Sales, Production Show GM Korea Too Efficient to Fail

While they can’t say it in public, Korea’s automakers breathed a huge sigh of relief after the Supreme Court of Korea ruled on a worker’s lawsuit demanding his employer include bonuses in his regular pay calculation, then repay him for the shortfall in his wages the previous three years.

The Supreme Court issued its Dec. 18 ruling en bloc, meaning all 13 justices concurred. This is an unusual action taken only when a matter has significant, wide-ranging implications, and gives a “once and for all” finality to the issue.

The justices ruled bonuses must be included in determining a worker’s regular wages. But in part two of the ruling, they said workers may not seek past underpayments, if their claims might hurt their employer.

Each of Korea’s biggest automakers – Hyundai, Kia and GM Korea –are under the gun with several worker lawsuits claiming underpayments because bonus amounts were not figured into their overtime pay.

GM Korea lost two such suits in 2012. A lower court ordered the automaker to recalculate worker wages to include bonuses in determining overtime payments and severance packages, and to repay the resulting shortfalls going back three years (the statute of limitations in Korea).

A stunned GM Korea appealed the ruling to the Supreme Court, but also set aside 814 billion won ($745.6 million) to settle the unpaid-wages claims in case they lost the appeal. The appeals still are pending.

The contingency reserve wiped out all profits and caused a loss for 2012 of 340 billion won ($307 million).

Now some GM Korea insiders are saying last month’s Supreme Court ruling may alleviate the automaker’s grave financial situation.

That is because beginning this month, GM Korea adopted a back-to-back 2-shift day system that essentially does not include overtime pay. With that system in place, figuring bonuses into the basic pay package has little effect and loses its sting.

Previous working arrangements included overtime on all shifts and premium pay for overnight work.

While severance payments to retiring workers will be higher because of the ruling, day-to-day wages at GM Korea may well remain virtually unchanged under the new system.

The catch is that GM Korea must prove any backpayment of wages would endanger, or cause  severe hardship, to the company. That shouldn’t be hard to do, since the withholding provision in 2012 turned the automaker’s biggest profit into one of its biggest losses.

But none of the automakers can cheer publicly about the Supreme Court ruling that makes it difficult for workers to claim back overtime-pay shortages. To benefit from the provision, the employers must prove harm from paying the shortfalls retroactively, so the dispute is not behind them.

GM Korea, for instance, tells WardsAuto officially that “(parent General Motors) and GM Korea are concerned that the issue will have a serious impact on the company’s financial performance and sustainability of its future competitiveness.”

Stories swirling around in the Korean news media, and even worldwide, predict a dire future for GM Korea, in part because of the labor situation. Some reports have gone as far as to say GM is pulling out of Korea, a notion dismissed by serious analysts. GM Korea has a solid record of producing quality vehicles profitably.

One of the unlikely scenarios has GM transferring production in Korea to China. All of GM’s joint ventures in China, however, have capacity problems and are engaged in brick-and-mortar or process expansion to keep up with strong market demand.

A pullout also would strengthen the home market for the powerful Hyundai Automotive Group, whose Hyundai and Kia marques are a painful thorn in GM’s side in every world market.

“There is no plan to downsize the company and there is no plan to transfer any production to China,” GM Korea spokesman Hae-ho Park says in an interview. Growth in the Chinese market in fact means opportunity for GM Korea in the form of increased CKD exports, he says.

The second main source of the rumors and speculation is GM’s own announcement that it will stop selling Chevrolets in Europe by the end of 2015. Chevrolet Europe is a wholly owned subsidiary of GM Korea, which exports nearly 30% of its completely built-up units to the region.

Exports accounted for a little more than 80% of GM Korea’s CBU sales of 780,518 vehicles in 2013.

By consolidating the old Daewoo Motors’ sales operations in various European nations, GM Korea (earlier called GM Daewoo Auto & Technology) was able to build an enormous export business in Europe within just two years of its formation in 2001.

Despite the uncertainty surrounding the effects of Chevrolet’s pullout from Europe, anyone familiar with the operations of GM Korea, and with all of GM International Operations, need not look only at the Korean subsidiary’s balance sheet to determine its value to the automaker.

While GM Korea is capable of earning respectable profits, as it would have in 2012 (2013 figures won’t be released until April), there are several other measurements of the company’s true value.

