GM, Daewoo Iron Out Last-Minute Details

SEOUL -- After 10 months of complicated negotiations, General Motors Corp. and Daewoo Motor Co. Ltd. are poised to sign a memorandum of understanding stating the terms under which the GM and alliance partner Fiat Auto SpA alliance will acquire selected Daewoo assets.

Along with Daewoo’s two most modern Korean car plants, the Daewoo Technical Center and Daewoo Motor Sales’ dealership network, the deal will include manufacturing facilities in Egypt, Vietnam and possibly India, sources say.

The MOU could be signed “momentarily,” informed sources tell Ward’s Automotive International. Only minor details remain to be worked out. GM will either create a new company to acquire the assets or have them absorbed by the existing General Motors Korea entity. GM Korea imports, wholesales and services Cadillac and Saab brands through a small chain of Korean-owned dealerships.

The transaction involves no payments to creditor banks, which are owed in excess of 9 trillion won (US$6.9 billion) by Daewoo, whose total debts amount to some 22 trillion won (US$17 billion). However, GM will give creditors slightly more than US$1 billion in highly conditioned special preferred stock in a new company to be formed. It will be redeemable by GM at a later date if certain performance and profit objectives are met.

This is a public relations ploy meant to placate the Korean public, which is generally hostile to GM acquiring Daewoo for nothing. GM had initially proposed paying this amount out of future operating profits of the new company, provided that certain productivity and profitability targets were met within a stipulated time frame.

The latest plan sticks to this arrangement in principle. However, the creditor banks will now “be given paper to hold, which the new company may buy back in the future if its targets are met,” sources say. If preferred stock is issued, it has no voting rights and is subordinated to common stock. In other words, it gives the creditor banks no equity position or voting position in the new company.

While GM is putting up no money to acquire the Daewoo assets, it will invest some US$400 million in cash into the new company. This will be operating cash that will finance initial operations. It also is the identical amount Renault SA paid when it acquired Samsung Motors Inc.’s assets last year.

The South Korean government, through the Korea Development Bank (KDB), will also contribute US$200 million, increasing total operating cash to US$600 million. The asset value of the new company, once Daewoo’s physical assets are transferred, will exceed that amount several times over.

The assets to be specified in the MOU include Daewoo’s highly productive vehicle plants in Kunsan and Changwon. Kunsan produces Rezzo compact sport/utility vehicles and Nubira II compact cars. It has an annual capacity of 300,000 units on two shifts, although it currently operates only one shift.

Changwon has an annual capacity for producing 230,000 Matiz minicars and 10,000 Damas and Labo minivans on a two-shift basis. It currently operates at well above 90% of its capacity. In August, the plant exceeded management’s monthly production target by nearly 40%.

GM will not acquire Daewoo’s assembly plants at Bupyeong. The plants produce engines, transmissions, suspension systems and body systems. They also house the company’s two car assembly lines, with annual capacity of 500,000 units of Lanos and Leganza midsize and Magnus full-size cars, when operating flat out on two shifts.

The car lines have been operating at less than half capacity on a one-shift basis for many months. However, Daewoo says the Bupyeong facilities achieved an operating profit in August. While it will not acquire the facilities, GM will purchase the output from all of the Bupyeong plants for a certain number of years.

Sources say the time frame discussed stipulates a range of from four to six years. To make the Bupyeong deal seem more palatable to Daewoo’s labor unions and the 5,500 plant employees who work there, GM has thrown in a political sop.

It will have an option to acquire the plants at some later date, although the company now wants no part of owning these facilities. The Bupyeong car plants have low productivity, over manning and their labor unions have been fairly volatile.

KDB and Daewoo negotiators had wanted GM to take over “temporary” ownership of the plants, with the provision that it could divest them at a future date without incurring any kind of penalty. GM declined to accept that proposal and countered with the purchase option language instead.

The Bupyeong complex also houses Daewoo Motor’s world headquarters and the Daewoo Technical Center. Of Daewoo’s total of 15,353 employees in Korea, nearly 9,000 work at Bupyeong. GM will rent (or become entitled to use), but not acquire, some of the Bupyeong administrative facilities. This includes Daewoo’s world headquarters buildings, which are located within the complex and house some 2,000 white-collar employees.

Importantly, GM will acquire the Daewoo Technical Center, which has been called by GM Asia/Pacific President Rudy Schlais “a super facility.” The center employs 1,300 scientists, engineers, technicians and supporting staff. It has in its pipeline three new car models and one new engine, which are considered by analysts to be essential to maintaining the automaker’s product viability and competitiveness.

