Union Fears Korean Production Contractions Signal Change in GM’s Global Strategy

Union negotiators were taken aback last week when GM Korea CEO Sergio Rocha disclosed new product-development plans have been changed and that the next-generation Chevrolet Aveo/Sonic small car due out in 2016 will not be built in Korea.

Instead, the car will be produced in the U.S. and China, where it enjoys stronger sales, Rocha is quoted as saying by a source knowledgeable about the conversation. The CEO points to a recent company survey that finds it would be too costly to build the Aveo in Korea, where it does not sell well.

But the union is suspicious based on the belief that GM Korea is trying to downsize the company, the source says. This is apparent in recent employee early-retirement buyout offers and the fact the auto maker is not replacing the workers it is losing through the natural retirement process.

Management declines to discuss the matter, issuing a statement to WardsAuto that says in part, “Decisions are based on a comprehensive business case to deliver top-quality vehicles as cost-effectively and quickly as possible.”

The loss of the Aveo/Sonic will not have a huge impact on jobs in Korea, the source says. GM Korea will continue to build the current model for domestic consumption and some overseas markets.

Parent General Motors announced in February it was investing $7.3 billion in Korea over the next five years to focus on mini- and small-car development and powertrains. Included will be the doubling in size of the subsidiary’s design center in Bupyeong to be completed by the end of the year. The auto maker also will step up the export of complete-knocked-down kit assemblies.

But the Aveo’s withdrawal from local production, following news that the next-gen Cruze will be built elsewhere and recent reports that other models may be transferred to Europe, has union members worried about the future of GM Korea as a manufacturer.

What’s more, the union appears to have little say in its fate. The local branch of the militant Korea Metal Workers Union is powerless to take any action, the source says.

“They are very unhappy about it, but say this business matter is determined by General Motors International Operations. But GMIO says the local union can negotiate only with GM Korea management,” he says. The union can’t strike because it is outside of the collective-bargaining negotiations and would be deemed an illegal action.”

So what’s in store? The tea leaves are hard to read, but a trend does seem to be emerging.

The Aveo is not popular in Korea, selling fewer than 300 units a month, the source says. It accounts for only about 30% of production at Bupyeong Plant 1, with some 70% of output dedicated to the Chevrolet Trax, Buick Encore and Opel Mokka small cross/utility vehicles.

The loss of the next-gen Cruze, which is slated for 2015, will have more impact on jobs than will the Aveo. However, a German newspaper report this week is giving the union new worries that one or all of the three CUVs may be moving to GM’s plant in Zaragoza, Spain, to fill capacity and end supply constraints on the models that are selling well in Europe.

The source confirms the media report could have legs. “GM Korea is now working on a project to increase the line speed at Bupyeong Plant 1 to increase its capacity for producing the (CUVs). Management has asked for cooperation from the union, saying if it refuses to cooperate with the plan, the volume will go somewhere else.

GM Korea tells WardsAuto in a statement, “We can confirm that GM has announced it is conducting engineering studies to determine where additional small (CUVs) will be produced beyond the current locations. But we cannot confirm anything beyond that, including speculation related to the Zaragoza plant.

“When there is something to announce, we’ll tell impacted stakeholders first, including our union partners, employees and government officials. Small (CUVs) have grown in popularity in many markets, including Europe. This is one of the fastest-growing segments globally. We are growing our share in that market, and it is always an option to look for ways to make production and capacity utilization more efficient.”

Making Up The Difference

GM Korea is offsetting some potential job losses resulting from the upcoming move of the Cruze and Aveo by transferring production of the Captiva CUV from Bupyeong Plant 2 to the Gunsan facility, which makes the current Cruze. However, the Captiva, including the Orlando model, is a low-volume vehicle and likely will not make up the difference.

There is some good news: GM Korea will get the next-gen Malibu, which will be produced at Bupyeong Plant 2 that is building the current model, while the Changwon small-car factory will build the next-gen Spark.

But negativity among workers prevails. The cancellation of plans to produce the Aveo/Sonic and Cruze in Korea, plus worries over Spain, have added rancor to the current collective bargaining negotiations. GM Chairman Dan Akerson’s remarks to new South Korean President Park Geun-hye last month that wages are too high in Korea only added to the union’s angst.

Rocha is participating in most of the labor negotiations because of what the union calls the abject failure of the GM Korea’s industrial-relations team during negotiations in 2012, the source says. Those talks dragged on for five months, and the auto maker lost substantial production because of repeated strike actions taken by the union to move things along.

This year, the union is standing tough, he says, and so far management has not indicated any concrete response to its demands. Workers are focused on three primary areas: wages, the introduction of a back-to-back shift system and future vehicle-development plans.

The worry is that GM Korea is not replacing workers, the source says. “About 300 employees will leave the company this year and around 2,000 will leave over the next five years, but the company does not show any plan to hire replacement workers.”

Local analysts tells WardsAuto they do not believe the transfer of vehicle production from GM Korea to GM plants overseas would have much impact on the country’s overall industrial picture. Competitors could easily absorb all demand created by the loss of these models.

However, the impact on the nation’s economy if GM Korea was to end or majorly downsize its manufacturing operations would be quite another matter.

The auto maker directly employs more than 11,000 workers, supporting staff and management, which represent more than $500 million in direct payments. Income of in-plant supplier employees and service providers is estimated at close to triple that amount.

Combined, $2 billion in consumer purchasing power would be lost, unless there was an offsetting employment gain by GM Korea’s competitors and their suppliers.

The economic impact in the Incheon region and in Gunsan and Changwon would devastate the local economies as lost production would be picked up by competitors in other regions of the country.

Analysts believe it would all even out long term, but short term it would be a shock to the Korean economic system, which is struggling just to show a 2% gain in gross domestic product this year, despite the country’s enormous export volumes. It would be intolerable to local economies where GM Korea operates, they say.

On a cumulative basis so far this year, GM Korea has been holding its own against all major Korean competitors. However, analysts say the comparative numbers do not take into account that both Hyundai and Kia have lost considerable production and cannot fill orders because their unions refused to work weekend overtime schedules for nine weekends in April and May.

For the year’s first five months, GM Korea’s total output for both the domestic and export markets was flat on a yearly comparison at 331,245 units, according to a June 6 report by automotive analyst Heeguen Chae at Hyundai Securities.

Hyundai’s production for domestic and overseas markets in the same period was off 7.3% from year-ago to 751,741 units, while Kia was down 3.1% to 684,300. Renault Samsung output slid 30% with just 40,700 vehicles produced.

Although it ranks third in domestic sales, GM Korea still has a difficult time making inroads against the competition. May sales were down 9.2% to 11,810 units, while the first five months’ result fell 5% to 55,042.

Hyundai and Kia both saw domestic deliveries decline in May, with Hyundai down 0.2% to 57,942 units and Kia down 2.3% to 39,500. For the five months, Hyundai’s domestic sales inched up 0.6% to 270,063, while Kia fell 3.7% to 188,559. GM Korea’s exports through May rose 1.1% to 276,203 units. Hyundai was down 11.2% to 481,678 and Kia fell 2.9% to 495,741.