China's Korean Car Wreck
At a time when China is seeking ways to use its vast foreign exchange reserves to help its fledgling multinationals go abroad, its recent US$500 million disaster with the ill-starred Ssangyong Auto , Korea's fourth-largest automaker, is a cautionary tale of nightmare proportions.
Shangai Auto Industry Corp, known universally as SAIC, acquired 48.82 percent of Ssangyong in 2005, later raising its stake to 51.3 percent. The first foreign acquisition by a Chinese automaker effectively ended earlier this month when Ssangong filed for bankruptcy protection, effectively ending SAIC's control and signaling the loss of nearly all the US$500 million it used to acquire the automaker.
This collapse of a company founded in 1954 in just four years was the result of a fierce and xenophobic trade union, SAIC's inability to cut costs or the workforce, animosity between Chinese and Koreans over brands and plans to produce cars in China, the collapse of auto markets in South Korea, Europe and US and the refusal of Korean or Chinese banks to provide finance.
Through joinf ventures with General Motors and Volkswagen, SAIC is China's biggest auto producer and one of its richest. Sales from its two joint ventures last year were 947,000 vehicles, out of national sales of 9.38 million. In 2009, China will overtake the United States for the first time as the world's biggest auto market.
But, while it had cash and market share, SAIC did not have its own brands nor technology. It aimed to change that through its purchase of Ssangyong, which made SUVs, high-end passenger cars and commercial vehicles, with annual output capacity of 220,000 and exports to western Europe and the U.S.: it had 90 sales offices overseas and was best known for its SUVs.
SAIC planned to use Ssangyong expertise and technology to make its own brand of vehicles in China, where production costs are much lower than in South Korea.
The takeover worked well in the early months. SAIC sent five top managers to run the new company. They attended marriages and funerals of families of the staff and presented gifts on festival occasions. Some workers began to study Mandarin.
But the union, with a membership of 5,200 of the workforce of 7,100 and 100 full-time staff, was deeply suspicious: it believed SAIC wanted to move the majority of production to China. Ssyangyong's labour costs were the highest in the industry in Korea. With an average salary of US$40,000-50,000 a year, labor costs accounted for 20 percent of the cost of the vehicle, against a global average of 10 percent and 2-3 percent in China.
In October 2005, SAIC announced plans for a joint venture factory in Yizheng, Jiangsu province, with annual output of 100,000 vehicles, provoking a rebellion among the Korean management and workers.
On November 5, 2005, SAIC fired the Korean chief executive and 20 other Korean managers, replacing them with Chinese. On November 9, the union called for the resignation of Jiang Zhiwei, the most senior Chinese executive.
SAIC proposed production in China of the Kyron passenger car, under the SAIC brand: the Koreans said it must be a Ssangyong brand, with SAIC responsible only for manufacture and sales.
In June 2006, as relations deteriorated, SAIC named Philip Murtagh, former head of GM China and a 30-year veteran of the industry, head of its international operations, replacing Jiang.
On July 10, Murtagh announced a plan to fire 728 workers and 204 managers. On July 14, the union launched a strike, demanding no layoffs and increased investment in Korea. It lasted 49 days, causing 15,000 vehicles and US$300 million in losses. Workers smashed the windows of the main company building and, on one day, drove the entire management team out of the factory site.
On August 30, the two sides compromised – SAIC withdrew its dismissal plan and promised annual investment of 300 billion won in and the union promised no strikes in 2007. On November 5, Murtagh resigned, after only 15 months on the job.
The compromise led in 2007 to Ssangyong's best year and the first profit since the merger: output of 131,000 vehicles, of which 71,000 were exported, sales of US$3.1 billion, up 5.7 per cent, and profits of US$44.1 million. But in the meantime, Ssangyong's rivals, Kia and Hyundai, were producing tens of thousands of cars in the market Ssangong was shut out of -- at their China joint venture plants: that year, Ssangyong sold only 6,000 units in China.
In 2008 the firm was hit by the global crisis, abroad and at home, where 80 percent of people buy cars on credit. Output in 2008 was 90,000, below the breakeven point of 125,000. It needed US$451 million in new financing to stay in business, but no bank or government was willing to provide it.
The failure was a bitter lesson for SAIC – its inability to meld Chinese and Korean business cultures, manage a xenophobic and sometimes violent union and build a plant at home that would have utilized Ssangyong technology and Chinese costs.
The global financial crisis was the final blow: it has weakened, and will possibly kill, companies more powerful than Ssangyong. SAIC also failed in its attempt to acquire the Rover brand. It paid 67 million sterling for the intellectual property of Rover 75 before MG Rover collapsed but was unable to use the Rover brand, which belonged to BMW. Instead, it launched the Roewe brand in early 2007.
As the Japanese learned during the endaka period, overseas purchases have a way of exploding in your face. Money alone will not buy a place among the world's manufacturers. It cojldl be a long learning curve for SAIC and the other Chinese industrial giants.