Financially distressed GM Korea has avoided bankruptcy after a tentative agreement with its labor union but it faces a long and bumpy road to normalization.
Under the deal, the South Korean unit of General Motors scrapped a plan to lay off the 680 remaining workers at its factory in Gunsan, North Jeolla Province, which is scheduled to be closed in May. It will implement a voluntary redundancy program and transfers to other plants. The union accepted the company’s request to freeze base wages and skip bonuses for this year as well as trim benefits.
The government has some influence on the deal to prevent the company from going bankrupt, but criticism that it bent the rules on restructuring to listen to the foot-dragging labor union is unavoidable.
When labor negotiations passed the deadline set by GM, the government intervened immediately. The deadline was pushed back by three days, and the deal was made. GM Korea tried to file for court-managed bankruptcy protection but dropped the plan. The state-owned Korea Development Bank, GM Korea’s second-largest shareholder, said that it would deal with the issue by the principles of restructuring without allowing any party to drag on, but detracted from the principles of its own accord.
GM proposed converting the $2.7 billion it lent to GM Korea into equity, investing $2.8 billion in GM Korea and allocating two new models to its plants in Bupyeong in Incheon, and Changwon in South Gyeongsang Province. GM also demands the KDB extend a fresh loan worth 500 billion won ($464 million) to GM Korea and that the government should designate the Bupyeong and Changwon plants as foreign investment zones that can receive investment incentives including tax reductions.
The KDB’s fresh loan and incentives from foreign investment zones come from taxpayers’ money. People do not pay taxes in order to revive a near-bankrupt private company in the free market economy. The government must reconsider its way of thinking that its job is to heed the voices of labor unions and resolve problems with taxpayers’ money.
It is questionable whether corporate restructuring funded by taxes will help businesses stand on their own. Taxpayers’ money will be wasted if GM closes its South Korean operations eventually after spending the money on redundancy payments and other restructuring programs.
GM is reportedly considering running its South Korean unit for at least 10 more years. The KDB and the government must keep an eye on whether GM will keep its word. GM is a global enterprise with experience in negotiating with governments over its business withdrawal. The bank should also secure the right to veto GM decisions on important issues such as the disposal of assets, though an increase in its fresh funding will be inevitable.
Though it avoided court receivership by striking a deal with its labor union, GM Korea still faces rough sailing. Pressed by time, they pushed back controversial issues. Disputes can erupt anytime. More important than anything else is GM’s strong will and plan to put its South Korean unit back on track. GM must try harder to revive GM Korea on its own rather than rely on KDB funds or government assistance.
The KDB expects GM Korea to turn a profit from 2020. To meet such expectations, its labor union must accept painful cost-saving steps including cuts in wage and welfare benefits, while GM must not spare investment and support.
And yet difficult issues remain to be tackled: GM’s global strategy to put profits first and GM Korea’s labor productivity, which falls short of the strategy. Plants can be closed any time as long as the productivity problem is unresolved.
GM Korea posted an annual net loss of $1.1 billion in 2017, its fourth straight year in the red. The South Korean unit has been weighed down by labor costs and hurt by the Detroit automaker’s decision to pull its Chevrolet brand from Europe, a key export market.
High productivity and a prudent product strategy are the first steps toward normalization.