The government and General Motors agreed to provide $7.15 billion for GM’s struggling local unit. GM will convert $2.8 billion owed by GM Korea into shares and inject $3.6 billion into the local unit in fresh funding. The government will offer $750 million through state-run Korea Development Bank.
GM will be banned from selling any of its stake in GM Korea over the next five years and will be required to retain at least a 35-percent stake in its Korean unit for the following five years. KDB has secured a right to veto GM’s sale of 20 percent or more of GM Korea assets.
In a nutshell, the government will offer $750 million in taxpayers’ money to ensure GM Korea stays in the country for at least 10 years.
The agreement leaves many things to be desired. Of the $3.6 billion GM agreed to provide in fresh funds, $2.6 billion will be loaned to GM Korea, while all of KDB’s new funds will be made in the form of preferred stocks, meaning it will be difficult for it cash in on the deal.
The government effectively accepted GM’s request that its Korean plants be designated as foreign investment zones where corporate taxes will be exempted or reduced. It will reportedly subsidize the construction of a factory. The actual government support will exceed $750 million.
Prime Minister Kim Dong-yeon said that KDB would offer just a little more than 10 percent of the total support. Of course, there is little room for criticism of support with taxes inducing large funds from GM, but $750 million is not a negligible amount at all. It goes against the free market economy to use taxes to revive a private company.
Not just one or two companies are financially distressed in Korea. How will the government answer if asked why it does not support voluntary resignations at faltering electronics companies without strong unions?
“More than 2,000 GM Korea employees endured painful restructuring steps such as wage freeze and bonus reduction,” Prime Minister Kim said, “Their perseverance must have looked positive in the eyes of the people.”
Too bad the employees went through a tough restructuring process, but they need to look back on their effect on the company.
Their average annual pay was 86.7 million won ($81,000) in 2016. That is nearly triple the income earned by small self-employers or workers at small businesses.
GM employees reportedly received two years of annual pay as voluntary resignation allowance, separately from severance pay. The allowance is estimated at 190 million won per voluntary retiree. It is not common for a company that went to the brink of bankruptcy to give that amount as a voluntary resignation allowance.
GM agreed to open a new regional headquarters to manage its strategies for the Asia-Pacific region. But China is not a part of that region. Last year GM sold 9.6 million cars worldwide. To GM, China was the largest market with 4.04 million cars sold. However, it sold 45,532 cars in nine Asia-Pacific nations. The proportion to its global sale was 0.47 percent.
At the end of the day, if GM Korea fails to make a profit, everything will come to nothing. Hyundai Motor saw its sales and operating profit drop 4 percent and 45.5, percent, respectively, in the first quarter of this year from the same period last year. The economy is getting tough for automakers.
As long as a factory remains fettered to low productivity and high wages, support from outside will have to be injected continuously to sustain it. It’s like pouring water in a sieve.
Economic assistance is needed to revive the faltering GM Korea and help its parts suppliers, but labor reforms must accompany it.
If its union goes on strike next year demanding a sharp wage increase and generous welfare benefits, its goal of revival will go farther. Interference by a militant labor group where the GM Korea union belongs must be minimized until the company stands on its own. GM, for one, must provide unfailing support for its Korean unit as it agreed.
The crisis of GM Korea and support with taxes must not be repeated.