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Why General Motors Could Be Leaving Korea for Good

Adam Levine-Weinberg, The Motley Fool

In recent years, General Motors (NYSE: GM) has posted consistently strong profits in its two largest markets: North America and China. However it has struggled in the rest of the world. As a result, management has moved aggressively since 2015 to exit markets where there was no clear path to sustainable profitability.

These moves helped lift the General to a record profit in 2017. That said, one long-standing problem remains: GM Korea. The company has signaled that fixing its Korean business is a top priority for 2018. It's seeming increasingly likely that GM will ultimately have to end its manufacturing operations there to achieve this goal.

General Motors begins the downsizing process

Management first publicly raised the need for restructuring at GM Korea during General Motors' fourth-quarter earnings call earlier this month. The company didn't wait long to get started. Last week, it announced that it will close its manufacturing complex in Gunsan by the end of May.

An aerial view of GM's manufacturing complex in Gunsan, South Korea

GM Korea will close its Gunsan plant in South Korea. Image source: GM Korea.

The Gunsan plant has been running at about 20% of capacity for the past three years, which is a recipe for big losses. This underutilization came about mainly from GM's late-2013 decision to stop selling Korean-built Chevrolets in Europe in the face of heavy losses. To make matters worse, domestic sales in South Korea plunged 27% last year.

In conjunction with closing the Gunsan facility, General Motors expects to record a one-time asset impairment charge of approximately $475 million. It will also incur cash charges of up to $375 million for severance pay and other labor-related expenses.

This is just the start

GM has signaled that it is just beginning its restructuring effort in South Korea. The company operates three additional assembly plants in the country, and it will make decisions about their future in the coming weeks. Closing all of them is not out of the question.

Indeed, GM Korea's problems go far deeper than underutilization of its factory capacity. Labor costs have increased by more than 50% since 2010, according to GM President Dan Ammann. Meanwhile, worker productivity is dreadful. It takes almost three hours longer to build a car in GM's Korean factories than at its U.S. facilities. Periodic strikes have further crippled profitability in the country.

Nevertheless, General Motors has presented a plan to preserve thousands of jobs and maintain a significant manufacturing presence in South Korea. This would entail allocating new products to the country and making significant investments to retool the remaining production facilities.

There are big strings attached to this offer, though. GM seems to want some combination of tax breaks, a capital infusion from the Korea Development Bank (already a minority shareholder in GM Korea), and pay concessions by the labor union.

It will take a miracle to save this sinking ship

General Motors has stated that it needs to make critical product allocation decisions in early March, so there isn't much time to reach a consensus among all of the interested parties in South Korea. This makes it rather unlikely that GM will be able to salvage its Korean unit.

Predictably, the labor union has come out swinging, blaming GM Korea's problems on bad management and opposing any layoffs or pay cuts. It's hard to see the union completely reversing course in the next few weeks -- and as long as the union refuses to compromise, it would be irresponsible of GM's management to throw good money after bad by making further investments in South Korea.

If General Motors does decide to wind down manufacturing in South Korea, a lot of GM Korea's production could be reallocated to Mexico (and perhaps also China and India). Mexico's broad network of trade deals and relatively low operating costs make it an ideal export hub. The additional volume could also help keep GM's Mexican factories busy if the company is forced to move some production from Mexico to the U.S. to appease the Trump administration.

Most of the big decisions about the future of GM Korea will be made within the next month. As of now, the likelihood of a successful restructuring seems quite small.

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Adam Levine-Weinberg owns shares of General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.