Date: Mar. 12, 2018
The U.S. multinational General Motors (GM) is planning on shutting down GM Korea’s Gunsan plant. This would mean a loss of 2,000 jobs. GM has requested bailout funds from the Korea Development Bank. However, before providing any funds, the Korea Development Bank (GM Korea’s second largest shareholder, and Korea’s state policy bank) will investigate various suspicions that GM drove GM Korea towards bankruptcy while pocketing profits through high interest loans and exorbitant royalties on GM’s technology. It will also investigate whether the bailout funds would allow GM to keep its Korean plants open or whether it would merely keep it simply stave off closure for just a few years.
Before acquisition by GM, GM Korea was the Korean automaker Daewoo. At its heyday (2003 and 2013), GM Korea produced nearly 2 million cars a year. GM’s strategy was to produce midsize sedans, SUVs and pickups in the United States, and to produce light, small and compact cars in GM Korea. So great was the world’s demand for light, small and compact cars that running the plants around the clock could not satiate the market demand.
The depreciation of Japan’s yen in 2012 and the drop in oil prices in 2014 shrunk the market for GM Korea’s small, light and compact autos. This led to a drop in production to 500,000 units. Now, the factories are run at half capacity. Without new capital inflows since 2017, GM Korea will go bankrupt without a bailout. However, because of GM’s management control, GM Korea, on its own, cannot diversify auto production into the more profitable larger autos. In fact, suspicions GM is deliberately driving GM Korea into bankruptcy are based on the fact that if GM sold its Gunsan plant it would have money left over even after paying off its debt. Unfortunately, even if it closed the Gunsan plant, GM would still have an excess production capacity at 700,000 units. Given the pressure by hedge fund shareholders for greater value,GM is likely not finished closing down plants and laying off workers.
Without a clear national industrial plan, the Moon Jae-in administration is simply held hostage to GM’s demands for bailout funds. This lack of a national industrial plan is the result of the 1997 IMF crisis that imprinted the notion that rather than a national industrial strategy, Korea’s economic strategy should simply involve deregulation and the opening of its markets through FTAs. The Moon administration needs an industrial strategy that goes beyond GM Korea’s crisis such as exploring new technologies such as electric and self-driving cars.