198

International

Strategic Management

CLOSING

CASE

General Motors and Daewoo: Married, Divorced, and Married Again

In 1984, General Motors (GM) and Daewoo fonned a 50/50 joint venture OV) named the "Daewoo Motor Company," each contributing $100 million equity. The]V would produce the Pontiac LeMans, based on GM's popular Opel Kadett model developed by GM's wholly owned Gennan subsidiary Opel. Commentators hailed the alliance as a brilliant outcome of a corporate "marriage" of Gennan technology and Korean labor (whose cost was low at that time). As a winwin combination, GM would tackle the small car market in North America and eventually expand into Asia, whereas Daewoo would gain access to superior technology. Unfortunately, the alliance was problematic. By the late 1980s, Korean workers at the ]V launched a series of bitter strikes to demand better pay. Ultimately, the]V had to more than double their wages, wiping out the low-cost advantage. Equally problematic was the poor quality of the LeMans. Electrical systems and brakes often failed. US sales plummeted to 37,000 vehicles in 1991, down 86% from the 1988 high. However, Daewoo argued that the poor sales were not primarily due to quality problems, but due to GM's poor marketing efforts that had not treated the LeMans as one of GM's own models. Further, Daewoo was deeply frustrated by GM's determination to block its efforts to export cars to Eastern Europe, which Daewoo saw as its ideal market. GM's reasoning was that Eastern Europe was Opel's territory. Gradually, Daewoo secretly developedindependent car models, while GM initially was unaware of these activities. Once Daewoo launched competing car models, the troubles associated with this ]V, long rumored by the media, became strikingly evident. The picture of an "ideal couple" with a "perfect kid" (the JV) was now replaced by the image of a dysfunctional family where everybody In 1992, GM and Daewoo divorced, with Daewoo buying out GM's equity for $170 million. While GM exited the problematic ]V, it was left without a manufacturing base in Korea. Daewoo, on the other hand, embarked upon one of the most ambitious marches into emerging economies, building a dozen auto plants in Indonesia, Iran, Poland, Ukraine, Uzbekistan, and Vietnam. In the process, Daewoo borrowed an astounding $20 billion, leading to its collapse during the 1997 Asian econormc cnSlS. In an interesting turn of events, GM and Daewoo joined hands again. Despite its bankruptcy, Daewoo attempted to avoid GM and strongly preferred a takeover by Ford. But Ford took a pass. Then, GM entered the negotiation, eventually fonning a new]V, called "GM Daewoo Auto and Technology Company," with Daewoo's Korean creditors in 2001. The tenns of this marriage were quite different from the previous one. Instead of a 50/50 split, GM was now in the driver's seat, commanding a 67% stake (with a bargain-basement price of $400 million)-in essence, a GM acquisition in disguise. This time, GM has fully integrated GM Daewoo into its global strategy, because GM noW has uncontested control. GM Daewoo makes cars in South Korea and Vietnam and exports them to over 140 countries. One of the most decisive moves is to phase out the Daewoo brand tarnished by quality problems and financial tUrbulence, except in South Korea and Vietnam. GM has labeled a vast majority of cars built by GM Daewoo as Chevrolet, a brand that GM usually pitches as more American than the Stars and Stripes. In the United States, Latin America, and Eastern Europe, the GM Daewoo-built Chevrolet Aveo has become one of the best-selling compact cars, beating the Toyota Echo and the Hyundai Excel. In addition to finished cars, GM Daewoo
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China, Colombia, India, Thailand, and Venezuela. In three years, GM Daewoo's worldwide sales of cars and kits reached one million, up from 400,000 when GM took over. That makes GM Daewoo one of the best-performing units of the troubled Detroit automaker.
Sources: Basedon (1) BusinessWeek, 2004, Daewoo: GM's hot new engine,November 29: 52-53; (2) Business Week, 2005, Made in Korea, assembled China, August 1: 48; (3) M. W. Peng & O. in Shenkar,2002. joint venturedissolutionas corporate divorce,Academy oj ManagementExecutive, 16: 92-105; (4) Wikipedia, 2008, GM Daewoo,en.wikepedia. org.

Case Discussion Questions

1. fue the conditions in the automobile industry facilitating or constraining an alliance strategy? 2. In the first JV, did GM and Daewoo have the necessary relational capabilities to make the JV work? 3. In the second JV, have the partners improved their relational capabilities? 4. How does this case inform the debate on alliances versus acquisitions?