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Inside GM-Asia's secret weapon

Christine Tierney | The Detroit News / The Detroit News

BUPYUNG, South Korea -- As General Motors Corp. accountants picked through the assets of the crumbling Daewoo Group in 2001, rivals and analysts marveled at the U.S. automaker's appetite.

GM had recently bought Saab and part of Fiat Auto and held stakes in three Japanese carmakers. Ford Motor Co. had looked at Daewoo and walked away. To outsiders, the insolvent Korean carmaker whose fugitive founder had fled the country looked like a dodgy proposition.

But of all of GM's recent deals, the $251 million purchase of Daewoo auto assets has turned out to be the best investment.

Now called GM Daewoo Auto & Technology, the South Korean automaker has emerged as an engine for GM's fast-growing Asian operations. With its ability to turn out well-finished cars at low cost, Daewoo supplies GM with affordable cars for more than 150 markets around the world.

"Daewoo is the 'stupid' move that has turned out now to look pretty good," said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

In addition to plugging gaps in GM's global lineup, GM Daewoo is bolstering the U.S. automaker's turnaround by helping to rev up GM's sluggish corporate metabolism. Daewoo engineers bring expertise in key areas where GM lags, such as the cost and time it takes to develop vehicles.

"The role of GM Daewoo in GM's global operations can't be underestimated," says Fritz Henderson, GM's chief financial officer, who was running the Asia Pacific operations in 2002 when the deal was concluded.

Without Daewoo, it's doubtful GM could have secured a leading position in China, which is expected to become the world's No. 1 auto market.

Daewoo-designed cars account for more than half of the GM-brand vehicles sold this year in China, GM's second-biggest market after the United States.

Over the past four years, GM's China operations contributed $1.4 billion to the company -- whereas GM lost money overall for that period.

GM recently sold stakes in Fuji Heavy Industries, Isuzu Motors and Suzuki Motor, essentially giving up on the tough Japanese market. But its top executives don't regard success in China as optional. "For GM to remain a global industry leader, we must also be a leader in China," said Mark Bernhard, chief financial officer of the GM China Group, based in Shanghai.

By contrast with its struggle in the U.S. market, where GM has been pushed back by aggressive Asian rivals, it is a predator here in the Far East. Unfettered by legacy costs and image problems, GM is clawing market share from others. It expects its Asian operations, including Australia and India, to increase its regional market share by more than half, to 10 percent by 2010.

In China, GM has vaulted to second place after narrowing the gap with longtime leader Volkswagen AG. With 10.5 percent of the car market, it is ahead of Toyota Motor Corp. and generates three times more sales than Ford and DaimlerChrysler AG combined.

"We have an opportunity here to recreate General Motors," Bernhard said.

Asia Pacific veterans Henderson and Troy Clarke, now president of GM North America, are trying to import some of the speed and agility of GM's Asia operations. "The growth of our business in Asia helped us become much more of a global company," Henderson said, "and a better global company, as well."

It's a new benchmark

On a cold, wet day in December 2001, while GM was in talks with Daewoo creditors, Daewoo's chief engineer Kijoon Yu brought a dozen vehicles to GM's Milford proving grounds. For two hours, GM's top engineering and production managers compared Daewoo and GM vehicles. "Bob Lutz was there, Gary Cowger was there, Jim Queen was there," recalls Yu.

Lutz, vice chairman in charge of product development, said the Daewoo cars could serve as a benchmark for fit and finish.

GM was familiar with Daewoo Motor, having held a 50 percent stake in the company for 14 years until 1992. Its executives were impressed with Daewoo's ability to control costs and figured the Korean automaker could get GM into segments and markets from which it was now shut out.

"They found that Daewoo was a fabulous opportunity," Cole said.

GM Daewoo's Kalos small car, sold here as the Chevrolet Aveo, allows GM to compete against Asian automakers in the burgeoning U.S. subcompact segment.

