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The GM Korea ‘win-win’

May 04,2018
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Yi Jung-jae
*The author is a columnist of the JoongAng Ilbo.

The results are hardly surprising. The government claims that the deal with General Motors (GM) to save its Korean unit, GM Korea, was a win-win for both sides. But Korea’s taxpayers have been shaken down once again. The price to state-lender Korea Development Bank (KDB) for so-called pain-sharing as the second largest stakeholder in GM Korea went up to 800 billion won ($743.5 million) from an original 500 billion won. The KDB’s demand for a graded capital reduction in a ratio of 20 to one also went down the drain. It won the right to veto major management decisions for 10 years — instead of 15 years ensured in the original terms that expired last October.

From the start, the government was not able to push too hard. KDB Chairman Lee Dong-gull said, “It won’t be bad if we can save 150,000 jobs with 500 billion won.” In the previous government, Lee said tax funds must not be wasted to save an ailing company. He vowed to uphold that principle when the former chief of the Korea Institute of Finance was picked to head the state-run bank in September last year. He may have bent his principle under the new government’s industrial considerations.

The state bank did not do that bad considering the tough dealmaker it was facing, GM. In GM Korea’s case, the government had to deal with a multinational company. Creditors cannot force a global company to comply with its restructuring demands. Moreover, GM made the preemptive move of shutting down a factory in Gunsan and floating the idea of pulling out altogether with mid-term elections approaching. It was meaningful to make the Detroit-based automaker keep its Korean operation open and do its duty to its workers. GM headquarters will be extending 2.9 trillion won in new funding to GM Korea at a 3.46 percent annual floating interest rate, which is lower than the American carmaker’s usual 4 percent to 6 percent borrowing rate.

The KDB also won back a veto right for at least a decade to ensure the American carmaker keeps its Korean business alive for that period. Drawing specific numbers is the hardest part of a deal. Once numbers are put into writing, there is no way out. That is why negotiators prefer ambiguity over specific figures. GM reportedly resisted the 10-year veto right of the KDB.

Still, the GM negotiation left much to be desired. It underscored how vulnerable the Korean government and business can be against the threat of an exit by a foreign investor. The government stumbled after GM announced the closure of its Gunsan factory. There was no command center. Comments from the Ministry of Trade and Industry, Financial Services Commission, Ministry of Finance, the KDB and the Blue House all differed. Government officials hurriedly gathered to coordinate their plan two weeks after the GM announcement.

Foreign capital can pull out at any time. The government must draw up a manual and contingency action plan. South Korea is a country with a per capita income of more than $30,000. The country no longer can appeal to investors on price competitiveness. GM decided to stay in Korea 10 years longer because of its confidence in Korea’s auto parts infrastructure. But we cannot know what will happen after 10 years.

What’s more worrisome are the country’s bigger carmakers, Hyundai Motor and Kia Motors. If they become vulnerable, the government may have to inject 10 times more than what went into bailing out GM Korea. Other areas in the manufacturing sector are equally dismal.

The government must come up with a more sophisticated industrial policy. In the industrialization stage, there were benchmarks to emulate. Korea Inc. must now reinvent itself to stay in the game. The more advanced the economy, the harder it becomes for an enterprise to fight alone. The government must muster wisdom from business gurus and academics to redesign our industrial framework to build a new infrastructure for future industries and breed innovative enterprises.

The book “Makers and Takers: The Rise of Finance and the Fall of American Business” exposes how Apple became successful. It did not invent anything or need universities to train engineers or planes to transport resources. It did not have to fight the Japanese and Chinese governments because the U.S. government did it all.

The government must build that system so that corporations can innovate and grow. If it has learned that lesson from the GM negotiation, it will put the tax money spent to worthwhile use.

JoongAng Ilbo, May 3, Page 34