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IHS Global Insight Perspective
General Motors (GM) and the Korea Development Bank (KDB) have entered into an agreement in order to secure long-term growth at the former's South Korean unit, General Motors Daewoo Auto & Technology (GMDAT).
Under the agreement, the KDB will have veto rights over GMDAT's management decisions, while it will also regain the power to appoint three members to the South Korean company's board of directors.
GM holds a 70.1% stake in the South Korean subsidiary, while the KDB holds almost 17.0%. The latest agreement should help GM forge ahead with its plan to launch its Chevrolet brand in South Korea as soon as March 2011.
General Motors (GM) and the Korea Development Bank (KDB) have entered into an agreement in order to secure long-term growth at the former's South Korean unit, General Motors Daewoo Auto & Technology (GMDAT), reports Yonhap English News. The agreement was signed by Tim Lee, president of GM's international operations, and Euoo-sung Min, chairman and chief executive officer (CEO) of the KDB. GMDAT said in a statement that, under the agreement, GM will ensure the redemption of its preferred shares owned by creditors, while it will also give the KDB—which is the second-largest shareholder in GMDAT—the right to appoint three members to GMDAT's board of directors. GMDAT said that, "The agreement also resolves issues on the revision of the Cost Share Agreement between GM and GM Daewoo." Meanwhile, Dow Jones International News quotes the KDB as adding that it will also have veto rights over GMDATs management decisions.
Lee claims that this agreement will help secure the long-term development of the South Korean unit, while meeting the demands of its second-largest shareholder. Lee added, "We have aggressive business plans for our [South] Korean unit in the domestic market as well as the international arena." Min meanwhile said that, "We are happy to ascertain GM's intent on its commitment to GM Daewoo during the negotiations", adding, "KDB and GM will maintain the relations as cooperative partners for GM Daewoo's long-term success."
Outlook and Implications
The latest agreement marks an end to the months of negotiations between GM and the KDB over the long-term development plans for GMDAT. The KDB had been increasing the pressure on GM to accept the restructuring programme suggested by creditor banks for its South Korean subsidiary following a disagreement over the U.S. automaker's decision to increase its stake in its South Korean subsidiary from 50.9% to around 70.1% in October last year. It did this by subscribing to GMDAT's rights issue worth 491.2 billion won (US$433.4 million), a move the banks consider to have been illegal (see United States - South Korea: 4 May 2010: Korean Development Bank May File Lawsuit Against GM over Capital Increase at GMDAT). The KDB was asking for GM to transfer intellectual property rights for some vehicles to GMDAT and to increase the company's output beyond a certain level over the next five years as part of a long-term development strategy for the automaker. The KDB had indicated that if it secured a favourable deal, it would convert the remaining loans into five-year-term loans; if not, it would ask GMDAT for their direct repayment.
Meanwhile, GMDAT recently announced that it would repay its outstanding debt of 1.13 trillion won to the KDB this month; as a result, the revolving credit facility will subsequently be terminated (see South Korea: 1 December 2010: GMDAT to Clear Its Debt Obligations with Korea Development Bank). The latest agreement should certainly help GM lead the development of GMDAT in the long term as it has secured long-term co-operation from the KDB by reducing the shareholding limit for the veto rights in the South Korean unit from 28% to 15%. In addition, the cost-sharing agreement will help GMDAT reduce technology costs for the development of new models as it will not be required to pay a technology loyalty fee to its U.S. parent company. The South Korean automaker is already accelerating its efforts to strengthen its position in its domestic and overseas markets; it plans to launch seven new models in South Korea before the end of 2011 (see South Korea - Europe: 30 November 2010: GMDAT to Develop Two Small Cars for European Market—Report), while it also plans to produce volume models for foreign markets (see South Korea - Europe: 30 November 2010: GMDAT to Develop Two Small Cars for European Market—Report).In addition, the latest agreement is likely to help GM secure the confidence of the South Korean unit's management and creditors in its plan to rebrand the unit using the Chevrolet brand, under which its vehicles are sold in other parts of the world. GM was planning to sell both the Chevrolet and Daewoo brands in South Korea as early as 2010 but delayed this until 2011 following strong opposition from GMDAT's labour unions in South Korea and some of the company's senior officials, who argued that such a move would make the business a sub-contractor to its parent firm (see South Korea: 28 April 2010: GMDAT to Delay Rebranding of Daewoo in South Korea). GMDAT has already reportedly decided to stop sales of its Tosca mid-sized sedan and Winstorm sport utility vehicle (SUV) in South Korea in order to introduce the Chevrolet brand in the country—scheduled for launch in March 2011. The company will reportedly release the sequel to the Winstorm—based on Chevrolet's Captiva SUV—during March, while the sequel to the Tosca—based on Chevrolet's Malibu mid-sized sedan—will be introduced during the second half of 2011. GMDAT already supplies the Chevrolet Cruze and Spark models for sale in many global markets and is also eyeing China as it bids to strengthen its global presence (see China - South Korea: 19 October 2010: China a Good Market Opportunity for GMDAT, Says Executive).