Biting The Buyer

America's biggest industrial giant is trying an old tactic in South Korea--the kowtow. After negotiating unsuccessfully since 1998 to penetrate East Asia's most protected automobile market, General Motors is hanging its hopes on a foreign pitchman dressed in traditional Korean clothes. Featured in a new advertising campaign launched late last year, he wears his hair pulled tight in a topknot, kneels with palms pressed submissively to the floor and bows as if to an elder. The aim? "To humbly ask for permission to participate in the Korean market," explains Randall Smith, director of the advertising agency Seoul D'Arcy, who created GM's newspaper campaign and shed his suit to play the deferential barbarian. "With their brains, Koreans understand the need for opening, but their hearts are not ready to accept it," he says. "We made the ad to touch their hearts."

GM's charm offensive comes as the insolvent Daewoo Motor Co. appears to be slipping from its grasp. After failing to reach a deal with Daewoo creditors, GM is now preparing to bid for the firm at auction--against a list of rival suitors that could include Ford, Fiat, DaimlerChrysler, Renault and Hyundai, Korea's largest carmaker. So far, only GM has ruled out taking on a Korean partner, a position that has made it a lighting rod for populist anger. "Many people feel this government has sold too many key industries to foreigners," says Lee Shin-Bom, a powerful opposition lawmaker, suggesting that South Korea's closed automobile market should be protected, not opened.

Like other multinationals looking for beachheads in South Korea, America's automotive giant is caught in shifting tides. Just two years after Seoul's currency collapsed, rendering Asia's second largest trading nation a ward of the IMF, a dazzling recovery orchestrated by President Kim Dae Jung has produced a backlash against free trade and open markets--particularly in industries deemed "strategic" to the national economy. Unions are threatening to strike unless consulted on major deals. Large conglomerates, or chaebol, say openness could reduce South Korea to a subcontracting "colony." With parliamentary elections slated for April, politicians are courting the large blue-collar vote by blasting globalization. "I can't easily imagine that a company as large as Daewoo Motor will be taken over entirely by foreigners," says Richard Samuelson, executive director of investment bank Warburg Dillon Read in Seoul. "Politically, it's a nonstarter."

Still, South Korea's No. 2 carmaker is a tempting prize. Its domestic capacity of 1.2 million vehicles a year makes it a plausible challenger to industry leader Hyundai and its subsidiary Kia Motors, which last year claimed a 73 percent market share. Internationally, it owns 12 plants in 11 foreign countries, including a prized operation in Poland. Yet reckless expansion with borrowed money has crippled Daewoo. Its debt, $14 billion, is $3 billion more than the most generous appraisal of its assets. And despite South Korea's phenomenal 10.2 percent growth in 1999, Daewoo's creditors must now inject nearly $400 million a month to keep its assembly lines running.

Nobody knows Daewoo better than GM. The two were partners until 1992, when Daewoo's urge to expand and unwillingness to relinquish control in the domestic market forced a split. When its parent company, the Daewoo Group, collapsed last year, GM moved fast to buy its former ally outright. "It will be a very good, strategic fit for both companies," says David Jerome, GM's managing director in Seoul. "We see some real powerful synergy." Specifically, Daewoo's emphasis on small cars augments GM's hefty fleet. And its location at China's doorstep makes it an ideal export platform for when Beijing cuts auto tariffs from 100 to 25 percent in 2005 as part of its accession into the World Trade Organization. "I'm positive that GM doesn't look at Korea as a fast-growing market," says Richard Biggs, an automotive analyst at ABN-Amro in Seoul. "They're looking at China."

In that, GM is not alone. Ford, too, views South Korea as an ideal place "to produce cheap cars and send them to other parts of the world," says Steve Girsky, an auto analyst at Morgan Stanley. And last week executives from France's Renault visited Korea to discuss the possible purchase of the country's newest automaker, Samsung Motors, which like Daewoo is insolvent. With memories of Asia's financial crisis fading fast, the world's automakers are now rushing to examine Daewoo's books.

They would do well to consider how GM lost its lead. In December, its negotiations with Daewoo creditors foundered over the banks' refusal to write down bad debt (a demand that many of the same banks did meet when Hyundai bought the failed domestic carmaker Kia Motors in 1998). Once Ford expressed interest, Seoul's Financial Supervisory Commission invited other bidders to join a "transparent and objective" auction. "At the moment, the deal is kind of in limbo as some other auto companies want to take a look and maybe participate," said GM chairman John F. Smith in Detroit last week. "This is about as tough, as difficult a transaction as I have ever participated in."

Why couldn't GM close? In one view, bankers balked when South Korea's economy began to rebound, making them less eager to unload Daewoo at fire-sale prices. Yet cynics offer another take: that the delay is more about politics than money. In this view, Seoul's hidden agenda is to preserve Hyundai's grip on the domestic automobile market (where imports accounted for less than 1 percent of sales in 1999) by keeping GM out. If that's the goal, the ideal buyer for Daewoo is either a consortium in which Hyundai participates or a non-American carmaker with limited global reach.

At the Federation of Korean Industries, a pro-chaebol lobbying group, secretary-general Yu Han-Soo says GM would wage war on "all our industries," adding: "I don't think this is a protectionist position; it's a matter of survival." Across town at the Korean Confederation of Trade Unions, labor leaders warn that a GM takeover at Daewoo would produce job losses, wage cuts and "weaken our sense of self-determination," explains Yoon Youngmo, the group's international secretary. "When a person who holds power shows up and bows, it is not taken as a sincere gesture," he says. According to Harry Choi, a senior vice president at Hyundai Motors, "for the protection of the domestic industrial base, it is not desirable for a foreign company to take more than 50 percent of Daewoo Motor and have management rights as a majority shareholder."

One thing is certain: the battle for Daewoo Motor Co. is far, far from over. "It's easy to fall back on nationalism," says Jerome, GM's man in Seoul. "But the better question is, What is good for Korea?" One rumor circulating in Seoul last week held that Ford and Hyundai are preparing a joint bid (Hyundai wouldn't comment. Ford vice chairman Wayne Booker, speaking in Detroit earlier this month, left the possibility open, but said his company is not currently in talks with Hyundai). If true, it would be an ironic twist, given that the two companies were rivals in the 1998 Kia auction. "Politics makes for strange bedfellows," says Samuelson, "and a lot of politics are involved in this." And more than a few deep bows.