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Probe may be called to look into dealings of GM Korea

Feb 13,2018
GM Korea may face an investigation by Korea’s financial authorities after reports that its U.S. headquarters has been exploiting its troubled affiliate’s resources.

General Motors CEO Mary Barra hinted last week of a possible exit from Korea, citing overly high costs.

But according to GM Korea, it borrowed 2.4 trillion ($2.2 billion) won from its U.S. headquarters in 2013 at an annual interest rate of 5 percent, which resulted in interest payments of 462 billion won by GM Korea to the parent company over the past four years. That interest rate was much higher than the average of 3 percent on loans from commercial banks. Hyundai Motor, for example, pays a 2 percent interest rate when borrowing from banks.

The Korean operation explained that GM Korea had to purchase preferred shares worth 1.7 trillion won from the state-run Korea Development Bank that guaranteed dividends of 7 percent of the value of the stock. GM Korea said it had no other choice but to borrow from its headquarters because the company was not financially qualified to borrow from a commercial bank, and the 5 percent interest was still lower than the 7 percent dividend payments it would have to pay if it didn’t buy back the shares.

Another issue was the high cost of making vehicles in Korea to export to the U.S. manufacturing costs in the automotive industry in Korea are usually under 90 percent of the final sales price of the vehicle. But in GM Korea’s case, the manufacturing costs at Korean plants were 97 percent in 2015 and 94 percent in 2016, the company claims.

“The cost of sales, which is much higher than market average, makes it impossible for GM Korea to make profit,” said Ji Sang-wook, a lawmaker from the Bareun Party at a parliamentary hearing last week. Ji wants a probe of GM Korea’s financial statement. “Also, the opaque financial transaction between the two firms, such as paying an overly high interest rate, will make it impossible for GM Korea to turn a profit.”

A top executive from the U.S. headquarters visited Korea twice in the past two months to ask for government support.

It has been rumored that Barry Engle, General Motors International President, asked the state and financial authorities if they would support the issuing of new stocks worth 3 trillion won.

“We are not the biggest stakeholder of GM Korea, but if issuing new stock turns out to be the final resolution for GM Korea, we may have to participate in it,” said an official from the Korea Development Bank.

GM Korea officials claim that detailed discussions didn’t take place between Engle and the Korean authorities. “We are aware that Engle came to Korea to discuss how to resolve the current situation and let us know that employees and executives have to share the pain in such a situation,” a GM Korea spokeswoman said.

Paik Un-gyu, Minister of Trade, Industry & Energy, said Monday that Engle asked for a “long-term commitment” from the Korean government.

“[The government] should work together so that foreign companies that do business in Korea could have the minimum rate of profit,” Paik said in a briefing. “There weren’t specific requests, but [he] asked for plans on a long-term commitment.”

GM Korea has accumulated 2.5 trillion won in operating losses over the past four years.

JIN EUN-SOO [jin.eunsoo@joongang.co.kr]