GM Korea Reverses Wage Contingency, Adds $577 Million to Bottom Line

GM Korea spokesmen are prone to dance around questions about this year’s labor negotiations and whether the automaker will follow an apparent Supreme Court of Korea precedent and include various bonus payments in its regular wage calculations.

But the parent company’s official filings with the U.S. Securities and Exchange Commission are perfectly clear on the matter.

GM Korea’s accountants, as well as those at GM International Operations and parent GM in Detroit, already have made up their minds GM Korea may be liable for a high charge caused by refiguring wage rates under a new labor agreement.

However, they apparently also have concluded the automaker will avoid the worst-case scenario and escape liability for making the payments retroactive for the statutorily limited 3-year period demanded by unions and workers who have sued the company.

In GM’s highly detailed 10k SEC filing in advance of its annual report to shareholders, the automaker asserts it will not have to make the retroactive payments if it is required to recalculate wages.

The 10k states that since 2010, eight separate wage-deficiency-claim lawsuits have been filed by workers or retired GM Korea workers in the Incheon District Court.

The 10,000 employees covered by the suits say the company owes them money for past overtime and other payments, because they were calculated on wage rates that did not include the substantial bonuses traditionally awarded to workers under each new wage agreement.

Under prevailing Korean statutes, if the claims were proved, GM Korea could be liable to make retroactive payments at the higher recalculated rate that goes back for three full years.

The Incheon court ruled in favor of the workers in some of the GM Korea suits and the cases then went to the Seoul High Court (an intermediary court), which also ruled in favor of the workers.

GM Korea’s lawyers challenged the rulings in the Supreme Court of Korea, but the case still has not been heard.

However, a Supreme Court ruling in a similar case involving an unrelated climate-systems supplier, KB AutoTech, has been definitive enough to convince GM Korea that while it may have liability to adjust wages under a new agreement, it will not have to make any retroactive payments.

In fact, in calculating its 2013 earnings, GM Korea has reversed a huge 746 trillion won ($711 million) special accrual that was set aside to cover this contingency in 2012.

That contingency robbed GM Korea of its most profitable year ever, requiring the automaker to book a substantial 2012 loss.

Of the total, GMIO has posted a credit for $577 million to its 2013 income, which is a pro rata portion of the accrual reversal, representing 77% of GM’s ownership of GM Korea. This amount has passed through as a positive $577 million to parent GM.

Supplier Court Case Influencing GM Roadmap

In its 10k filing GM cites the Korean Supreme Court’s ruling in KB AutoTech’s case, saying it believes that decision “is favorable to GM Korea.

“In particular, while the Supreme Court held that fixed bonuses should be included in the calculation of ordinary wages, it also held that claims for retroactive application of this rule would be barred under certain circumstances.”

The Supreme Court ruling in the KB AutoTech case has been widely interpreted by lawyers to mean a company can dodge the retroactive payments if it can show they would inflict an extreme hardship.

GM thinks this applies to GM Korea and frees it from more than half of the amount it had reserved to cover its potential liability.

“We believe the Supreme Court’s reasoning is applicable to GM Korea, even though GM Korea’s case remains pending before the Supreme Court,” the 10k note states. “Accordingly, we have eliminated the accrual associated with these cases.

“In the year ended December 31, 2013, we recorded a net reduction of our accrual of 746 billion South Korean won ($711 million) to automotive cost of sales (77% of which is reflected in our net income attributable to stockholders based on our ownership interest in GM Korea).”

Apparently all GM entities have conceded GM Korea may have to refigure wages based on the December Supreme Court ruling, however.

In its 2013 10k filing with the SEC, GM states that although the special contingency reserve has been reversed to reflect retroactive payments probably will not have to be made, GM Korea has set up a 2013 reserve of 632 billion won ($599 million) to compensate for any potential losses arising from recalculation of wages.

It also has set aside an additional 165 million won ($156 million) to cover possible losses arising from another wage matter.

Wage Dispute May Impact Labor Talks

While GM Korea spokesmen are evasive on how the December KB AutoTech Supreme Court ruling might impact soon-to-begin labor negotiations with the automaker’s workers union, GM Korea president and CEO Sergio Rocha does not duck the matter.

On March 6, the day Rocha unveiled the new Chevrolet Malibu diesel variant in Korea, he told reporters the single most important problem facing GM Korea this year was successful and peaceful resolution of a new contract with the workers union, devoid of strike action.

Rocha said even though the Supreme Court ruling in the KB AutoTech case could make things difficult, he was optimistic the company and union representatives could come agree upon a productive approach for conducting the negotiations.

He successfully won union cooperation in recent months when GM Korea downsized the workforce at its underutilized plant in Gunsan, placing it on a single shift.

Most security analysts believe the Supreme Court ruling in the KB AutoTech lawsuit is a game-changer for Korean business.

The same possible liability to recalculate wages by including previously excluded bonus payments impacts all five of the country’s automakers, as well as other companies in Korea.

The “undue hardship” escape language gives them a way to avoid the much more costly prospect of back-paying three years of recalculated wages.

Every automaker in Korea has considered the impact of the court ruling in its overall planning for 2013 and the years ahead.

Analysts warn increased pay for the workers resulting from recalculated wages is not necessarily a victory for them.

They note higher pay must be accompanied by improvements in productivity, or else the company that employs them must increase product costs and become less competitive.

Rocha said in March that recalculated wages will represent a substantial increase in costs for the entire industry. It would be significant enough to impact their competitiveness, he told reporters, and said a company that is not competitive is not sustainable.

Analysts point out all five Korean automakers are highly dependent on overseas export sales, and a rise in product prices to offset the increased labor costs could seriously impact their competitiveness overseas. In some cases this could trigger a strategy to produce more vehicles at plants abroad than in Korea, they say.