Daewoo’s Brash Gambit : South Korean Giant Bids Against GM for Polish Auto Plant
WARSAW — Jerzy Wozniak has been on deathwatch since the collapse of communism six years ago.
As the Solidarity trade union leader at Poland’s largest state-owned car maker, Wozniak has been privy to reams of bleak financial news. The ailing manufacturer, he says, cannot survive in a competitive market without slashing thousands of jobs.
“Time is running out on us,” said Wozniak, a 26-year employee of Fabryka Samochodow Osobowych (FSO), which has 21,000 workers. “Everyone realizes that.”
Everyone, it seems, except a billionaire businessman from South Korea who toured the obsolescent plant for the first time in August and now proposes making it a cornerstone of his rapidly expanding automobile empire.
Kim Woo Choong, chairman of Daewoo Group, sees the Communist-era white elephant as his cut-rate ticket to the flourishing European car market. Kim says he wants to buy 60% of FSO--its bloated work force and all--and pump $1.1 billion into making it a center for automobile and other Daewoo operations throughout the continent.
If successful, Kim will not only have rescued FSO from ruin, but he will have dealt a humbling blow to the vaunted expansion plans of General Motors, the world’s largest auto maker and until three years ago an equal partner in Daewoo’s automobile division.
In a further jolt to his American competitors, Kim and the Polish government have agreed to close any deal by the end of this month--lightning speed in a country where transforming state-owned companies into private ones usually takes years. GM has been talking since 1991 about buying a majority stake in FSO, and so far has negotiated only a small joint venture.
The Daewoo move sets the stage for a fierce struggle over the exploding Polish car market, which is the biggest in Eastern Europe.
Daewoo sees a Polish base as part of a broader strategy to develop its car manufacturing as a pillar of the huge conglomerate, which is already an international giant in shipbuilding and electronics.
“With this project, we will earn a competitive position, not only in Poland but also in all of Europe,” Kim boasted during his visit to Warsaw.
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GM had planned on getting FSO on the cheap. But if Daewoo walks off with the company, the overconfident Americans will not only be forced to build their Polish operations from scratch, they will instantly face a low-end competitor in a market where consumers value cheap sticker prices over advanced technology.
“Daewoo is a serious player,” said Maryann Keller, an automotive analyst for Furman Selz Inc. in New York. “The entrance of a competitive, potentially low-cost source of product on their doorstep . . . is of course a threat to other car companies in Europe.”
The startling Daewoo bid promises no layoffs at FSO and the production of 220,000 cars annually, more than were manufactured in all of Poland last year. Little-known here, the South Korean company currently sells fewer than 4,000 cars annually in Poland, and until recently was prevented from exporting to Western Europe by restrictions GM imposed when it relinquished its share of Daewoo Motor Corp. in 1992.
Ironically, the first Daewoo cars intended for Europe--the Nexia and Espero--are adaptations of old GM models that Daewoo developed during its 13-year joint venture with the American car maker. The arrangement strictly limited Daewoo’s overseas operations, but with the restrictions now mostly expired, Daewoo has decided to take on its former partner and mentor with a vengeance.
“I wouldn’t say they are the closest friends anymore,” Keller said.
A Daewoo spokesman in Seoul said the FSO property--which includes several hundred acres of prime real estate in Warsaw--could also be adapted for other Daewoo businesses. The company already operates a consumer electronics plant near Warsaw, and it has pledged to use mostly Polish-made components in its FSO-produced cars.
The behemoth Polish car maker, in keeping with Communist-era practices, has extended its reach far beyond car production. FSO not only makes automobiles, it runs five vacation resorts, a health spa, a vocational high school, a small hospital and a 4,000-acre farm. Daewoo would also get a 17th-Century palace in the deal.
“Daewoo thinks Poland can be like a Hong Kong for Europe,” said Tadeusz Soroka, Poland’s deputy minister of industry and trade. “And not just for cars. They are interested in shipbuilding, steel, banking and hotels. . . . This is not love toward Poland on their part, but cold calculation.”
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The contrast with GM is striking.
The American auto maker’s plans for FSO are far less ambitious, mainly because GM is already deeply entrenched in Europe and does not need to establish a major new presence.
GM has long seen FSO as a potentially low-cost assembly facility for its big Adam Opel vehicle division, based in Germany. Last November, the American auto maker began assembling a small number of German-made Opel Astras in a corner of the sprawling FSO campus as part of a $20-million joint venture with the Poles.
But GM has been reluctant to commit more money without a major restructuring of the Polish car maker. In April, the company presented a detailed offer to the Polish government that Opel Chairman David Herman characterized as a candid assessment of FSO’s prospects as a private enterprise.
GM pledged to invest $340 million in FSO, but its bid called for huge cuts in employment and made it clear the company wanted only those FSO operations that dovetailed with its vast production network in Europe. The Polish government balked and immediately turned to Daewoo.