One of the cars, the T-200, was shown at this month’s Frankfurt International Motor Show. It has the temporary name of the Kalos Dream. It’s a 5-door compact hatchback, with an engine range of1.2L to 1.6L, and is scheduled to debut sometime in 2002.

Another new offering is the J-200, an intermediate hatchback, which will be produced at the Kunsan plant on the present Nubira II line. A third offering is the P-100 large-size luxury car, powered by a 2.5L V-6 engine. That project was put on hold last year.

The new 2.5L engine program has continued, however, and Daewoo sources say it could be in production by year’s end. The engine has strategic importance, as it will replace the Magnus model 2.5L that Daewoo currently imports from GM’s Holden Ltd. subsidiary in Australia.

Daewoo’s apparent lack of new product has been of concern to security analysts who follow the bankrupt company. Unless these new products quickly find their way into the market, Daewoo sales will plummet even further, they believe.

Daewoo Motor Sales Co., the marketing and sales arm, is lobbying energetically to be included in the overall deal. Sources say GM does not wish to acquire the company but has not totally rejected its appeal. GM would hold or acquire the sales contracts the sales arm has with existing dealerships. Sources say there is no reason for GM to acquire physical dealership assets, although this has not been completely ruled out.

GM also is including three overseas Daewoo affiliate car companies in the deal, in which it would acquire Daewoo stock but not the physical assets or direct liabilities, thus limiting its exposure to that of a shareholder. It is highly likely that only two of the offshore companies, Daewoo Motor Egypt Co. Ltd. and Vietnam-Daewoo Motor Co. Ltd., will be included in the MOU.

GM wants to acquire the stake held in Daewoo Motor India Ltd. as well. However, the facility currently has legal complications that have to do with the amount of stock actually held by Daewoo versus that held by Daewoo Corp, Daewoo’s former corporate parent. Until the legal problems are ironed out, Daewoo’s India operations are sidelined.

The overseas subsidiaries fit nicely into GM’s plans. India is a market of enormous potential. Vietnam is an assembler of completely knocked-down vehicles but has high regional potential, and Egypt gives GM a good position in the Middle East. Analysts note that rival Hyundai Motor Co. Ltd. has a hungry eye on all of these facilities and would step in eagerly if GM declined to include them in the deal.

Daewoo India’s stock is 91.6% owned by Daewoo Motor. Its Naida plant has an annual capacity for 72,000 passenger cars and 240,000 engines and 240,000 transmissions. The company has 2,000 employees and produces Matiz minicars and Ciero compact cars. It was initially capitalized at US$147 million.

Vietnam-Daewoo Motor’s Hanoi plant, initially capitalized at US $10 million, is 65% owned by Daewoo. It is an assembler of partially knocked-down vehicles exported from Korea. They include the Matiz, Lanos, Nubira and Leganza passenger cars and full-size passenger buses. It has capacity for assembling 20,000 cars and 2,000 buses annually.

Daewoo Motor Egypt’s plant is located on the outskirts of Cairo and produces the Nubira, Lanos and Leganza models, which are shipped in CKD kits out of Korea. The company has 1,048 employees and was initially capitalized at US$27 million. Daewoo holds 60% of the stock.

Much remains to be done after the MOU is signed. GM, for example, has yet to complete a detailed accounting due diligence on the Daewoo assets, which sources say should take three to four months. At the same time, GM and Daewoo will have to negotiate a definitive agreement.

While the MOU spells out general conditions that are acceptable to both sides, the details must be adjusted. Data uncovered or found to be insufficient during the due diligence could have a bearing. The conditions agreed to by both sides also must be translated into binding legal language in English, Korean and Italian -- no small task when three different sets of law are being applied.

That the road ahead may not be smooth was demonstrated this week as Daewoo was forced to shut down production at some of its passenger-car assembly units. Suppliers refused to deliver components and parts for a 24-hour period, deliberately calculated to shut down the company’s operations.

Their grievance goes back to promises made to them many months ago by Daewoo’s chief creditor, the KDB, which promised to pay 122.3 billion won (US$95 million) out of the 1.4 trillion won (US$1.08 billion) total owed to them by Daewoo. That was supposed to happen in May, and the suppliers still are waiting for their money.

“We’re not trying to block GM from taking over Daewoo Motor or to interfere in the negotiations,” a supplier spokesperson says. “We just want to make sure we receive our money before the company’s assets are handed over to somebody else.” o