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South Korea looking for GM to solve problems in return for incentives

By
Jennie Oh
General Motors has announced it will shut down its assembly plant in Gunsan, South Korea. by the end of May. Photo by Yonhap
General Motors has announced it will shut down its assembly plant in Gunsan, South Korea. by the end of May. Photo by Yonhap

SEOUL, Feb. 26 (UPI) -- The state-run Korea Development Bank will attempt to figure out this week how GM reached a $1.9 billion deficit in four years, prompting it to announcing the closing of one factory and seek government incentives to keep three others running.

Industry experts told UPI on Monday that they don't expect to find much during this due diligence process and that a commitment to transparency from the U.S. automaker -- and long-term investment in Korea -- would be more meaningful.

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The KDB has a 17 percent stake in GM Korea. The company had accumulated a $1.9 billion deficit from 2012 to 2016 and has announced it will close its factory in Gunsan. The plant employs about 2,000 workers and another 12,000 work for its suppliers.

GM has said the fate of its three other Korean plants depend on financial support from the government.

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The KDB plans to fast-track it's research within two months to determine how to sustain the company's operations and the scale of government support.

"There have been financial reviews conducted on the company every year, which concluded the company was in the red, so it is unlikely due diligence will produce new findings," said Lee Hang-gu, a senior analyst for the Korea Institute for Industrial Economics and Trade.

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Lee suggested the best way forward is to focus on how the company will iron out its management problems and expand its investment in South Korea.

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The automaker has been criticized for practices including making high-interest payments to its parent company, providing cars at low prices and investing excessively in research and development.

"It would be a challenge to investigate the high interest on loans and low transfer prices unless the National Tax Service steps in. Due diligence is necessary to evaluate the firm's situation but it will likely be limited in uncovering new information," Lee said.

GM has asked for financial support through KDB and tax benefits for new investments while proposing $2.8 billion in new investment and converting the Korea division's $2.7 billion debt to equity with capital increase from KDB.

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"The company should rather specify what it will do with the $2.8 billion investment as well as disclose details on the allocation of new cars to South Korean plants," Lee said.

The South Korean government has asked the company to lay out a plan to iron out management issues, improve profitability as well as specify a mid- to long-term plan to invest in South Korea operations.

"This time around, the government is likely to clearly state the conditions and require GM to follow though in order to receive support," a KDB-related analyst told UPI.

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Industry experts have also called the need for to increase KDB's shareholders' rights in the boardroom as well as enhance transparency.

"There have been a series of discussions where the bank called on the company to make new investments instead of just pulling out of the country. However, the bank has not been able to involve itself in management decisions, especially as it is a multinational firm," the expert said.

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