“GM was sure they could do anything they liked with us, that they could dictate the terms of any agreement,” said Zbigniew Boniecki, head of corporate communications at FSO. “It is very hard to be generous if you are a real power.”
GM says it is still interested in FSO, and the company intends to present a sweetened offer in the coming weeks. But Polish negotiators have left little doubt that upstart Daewoo would have to self-destruct to lose its advantage over the American giant.
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Not only does GM want to invest less in FSO, but its proposal calls for slashing the work force by as much as three-quarters, with most of the job losses coming in the politically important Warsaw area. With presidential elections set for Nov. 5, there is a long list of public officials eager to embrace a blockbuster Daewoo deal that would save blue-collar jobs.
“For all of us, it seemed impossible that we would find an investor that offered so much money and would take over an entire factory, which, honestly speaking, is old-fashioned,” said Soroka, who is heading the talks with Daewoo. “For the workers at FSO, it is a very big opportunity. For the entire car industry, it is a very big opportunity.”
Herman, who has been leading the GM contingent, said the American company is committed to finding a permanent location in Poland, and particularly wants to manufacture low-cost components for its cars assembled elsewhere in Europe. But Herman said GM has no intention of investing huge sums of money in an antiquated facility.
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FSO currently manufactures about 100,000 Polonez cars annually, poor-quality vehicles that analysts say sell big in Poland only because steep tariffs price most competitors out of the market.
Last year, the Polonez was the best-selling car in Poland, capturing a third of the market, but sales are projected to drop as Poland lowers its tariffs under a trade pact with the European Union.
Analysts say GM needs to expand quickly into Eastern Europe, where costs are much lower than in Western Europe and car sales are booming. But not at any price, Herman said.
“The Polish government has to come to grips with what are commitments and what are possibilities,” Herman said of the Daewoo proposal. “Our possibilities are unlimited as well, but our commitments were put forward honestly.”
Kim’s plan would make Daewoo the largest foreign investor in Poland, and would place it in an elite club of $1-billion-plus investors in Eastern Europe, which now includes such auto giants as Volkswagen of Germany and Fiat of Italy. In the past year, Daewoo has acquired control of three other vehicle manufacturers in the region, including a car maker in Romania and light-truck plants in Poland and the Czech Republic. Its strategy calls for investing more than $3.5 billion in the former East Bloc.
Kim wants to quadruple automobile production worldwide from 500,000 vehicles to 2 million. Under the plan, the unprofitable Daewoo Motor Co., which is South Korea’s third-largest car maker, would focus production and sales on emerging markets in Eastern Europe and Asia.
“We intend to become one of the 10 largest automobile makers in the world by the year 2000,” said Daewoo spokesman Lee Jung Seung.
The company is also counting on sneaking into the lucrative Western Europe market through the backdoor.
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Poland has applied for membership to the European Union, which would make it part of the vast common market that stretches from Greece to Sweden. With labor costs a fraction of those in most Western European countries, Daewoo expects that its low-cost Polish-made cars will find a profitable niche throughout Europe. It already exports tens of thousands of televisions and washing machines from its Warsaw-area electronics factory.
“My first reaction was that it sounds like a fairy tale,” said Wozniak, the Solidarity leader who has sat in on talks with Daewoo. “But we are standing against a wall with nowhere to turn. This may be our only chance for survival.”
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Investing in Eastern Europe
Daewoo is just one of many international auto makers moving to the Eastern European market:
VOLKSWAGEN
* $970 million in Skoda Automobilova in the Czech Republic and plans an additional $1.8-billion investment.
* $420 million with partner Audi in engine manufacturing in Hungary.
* $32.5 million in an assembly plant in Slovakia.
GENERAL MOTORS
* $500 million in engine manufacturing and car assembly in Hungary.
* $20 million in Opel Astra assembly at the FSO plant in Poland, and has proposed an additional $340-million investment in the Polish car maker.
FIAT
* $260 million in car production with the Polish car maker FSM and plans an additional $1.5-billion investment in the Polish company.
SUZUKI
* $250 million in car manufacturing and distribution in Hungary.
DAEWOO
* $156 million in Rodae Automobile in Romania and plans an additional $750-million investment in the plant.
* Plans $200-million investment in Avia light-truck manufacturer in Czech Republic.
* Plans $350-million investment in car assembly at FSC car maker in Poland.
* Has proposed $1.1-billion investment in car production at FSO in Poland.
FORD
* $120 million in manufacturing components, as well as car sales in Hungary.
* $30 million in an assembly plant in Poland and plans an additional $69-million investment.
ROVER
* $50 million in an assembly plant in Bulgaria.
Sources: Polish Agency for Foreign Investment; Czech Invest; Budapest Business Journal; Slovak Foreign Investment Agency, and Daewoo Group; commercial attaches of Hungarian, Bulgarian and Romanian embassies in Warsaw.
Researched by ELA KASPRZYCKA / Los Angeles Times
