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GM Korea talks will continue through the weekend

Nora Naughton
The Detroit News

General Motors Co.’s imperiled South Korean business is getting a reprieve — at least for this weekend.

The automaker, burdened by declining demand for the compact vehicles it builds in its four Korean plants, is honoring requests from its labor union and the South Korean government to extend a self-imposed deadline to Monday to reach an agreement and avoid a path to bankruptcy.

The delay came after GM President Dan Ammann and GM International President Barry Engle met Thursday night with senior officials of the government, who also requested that GM Korea Co.’s board delay its vote to begin the process of filing for bankruptcy, called “rehabilitation” under South Korean law.

“Government officials will engage in the negotiations over the weekend in an effort to help reach a tentative labor agreement between the company and the union by 5pm Monday,” GM said in the emailed statement.

The fraught negotiations — which include its labor union, the South Korean government and the Korean Development Bank, which that owns 17 percent of GM Korea — reached a dramatic apex when union workers trashed the CEO’s office earlier this month.

The confrontation began in February when GM said it was preparing to shut one of its four Korean manufacturing facilities because of declining demand. GM’s Gunsan plant builds the Chevrolet Cruze compact car and the Chevrolet Orlando compact SUV. At the time, GM said it would close in May.

At the time, Engle said GM’s South Korean operations needed to be “urgently addressed. As we are at a critical juncture of needing to make product allocation decisions,” he said in the February statement, “the ongoing discussions must demonstrate significant progress by the end of February, when GM will make important decisions on next steps.”

That statement, buried in a press release about a plant closure, and CEO Mary Barra’s comments regarding Korea in a conference call with investors at the beginning of the year, signaled that GM’s problems in Korea run deeper than the Gunsan plant.

Founded in 2002 from the assets of moribund Daewoo Motor Co., GM Korea suffered its first big hit when the automaker ended Chevrolet sales in Europe some five years ago because many of the Chevrolets sold in the European market were imported from Korea.

The declining demand accelerated when GM bolted Russia, exited India and sold its European operations to PSA Groupe SA of France — all markets partially served with exports from GM’s Korean plants. Annual production has plummeted from 1 million units to 450,000, while overall employment remains at 17,000.

Add union tensions and a shift away from many of the small vehicles produced there. The result, analysts and company officials say, is a GM Korea that has gone from a manufacturing powerhouse to an endangered species.

That’s left GM with few options. It can file for bankruptcy, essentially a liquidation process under South Korean law that is considered more dire there than Chapter 11 reorganization in the United States. Or it can execute a proposed restructuring that would close the Gunsan plant and reduce the headcount by roughly 10 percent, risking further union tensions.

“I would not put it past GM to file bankruptcy, or if they can’t make the business case work to just walk away,” said Dave Sullivan, an analyst for AutoPacific, an automotive consulting firm. “This GM is willing to just walk away if the long-term business case does not exist.”

Getting up and leaving — even restructuring — aren’t decisions to be made lightly. For one, Sullivan said, Korea produces the Chevrolet Trax and its sibling, the Buick Encore, a compact SUV crucial product for GM’s premium brand.

“GM can’t afford a hiccup with that right now,” he said. “This is something that would take quite a bit of long term planning, but I don’t think the Korean government and the union are going to be able to call GM’s bluff on this one. If the union plays hardball, they will lose.”

GM’s efforts to save the once-promising Korean unit notwithstanding, leaving Korea would emulate recent decisions by the automaker’s leadership to exit money-losing operations around the world, especially as the automaker ramps up its commitment to the fast-growing Chinese market.

The Detroit automaker ceded defeat in Europe last year, selling its Opel-Vauxhall business to PSA Groupe in France after a 90-year run. It ended production in Australia, left South Africa and bolted India, on track to become the world’s No. 2 market.

In the end, leaving South Korea or restructuring could be a better look for investors, according to a report Friday from Morgan Stanley:

“Even more than the net financial impact, the greater significance is the strategic messaging to GM shareholders,” the report said. “GM doesn’t have the time or the resources to devote to regions that lack visibility into generating a positive return or even a positive margin.”