The Fall of Daewoo Motors|Business Strategy|Case Study|Case Studies

The Fall of Daewoo Motors

            
 
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Case Details:

Case Code : BSTR034
Case Length : 13 Pages
Period : 1990 - 2001
Organization : Daewoo Motors
Pub Date : 2002
Teaching Note : Available
Countries : South Korea
Industry : Auto and Ancillaries

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"In a drive to go global, it (Daewoo Motors) refused to quit when it was behind."

- BusinessWeek, August 23, 1999.

"Kim Woo Choong has been stealing money from the company and we should not be punished for the mess he created."

- Choi Jong Hak, Daewoo Motor Labor Union representative, in 2001.

A Company in Trouble

In the late 1990s, the leading South Korean car manufacturer, Daewoo Motors (Daewoo), was in deep financial trouble. For the financial year ending 1999-2000, Daewoo generated revenues of $197.8 million and a net loss after tax of $10.43 billion (13.7 trillion won). The company's revenues had dropped by 94% since 1999.

The loss reported was also three times higher than that reported in 1999, and was ranked as South Korea's largest ever corporate loss. In addition, the company's domestic marketshare fell from 33% in 1998 to just 23% in 2000. According to analysts, Daewoo's borrowings for its expansion programs were responsible for its losses. The company's domestic and foreign debt amounted to more than $16.06 billion in December 1999. Moreover, its expansion into risky and uncertain markets like Vietnam and its decision to sell products at very low prices to gain marketshare had negatively affected its financial condition. Labor unrest was also one of the reasons cited by market observers for Daewoo's poor financial performance. The workers at many of its plants went on strike protesting against low wages, layoffs, and lack of job security.

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The Southeast Asian Financial Crisis1 of 1997-98 further deepened Daewoo's problems. The company's creditors started demanding repayments. However, some analysts felt that the primary reason for Daewoo's problems was mismanagement and the corrupt corporate governance practices adopted by Kim Woo Choong (Kim), the founder of the Daewoo Group.

An analyst commented, "The ill management and inability of Daewoo companies resulted in bankruptcy. The run-away irresponsible previous owner, Kim is now hiding somewhere in the world."2 Analysts commented that because of his financial mismanagement, not only Daewoo but also the entire Daewoo Group was deep in debt. In November 2000, the Korean government officially announced Daewoo's bankruptcy and its assets were put on sale. Amid controversies and almost a year of negotiations with the Korean government, GM signed a preliminary agreement in September 2001 to buy Daewoo's assets for $1.2 billion. However, this agreement ran into problems when GM reported a discrepancy in Daewoo's overseas accounts. With so many skeletons in Daewoo's closet, market observers wondered when the company would find a buyer and when its problems would be solved.

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1] The Southeast Asian financial crisis arose mainly due to a shortage of foreign exchange that had caused the value of currencies and equity shares in Thailand, Indonesia, South Korea and other Southeast Asian countries to fall drastically.

2] As quoted in workers.labor.net.au

 

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