The brightest star in GM's constellation
South Korea's Daewoo brings GM into the subcompact market, cementing a very successful partnership.
By Sheridan Prasso, Fortune

(Fortune Magazine) -- With all the bad news coming out of Detroit in recent years, here's one bright star in an otherwise dark sky: South Korea.

Since General Motors (Charts) bought the Korean automaker Daewoo (the name means "great universe") out of bankruptcy four years ago for $1.2 billion, it has embarked upon an incredible transformation. Today GM-Daewoo is actually making money. It helped generate $831 million in profits for GM Asia-Pacific, on sales of $8 billion in the first half of this year, up from a net loss of $535 million on $3.6 billion sales for the same period last year.

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The division has quadrupled production and sales of the small cars it makes to 1.6 million this year, and it has won, within GM, the exclusive right to develop all next-generation subcompact cars for the entire world - one, currently on sale in the U.S., is the Chevy Aveo - drawing a $3.2 billion investment from headquarters in upgrades, R&D and new plants.

Daewoo's success has allowed GM to enter the subcompact market in 150 countries where it previously had no product to offer, boosting sales in Latin America, Asia and Europe, where appetites for small cars are high. And Daewoo's platform used in small Chevys and Buicks has helped propel GM into the No. 1 market position in China.

The secret of their success

How did this happen at a company that collapsed under $17 billion of debt in 1999 at the height of the Asian financial crisis, after having embarked under its megalomaniacal founder, Kim Woo Choong, on an ill-conceived global push into African and other underdeveloped markets? And under the umbrella of new management in Detroit that managed to lose $10.6 billion last year?

GM's head of operations in Korea in 2002, Nick Reilly, who was promoted in July to oversee GM's Asia-Pacific division, made a series of shrewd moves when he took up his post in Seoul. First GM, having had a previous tie-up with Daewoo fail in the 1980s, cherry-picked only the Daewoo factories it wanted. Then Reilly got unions to accept lower wages for a time, promising to rehire 1,725 laid-off Daewoo workers as soon as he could - even older and more expensive employees - and finally rehired everyone who wanted his job back as of last year, a total of 1,609 workers.

"As a consequence," says Reilly, "we've had a very good labor-relations climate. We've been through four wage negotiations now and have had almost no industrial action, as opposed to what the past had been and what our competitors still have."

Reilly also started exporting "kits" of subcompacts to countries with high duties on assembled cars, such as China, India, Thailand and parts of Latin America, where they could be put together more cheaply at GM plants.

Then he gave a vote of confidence to Daewoo's engineering team, which Reilly says was underestimated by the company's Korean owners. Talent was just waiting to be tapped, he says. He took their platforms and designs around the world and called them Chevys, Buicks and Opels instead of Daewoos. The success allowed him to expand to even more plants and facilities in Korea, and last year GM-Daewoo bought one of the factories - the one with the most acrimonious history of labor relations - that it had bypassed in 2002.

This subcompact strategy is key to GM's future, says Masaki Taketani, director of Asian Vehicle Forecasts at CSM Worldwide. In India, for example, the car market is currently just 1.5 million vehicles annually, but it is expected to double in the coming decade on demand for the one-liter and 1.5-liter cars GM-Daewoo makes. Even in the U.S., rising gas prices have boosted sales of subcompacts nearly 60 percent this year, compared with last year.

It may be all be an accident of timing, but it has served GM-Daewoo well. "Demand for those types of cars is growing," notes Guido Vildozo, senior market analyst at Global Insight. "That's why you see Daewoo shining like a star compared with other GM subsidiaries." GM, it seems, has found there's a great universe in Daewoo after all.

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