Complete-knocked-down operations, which employ just 500 workers, are not stellar earners for GM Korea, but the 1.3 million CKD car kits exported from Korea each year are a lifesaver for many GM operations around the world. Without the CKD exports, GM wouldn’t have its foot in the door in many of the markets it serves.

The CKD exports also make vehicle production for GM’s partners in the importing countries economical. It is possible for GM Korea to lose money through CKD operations, yet GM’s importing operations could be more profitable because of it.

For example, GM Korea has been exporting CKD kits of the former Lacetti for many years. It has proved so popular in China, where it is sold as the Buick Excelle, that consumers there won’t let Shanghai GM retire the model, though it wanted to.

In 2013, 296,183 units of the legacy brand Buick Excelle were sold in China. GM Korea shipped 361,376 CKD kits to Shanghai GM, and most of them were assembled as Excelles. In other words, China’s best-selling compact sedan is produced in Korea and CKD-assembled in China,  though Shanghai GM doesn’t like to acknowledge it.

One GM joint venture in China, SAIC-GM-Wuling, of which 44% is owned by the parent company in Detroit, uses Lacetti kits for its all-China “homegrown” Baojun 630 sedan. It also produces the third-generation version of GM Korea’s Chevrolet Spark, which is marketed as the Baojun Lechi.

SAIC-GM-Wuling is by no means a fringe player. In 2013 it accounted for 1.48 million of the 3.16 million sales by all of GM’s Chinese JVs.

GM also owns 25% of the GM Uzbekistan JV in Uzbekistan, where it ships CKD kits for virtually all of the vehicles both sold in that Western Asia country and exported to Russia.

In 2013, GM Korea shipped 251,916 CKD kits, mostly an early version of the Chevrolet Spark, to Uzbekistan. There is more than a 1-year wait to buy one.

Also in 2013 GM Korea shipped 33,492 CKD kits to the Orion, MI, plant in the U.S. for assembly as the Chevrolet Sonic. Another 220,420 CKD kits were exported to GM Mexico and 97,824 kits went to Brazil and other South American markets.

Park notes new CBU-vehicle export opportunities could arise in Australia when GM Holden ends production there in 2017. However, this will be offset by the loss of roughly 20,000 CKD kits GM Korea has been exporting annually to Australia.

The spokesman also waves off conjecture in local news media that GM Korea’s 250,000-vehicle capacity Gunsan facility soon may close. He acknowledges the plant, which produces the Cruze, Orlando and Lacetti “legacy model” that is for export only, is operating only at 60% capacity. However, he says operations are being balanced companywide, including some worker transfers to high-volume plants that are at capacity. Other adjustments are planned.

The two plants in Bupyeong are running at capacity turning out the Malibu, Captiva, Alpheon, Opel Mokka, Traxx and Encore. The Changwon plant, which produces the Spark, is running at “more than capacity.”

Changwon also will resume production of mini-commercial liquefied-petroleum-gas-powered Damos vans and Labo trucks in second-half 2014, having obtained a 5-year grace period to meet Korea’s new emissions requirements.

GM Korea will continue rolling out new and refreshed vehicles, including the diesel-powered Malibu slated for launch in first-half 2014. An all-new vehicle lineup and a new powertrain are due in 2015, Park says.

There has been no change in the 8 trillion won ($7.3 billion) investment plan for GM Korea that was announced early last year. The 5-year plan provides a 60% increase over the previous investment pattern and is capital for new equipment and R&D.

While GM Korea for a fourth consecutive year will launch its voluntary-separation program for salaried employees during the current quarter, no reduction target has been set, Park says. The automaker and the union will discuss the program, which does not affect hourly workers, before it kicks off.

The voluntary separations are aimed at better balancing the white-collar workforce with the realities of the business. Its burgeoning ranks are a large holdover from the old Daewoo Motors days and something that needed correcting, a company source tells WardsAuto.

While the automaker seeks to reduce white-collar jobs, Park says GM Korea’s design center still is at full strength with 200 designers and support staff, and that the advanced-design center in Seoul is in full operation.

The expanded vehicle-design center in Bupyong is close to completion and should be functioning soon, he notes.

However analysts and media look at it, and despite the emotions stirred by the annual labor talks, GM Korea is an important and integral part of GM.