Wednesday , September 19 2018
Home / Wolf Street / How GM Is Shaking Down South Korean Taxpayers

How GM Is Shaking Down South Korean Taxpayers

Summary:
The threat of Carmageddon for jobs. It follows the playbook: It started on February 12, when General Motors announced the “first step” in the “necessary restructuring” of its GM Korea unit. It would “cease production” and shut down its factory in Gunsan “by the end of May 2018.” The “next steps” would affect the three remaining plants, whose fate would be decided “by the end of February.” Here’s the verbalization of the shakedown: The company has proposed to its key stakeholders — including its labor union, the South Korean Government and key GM Korea shareholders — a concrete plan to stay in the country and turn the business around that requires the full support of all parties. The proposal includes significant product-related investments in South Korea and would preserve thousands

Topics:
Wolf Richter considers the following as important: , , , ,

This could be interesting, too:

Wolf Richter writes How Millennials Are Shifting the Housing Market

Wolf Richter writes Meanwhile in China, Implosion of Stock-Market Double-Bubble

Wolf Richter writes What Can Cause the Next Mortgage Crisis in the US?

Wolf Richter writes My “Free” Advice for Sears Holding CEO Eddie Lampert

The threat of Carmageddon for jobs.

It follows the playbook: It started on February 12, when General Motors announced the “first step” in the “necessary restructuring” of its GM Korea unit. It would “cease production” and shut down its factory in Gunsan “by the end of May 2018.” The “next steps” would affect the three remaining plants, whose fate would be decided “by the end of February.”

Here’s the verbalization of the shakedown:

The company has proposed to its key stakeholders — including its labor union, the South Korean Government and key GM Korea shareholders — a concrete plan to stay in the country and turn the business around that requires the full support of all parties. The proposal includes significant product-related investments in South Korea and would preserve thousands of jobs.

The Korean government, via its Korea Development Bank, already owns 17% of GM Korea. But that isn’t enough. Now it’s going to have to pull out its wallet again.

GM Korea employs about 16,000 people. Many more jobs depend on the industries that support and supply GM Korea’s four manufacturing plants. Some of those secondary and tertiary jobs would be threatened. In total, the four GM Korea plants support about 200,000 jobs, GM says in the press release to make sure the government fully understands the magnitude of the threat.

But GM Korea has been losing money. Production has plunged 44% from 943,000 vehicles in 2007 (when it was still called GM Daewoo) to 524,000 vehicles in 2017. In 2017, GM exported 392,000 of these vehicles to other countries, including the US.

With this announcement, GM had the South Korean government’s attention. The extortion effort has been displayed in the media across the world. So the negotiations commenced and led all the way to the top of the government – in order to make the business profitable, GM President Dan Ammann told Reuters, adding, “Time is short and everyone must move with urgency.”

In other words, how much money would the Korean government be willing to pay directly via a cash infusion and indirectly via tax deals?

Now apparently a deal is being worked out, according to Reuters based on what “four sources with direct knowledge of the matter” had said who didn’t want to be named “due to the sensitivity of the subject” – because all this is carried out at all levels, including leaks to the media. Here are some elements of the deal that emerged today:

  • GM wants $1 billion from the government to recapitalize GM Korea.
  • GM wants its GM Korea sites designated as special foreign investment zones to make GM Korea eligible for tax breaks for seven years.
  • In return, GM offered to convert $2.2 billion of troubled GM Korea’s debt into equity.

And this is wandering up the political pyramid.

Today, Barry Engle, GM executive VP and president of GM International, discussed the restructuring and aid package with a government task force headed by a ruling party lawmaker from Bupyeong, where GM Korea largest plant is located. The threat in GM’s announcement was that the fate of this plant would have to be decided “by the end of February.”

Engle told Reuters that he’s “encouraged by the discussions” and is “optimistic” that “an outcome” can be achieved that would keep GM in Korea. As Reuters puts it, “He declined to comment further on the discussions between GM and the South Korean government.”

But the government is talking, according to Reuters:

Kim Sung-tae, a South Korean lawmaker, said Engle had told lawmakers that GM Korea planned to produce two new models.

Kang Hoon-sik, a spokesperson for the ruling party, told reporters that Engle said that GM Korea would try to maintain production of around 500,000 vehicles a year.

Finance Minister Kim Dong-yeon told reporters today that the government would “closely consult with GM to normalize its management,” and that thorough due diligence on the company should come first before a decision is made on financial backing.

The presidential office of South Korea said today that it would designate Gunsan an employment “crisis zone.” This would allow the government to offer laid-off workers some financial support, such as cheap loans.

Officials at the Korea Development Bank (which already owns 17% of GM Korea) complained that GM Korea has not shared sufficient information about its finances or the cause of its losses.

A government official who didn’t want to be named told Reuters, “They have requested for help, and a thorough audit of the situation is among many preconditions before any public funds can be set aside.”

Unnamed government officials said today that financial support to GM Korea will depend on GM’s willingness to commit to new investment in the remaining operations.

An unnamed government official said that GM hasn’t filed an official application to get the GM Korea sites designated as foreign investment zones, but it was “testing waters” to check the possibility.

GM wants to lower its costs in South Korea to get to “a viable cost structure,” as GM President Ammann put it. These cost reductions are going to be obtained from various “stakeholders,” including largely the Korean taxpayer.

GM is going to produce its vehicles somewhere. It’s just a matter of where it can do so at the lowest cost, including the greatest amount of subsidies. Over the years, GM has used this tactic to offshore much of its manufacturing operations from the US.

This is the same extortion principle that large corporations use with municipalities, states, provinces, and countries around the world, either to locate to those locations, or if they’re already there, to not close their shop. It’s a well-oiled machine that works – with taxpayers, who have no say whatsoever in this, always footing the bill.

How can the media be so gullible – and pliable? Read…  What the Headlines about Tesla, Snap, and Twitter “Earnings” Should Have Said

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.




Wolf Richter
Founder, Wolf Street Corp. In his cynical, tongue-in-cheek manner, he muses on WOLF STREET about economic, business, and financial issues, Wall Street shenanigans, complex entanglements, and other things, debacles, and opportunities that catch his eye in the US, Europe, Japan, and occasionally China.

Leave a Reply

Your email address will not be published. Required fields are marked *