Chapter 14 Outline

Closing Case Anatomy of a Failed Alliance-General Motors and Daewoo

In June 1984, General Motors and the Daewoo Group of Korea signed an agreement that called for each to invest $100 million in a South Korean-based 50/50 joint venture, Daewoo Motor Company, that would manufacture a subcompact car, the Pontiac LeMans, based on GM's popular German-designed Opel Kadett (Opel is a wholly owned German subsidiary of GM). Much of the day-to-day management of the alliance was to be placed in the hands of Daewoo executives, with managerial and technical advice being provided by a limited number of GM executives. At the time, many hailed the alliance as

a smart move for both companies. GM doubted that a small car could be built profitably in the United States because of high labor costs, and it saw enormous advantages in this marriage of German technology and South Korean cheap labor. At the time, Roger Smith, GM's chairman, told Korean reporters that GM's North American operation would probably end up importing 80,000 to 100,000 cars a year from Daewoo Motors. As for the Daewoo Group, it was getting access to the superior engineering skills of GM and an entrée into the world's largest car market--the United States.

Eight years of financial losses later the joint venture collapsed in a blizzard of mutual recriminations between Daewoo and General Motors. From the perspective of GM, things started to go seriously wrong in 1987, just as the first LeMans was rolling off Daewoo's production line. South Korea had lurched toward democracy, and workers throughout the country demanded better wages. Daewoo Motor was hit by a series of bitter strikes that repeatedly halted LeMans production. To calm the labor troubles, Daewoo Motor more than doubled workers' wages. Suddenly it was cheaper to build Opels in Germany than in South Korea. (German wages were still higher, but German productivity was also much higher, which translated into lower labor costs.)

Equally problematic was the poor quality of the cars rolling off the Daewoo production line. Electrical systems often crashed on the LeMans and the braking system had a tendency to fail after just a few thousand miles. The LeMans soon gained a reputation for poor quality, and US sales plummeted to 37,000 vehicles in 1991, down 86 percent from their 1988 high point. Hurt by the LeMans's reputation as a lemon, Daewoo's share of the rapidly growing Korean car market also slumped from a high of 21.4 percent in 1987 to 12.3 percent in 1991.

However, if General Motors was disappointed in Daewoo, that was nothing compared to Daewoo's frustration with GM. Daewoo Group Chairman Kim Woo-Choong complained publicly that GM executives were arrogant and treated him shabbily. Mr. Kim was angry that GM tried to prohibit him from expanding the market for Daewoo's cars. In late 1988, Mr. Kim negotiated a deal to sell 7,000 of Daewoo Motor's cars in Eastern Europe. GM executives immediately tried to kill the deal, telling Mr. Kim that Europe was the territory of GM's German subsidiary, Opel. Daewoo ultimately agreed to limit the sale to 3,000 cars and never sell again in Eastern Europe. To make matters worse, when Daewoo developed a new sedan car and asked GM to sell it in the US, GM said no. By this point, Mr. Kim was very

frustrated at having his expansion plans in Eastern Europe and the United States held back by GM. Daewoo management also believed that the poor sales of the LeMans in the United States were not due to quality problems but to GM's poor marketing efforts.

Things came to a head in 1991 when Daewoo asked GM to agree to expand the manufacturing facilities of the joint venture. The plan called for each partner to put in another $100 million and for Daewoo Motor to double its output. GM management refused on the grounds that increasing output would not help Daewoo Motor unless the venture could first improve its product quality. The matter festered until late 1991 when GM management delivered a blunt proposal to Daewoo--either GM would buy out Daewoo's stake, or Daewoo would buy out GM's stake in the joint venture. Much to GM's surprise, Daewoo agreed to buy out GM's stake. The divorce was completed in November 1992 with an agreement by Daewoo to pay GM $170 million over three years for its 50 percent stake in Daewoo Motor Company.

http://www.gm.com

Source: D. Darlin, "Daewoo Will Pay GM $170 Million for Venture Stake," The Wall Street Journal, November 11, 1992, p. A6; and D. Darlin and J. B. White, "Failed Marriage," The Wall Street Journal, January 16, 1992, p. A1.

Case Discussion Questions

1. What were GM's motives for entering into the alliance with Daewoo? What were Daewoo's motives for entering into an alliance with GM? Do you think these different motivations ultimately contributed to the dissolution of the alliance? Why?

2. Did the relative bargaining power of General Motors and Daewoo change over the lifetime of the alliance? If so, do you think this helped contribute to the dissolution of the alliance? How?

3. How might GM and Daewoo have reduced the chances of the alliance dissolving? What might they have done differently?