[Editorial] Gunsan plant closure

By Korea Herald

Self-rescue efforts should come first; Shutdown may be a warning of wider crisis

  • Published : Feb 14, 2018 - 16:30
  • Updated : Feb 14, 2018 - 16:30

General Motors said Tuesday it would shut down its South Korean operation GM Korea’s plant in Gunsan, one of its four factories in Korea, by the end of May.

Considering there are about 2,000 workers at the plant and some 11,000 employees at 130 or so suppliers in and around Gunsan, the decision is feared to strike a heavy blow to the regional economy.

There is a further concern that GM may be taking steps to withdraw from Korea altogether, just as it left India and South Africa.

The average utilization ratio of the plant was around 20 percent for the past three years. Its production plunged from 260,000 cars in 2011 to 30,000 in 2016.

In fact, not only the Gunsan plant but the entire of GM Korea struggles with low productivity. Its poor performance seems to be caused largely by misguided product and marketing strategies.

Labor costs were probably another big burden on GM Korea. The average annual pay per employee increased 20 percent from 73 million won ($67,280) in 2013 to 87 million won in 2016. Pay kept rising even though the utilization rate of the plant stagnated at 20 percent. Low productivity due to high wages, coupled with falling product competitiveness, has driven GM Korea to near bankruptcy. Most worrisome about the plant closure is its impact on jobs.

If the whole of GM withdraws from Korea, some 16,000 GM Korea employees will lose their jobs, and the jobs of about 200,000 employees of its suppliers will be threatened as well.

Though GM says the closure of the Gunsan plant is inevitable due to sluggish sales of cars from the plant and its low rate of use, the decision arouses suspicion that GM tried to press the South Korean government to offer financial support. Barry Engle, president of GM International, reportedly met with Minister of Trade, Industry and Energy Paik Un-gyu, First Vice Minister of Strategy and Finance Ko Hyoung-kwon and Chairman of Korea Development Bank Lee Dong-gull to ask for fiscal and financial support for GM Korea.

Considering the June 13 gubernatorial and mayoral elections and the high priority it puts on job creation, it would not be easy for the government to flatly refuse GM’s demands. But the government must not rush to inject taxpayers’ money into a financially distressed company with little chance of survival.

GM Korea is said to have agreed to undergo financial due diligence by Korea Development Bank, though it has not so far disclosed information on its management status to the bank, its second-largest shareholder.

There are allegations that GM supplied parts to its Korea operation expensively, then bought assembled vehicles cheaply, and that GM gave financial support to its Korea subsidiary at high interest rates. The state-owned bank will have to clarify these allegations when it conducts its review.

The government must hold both management and labor responsible for poor performance, and ask them to take self-rescue measures before it decides on whether to aid them.

The shutdown of the Gunsan plant serves as food for thought for other domestic automakers. Hyundai Motor and Kia Motors are not greatly different from GM Korea in terms of high labor costs and low productivity.

According to Korea Automobile Manufacturers Association, the average annual pay per employee of five domestic car makers, including GM Korea, was 92.13 million won in 2016, higher than those of Japan’s Toyota Motor (91.04 million won) and Germany’s Volkswagen (80.4 million won). On the other hand, the domestic automakers took 26 percent longer than foreign competitors to roll out a car. Considering this, it is difficult to expect the Korean auto industry to maintain its international competitiveness for a long time.

GM Korea probably raised the white flag first because of its financial troubles. In doing so, it may have flashed warnings to other domestic automakers about a looming crisis.