In Europe, GM is relying on GM Daewoo-designed Chevrolet cars to grow in entry-level categories dominated by Asian brands.

Now, as part of GM's effort to coordinate vehicle development globally, it has assigned its Korean subsidiary the big job of developing the next mini and small cars for all GM brands.

GM is also tapping talented Daewoo executives, such as Yu, for bigger jobs. Now based at GM's Warren Technical Center, Yu oversees "dimensional quality" of new GM vehicles around the world. That entails cosmetic issues, such as the space between body panels. But it's not just a question of appearance. How the parts fit beneath the sheet metal has direct bearing on the vehicle's performance and durability, Yu said.

At GM Daewoo's Bupyung plant, an hour's drive from the capital Seoul, vice president of engineering Steve Clarke says he believes aspects of South Korea's culture help mold top engineers.

Part of a divided country on a peninsula extending from northern China, South Korea has produced the world's fastest-growing major auto-making group, Hyundai Motor Co., and is home to the leading electronics firms in a sector evolving at lightning speed.

"One thing that's inherent in Korean culture is a drive to go fast," said Clarke. "When you look at the execution of just about any task, we're always pleasantly surprised how quickly it gets done."

In addition, he said, "Koreans won't stop 'til they get a job done."

In Bupyung, managers and engineers are putting in longer hours now as they develop the architecture for the next minicars, such as the Matiz, and small cars, such as the Aveo and Opel Corsa.

"It requires a lot of interaction with all the operations around the world, taking requirements from every country," Clarke said.

"It's quite a bit more work for us, but when you add it up, it's less work overall for GM."

China: A rousing giant

In 2002, just as GM's Daewoo acquisition raised eyebrows, so did its China strategy. It selected the fading Buick nameplate as its flagship brand. But unlike some European rivals who peddled obsolete models, GM sold the latest Buicks in China.

When the market took off in 2002, well-heeled Chinese customers with accumulated savings snapped up Buicks, paying up to 30 percent above the U.S. sticker price on the same models.

But in the past two and a half years, China's market has morphed into a brutal arena. GM officials estimate car prices have fallen nearly 20 percent as new players piled into the market.

Adding to the pressure, the biggest growth is taking place in low-margin, small car segments. This year, 60 percent of the cars sold in China are compacts or subcompacts, said Michael Dunne, vice president of J.D. Power Asia.

Ford and DaimlerChrysler are scrambling to line up partners to help them build small cars inexpensively. DaimlerChrysler's Chrysler Group is in talks with China's Chery Automobile Ltd.

"Without a small car, you're excluded from half the market," said Dunne. "GM has solved that by sourcing out of South Korea."

In coming years, Chinese carmakers are likely to put pressure on South Korea's automakers. Unions are militant and wages are relatively high in South Korea, which has a modern economy and is now coming of age politically. As part of a crackdown on corruption, Daewoo founder Kim Woo Choong was sentenced to 8 1/2 years in prison for fraud and embezzlement after he turned himself in.

Moving on to the next level

GM's turnaround will ultimately hinge on its success in North America.

The biggest growth is expected in Asian and other emerging markets, where sales of small and inexpensive cars, such as Renault SA's Logan models, are expected to outpace other categories. "Traditionally, GM has not been a good competitor in those types of segments," said Nick Reilly, president of GM Asia Pacific.

But it's learning. In 2002, the same year it struck the Daewoo deal, GM and its Chinese venture partner Shanghai Automotive Industry Corp. bought Liuzhou Wuling Automotive Co., a southern Chinese manufacturer of small vans and trucks priced between $3,200 and $6,000.

At the time, Wuling sold about 50,000 vehicles annually. But this year, its vehicles will account for just over half of GM's estimated 863,000 unit sales in China.

Wuling is now integrated in GM's global network, building the Daewoo-designed Chevrolet Spark minicar.

"Many people thought we couldn't run a low-cost company," says GM China President Kevin Wale.

GM is trying to prove them wrong.

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