ANATOMY OF A FAILED ALLIANCEGENERAL 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 1,00,000 cars a
year from Daewoo Motors. As for the Daewoo Group, it was getting access to the superior
engineering skills of GM and an entree into the world's largest car marketthe 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 irTl-987, 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 deliv-
ered a blunt proposal to Daewooeither 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
Sources: D. Darlin, "Daewoo Will Pay GM $170 Million for Venrure Stake," The Walt Street
Journal, November 11, 1992, p. A6; and D. Darlin and J. B. White, "Failed Marriage," The
Wall Street Journal, January 16, 1992, p. Al.