more outside of Korea, including a highly desirable assembly plant in Poland. In the country as well as the continent, the Daewoo name carries far more brand equity than a Ford or a Chevy, and the automaker builds a wide range of products.

A GM-Daewoo alliance makes the most sense because Daewoo has small-car strength, which GM lacks, says Ashvin Chotai of Standard and Poor's DRI Global Automotive Group. Daewoo also has synergies with Suzuki Motor Corp., 10%-owned by GM.

Samsung has a plant in South Korea's Pusan that makes one vehicle, the Maxima-like SM5, built with Nissan Motor Co. Ltd. technology. Pusan's citizens have staged rallies to keep the plant running, and its mayor is courting Renault to purchase the plant and keep the people employed. So, obviously, finding a willing workforce need not be a concern for the interested companies.

Foreign automakers have plenty of reasons for wanting to dive into these uncharted waters. The access, plants and vehicles, however, all come with a hefty price tag. And for GM or Ford, that sum could be in the billions of dollars. Daewoo's creditors already have rejected a bid from GM, which originally had exclusive negotiating status for the automaker, rumored to be as high as $6.2 billion. That this bid was rejected and Daewoo now is going to auction means that the price can only go up.

In the automotive industry, $6.2 billion - almost half of GM's cash reserves - could go a long way. For example, Ford bought the much larger, much stronger Volvo Cars in 1999 for $6.45 billion. GM in February announced it was building a new multi-vehicle plant in Lansing, MI, from the ground up for only $500 million. There are other countries in Asia, such as Thailand, that could serve just as easily as an export base and keep the door wide open to foreign automakers.

The price of doing business in Korea clearly is more than monetary. Korean negotiating processes have proven to be unpredictable and certainly do not favor foreign companies. And this Daewoo round, now in a holding pattern while the creditors fumble to find a date for the auction, does not seem off to a good start. GM Chairman John F. Smith sums up the situation: "The longer they delay, the worse it gets."

GM feels spurned over the negotiations. Last fall it was given exclusive bidding rights to Daewoo and hoped to seal the deal by the end of 1999. GM had a long-standing partnership with Daewoo, in which Daewoo made the Pontiac LeMans for the U.S. market. Former GM affiliate Delphi Automotive Systems still has several joint ventures with Daewoo subsidiaries in Korea and elsewhere. Despite this history, GM's $6.2 billion bid was rejected, and the creditor banks opened the playing field to other interested automakers.

GM found out about this dramatic change of plans just like everybody else - by reading the newspapers. "We're very disappointed, obviously," says Rudolph A. Schlais Jr., president of GM Asia/Pacific. "We've worked in good faith and put a lot of time and effort into (the question of) how do you make Daewoo a viable company. And then to hear in the news that this is what their intent is." Mr. Schlais nonetheless adds that Korea is a vital market, and GM intends to enter it - if not through Daewoo, through another avenue.

Mr. Chotai says a main pitfall of doing business in Korea is the length of the negotiation process, which in this case hit a snag regarding Daewoo's worth. "One of the reasons there was such a difference in valuation was because there were a lot of hidden liabilities in Daewoo's books," Mr. Chotai says. "Daewoo is like that. There are skeletons everywhere."

When the exclusive negotiations hit a roadblock in early January, Ford seized the opportunity to dive in - a move critics say may have been an effort to go through the due-diligence process on Daewoo and access financial statistics that very likely could be rolled into their largest competitor.

Yet, Ford has gotten burned in Korea, giving ample reason to wonder why it would ever again consider negotiating on Korean soil. In a scenario Ford should find dauntingly similar to its current situation, the No. 2 automaker jumped into the auction process in 1998 to purchase Kia Motors Corp., of which it held a 10% share, after the government saved Kia from bankruptcy. After investing a good chunk of change going to the wire as the preferred bidder, Ford got passed over for hometown favorite and No.1 Korean automaker Hyundai Motor Co. Ltd.

There's no saying history won't repeat itself. Hyundai, which now dominates the domestic car market, has expressed interest in purchasing all or part of Daewoo, is especially interested in its Poland plant, and has expressed opposition to foreign ownership of Daewoo. Any foreign competition could deflate Hyundai's soaring sales.

At the heart of this issue is the Korean government's plans to end the chaebol, or conglomerate, system, and its government protection. Daewoo Motors landed itself in its current beleaguered state because its parent, Daewoo Group, a chaebol consisting of some 22 companies, got too unwieldy and toppled, due to long-term effects of the Asian financial crisis.

Korea has pledged to disassemble the chaebol system to create a more manageable, more stable "Korea Inc." It would be a mistake to sell Daewoo to Hyundai, which, with its Kia purchase, has two-thirds of the automotive market. A 100% monopoly of the market could create another potentially dangerous financial situation, which could lead to failure of South Korea's entire automotive industry - the world's fourth-largest.

"For Ford or GM, the rewards far outweigh the risks. If it's Hyundai, the risks are too severe," Mr. Chotai says.

There are reasons to hope, however, that Korea's promises of reform are sincere. Korea's business world, especially the Daewoo Group, has been through hard times - hard enough, in fact, to reinforce the idea that it's time to build a better mousetrap. If Korea does not follow through on its promises of reform, the country, which is trying to step up foreign direct investment, could suffer a backlash from foreign players, Mr. Chotai says.

Also, the pressure is on to open Korea's doors. Both the European Automobile Assn. and the Automotive Trade Policy Council recently blasted Korea for its strong protectionist stance, calling on the government to welcome foreign participation.

The sales of Daewoo and Samsung will be the first real tests for Korea to stand by its vows to open the market and dismantle the chaebol. Then, if the price is right, the highest bidder may have its hands on the automotive world's holy grail and a strategic corner of the Asian market.

Let the bidding begin.