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The Ministry of Trade, Industry and Energy (MOTIE) and GM held an MOU signing ceremony on May 10 in Seoul to normalize GM’s operations in South Korea. Minister of Trade, Industry and Energy Paik Ungyu (center) Barry Engle (right), Executive Vice President at GM and head of its international arm, pose for a photo after the signing. (Yonhap News)
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GM to set up Asia-Pacific regional headquarters in South Korea
As part of a deal reached by the South Korean government and the Korea Development Bank (KDB) in negotiations with the GM corporate headquarters in the US to normalize business operations at GM Korea, GM will set up an Asia-Pacific regional headquarters in South Korea. Seoul has agreed to provide financial support for R&D projects by domestic parts suppliers and GM to increase its global parts purchases. Through the deal, GM underlines that it is committed to investing and producing vehicles in South Korea, while Seoul provides support to reinforce GM’s commitment. But it remains to be seen how substantial these measures are, experts say. During a meeting of ministers connected with strengthening industrial competitiveness that was held on the morning of May 10 at the government office in Seoul, Kim Dong-yeon, South Korea’s Deputy Prime Minister and Minister of Strategy and Finance, discussed the results of the negotiations with GM Korea and the plan to provide support for the affected regions and for the parts industry. Kim also called for this funding to be swiftly allocated through a supplementary budget. “The organization conducting the due diligence found that it will be possible to normalize operations and sustain the company in the long-term while gradually improving the ratio of cost to sales and operating profits, provided that competitive new cars are assigned [to GM Korea] and that an effort is made to reduce fixed costs,” Kim said in a press conference held after the meeting during which he announced the deal that was reached, including the establishment of GM’s Asia-Pacific regional headquarters in South Korea. This deal also finalized a relief package of US$7.15 billion altogether, with GM providing US$6.4 billion and the KDB providing US$750 million, which was announced last month. GM Korea’s rehabilitation plan can be summarized as a swap between subsidies by the government and the KDB, and GM’s commitment to the long-term operation of GM Korea as an independently viable company. Toward this end, the government agreed that next year it would start providing tens of billions of won to South Korean parts suppliers to research and develop parts for future vehicles through an MOU about cooperation between the Ministry of Trade, Industry and Energy and GM. And if GM revises its investment plan and reapplies for designation as a foreign-invested firm, the government agreed to review this within the bounds of the law. GM agrees to not pull out of South Korea in next 10 years In addition to massive loans and investment, GM accepted rules that prevent it from pulling out of South Korea within the next decade. These rules give KDB (the second largest stockholder in GM Korea with a 17 percent share in the company) the right to veto sales of company stock that amount to a share of 20 percent or more. For the next five years, GM is completely prohibited from selling company stock, and during the five years after that, it must hold at least a 35 percent share and maintain its status as the largest stockholder. It also agreed to make South Korea the home of its Asia-Pacific regional headquarters, which has a say in global plans and assignments for GM cars. The Asia-Pacific regional headquarters was originally based in Singapore until its functions were shifted to other headquarters following GM’s withdrawal from Australia and other markets in the area. As a result, it is not immediately obvious how meaningful a role this headquarters will play after it is set up in South Korea. Following the due diligence, the South Korean government concluded that the cause of the accumulating losses at GM Korea was the decline in global export volume and excessive fixed costs, including personnel costs. Amid a reduction in global export volume, GM Korea’s production volume was nearly cut in half, from 940,000 units in 2007 to 520,000 units last year. In contrast, personnel costs rose from 1.1 trillion won (US$1.03 billion) in 2007 to 1.65 trillion won (US$1.54 billion) in 2017. Negotiations between labor and management have produced a plan to cut personnel costs by 3.7 trillion won (US$3.46 billion) over the next decade. As for the debate over the high ratio of cost to sales, which was a key target of due diligence, no problems were found with “transfer prices,” and the investigation’s ultimate recommendation was to reduce fixed costs by lowering personnel costs and the interest rate on loans from corporate headquarters. GM Korea’s ratio of cost to sales in 2016 was 93.1 percent, which was about 10 percentage points higher than the average among South Korean automakers (81.3 percent) as well as GM North America (84 percent). For this reason, the KDB had announced that it would focus its due diligence on the transfer price of parts that the GM corporate headquarters sold to GM Korea, the appropriateness of the interest rate on loans, and personnel costs. But the findings of the due diligence announced by the government and the KDB were that transfer prices and other transactions were similar to those with other affiliates and that they corresponded to global standards. However, GM agreed to ease the company’s financial burden by lowering its interest rate on loans from 4-5 percent a year to around 3.5 percent. “It’s true that the ratio of cost to sales at GM Korea is higher than at its competitors, but our understanding is that this will fall to levels similar to its competitors between three and five years,” said KDB Chairman Lee Dong-geol. “There is some significance to GM’s establishment of its Asia-Pacific regional headquarters in South Korea and its expansion of global parts purchasing, as well as the government’s subsidization of R&D by domestic parts suppliers. But as for whether the establishment of the regional headquarters, which never had much of a role, will mean very much and whether the expansion of global parts purchasing is more than just an empty promise, we’ll have to keep a close eye on developments moving forward,” said Kim Pil-su, a professor of automotive engineering at Daelim University College. By Jung Se-ra, staff reporter Please direct comments or questions to [english@hani.co.kr]
