By staff reporters Chen Zhu, Hu Runfeng, Yu Dawei, Chenzhong Xiaolu and Liang Dongmei
From Caijing Magazine
Job and production cuts typically rankle nerves in an economic downturn. But the decision by South Korean automaker Ssangyong Motor to idle production lines had the opposite effect on its biggest investor, Shanghai Automotive Industry Corp. (SAIC).
SAIC officials sighed with relief as the recent shutdown brought a pause – and perhaps an end -- to a long, painful journey that began with visions of auto industry power. Union strife, cultural clashes and a failed integration plan dashed the Chinese company’s dreams.
SAIC tried but failed to rescue Ssangyong. It bought a 49 percent stake for 4.1 billion yuan in 2004 and increased its share to more than 51 percent two years later.
But during that time, the Korean automaker’s output shrank, debt snowballed, and distrust between the Chinese investor and Korean workers flared, creating a rift that ended only after Ssangyong filed for bankruptcy protection in February.
What went wrong? Almost everything.
SAIC was one of
SAIC hoped to use the Korean company to offer a competitive, independent model on the Chinese market. Foreign vehicles such as Volkswagens, Buicks and Toyotas had been rolling off Chinese joint venture assembly lines for decades, But SAIC, like other Chinese automakers, craved independent brands and R&D capabilities. Not only did SAIC want a larger market share, but it also sought heftier government subsidies that an independent brand could bring.
Ssangyong offered SAIC a golden opportunity. Hard hit during the 1997 Asian Financial Crisis, Ssangyong had changed hands several times. Korea’s Daewoo tried but went belly up. Later, Ssangyong shares were divided among a consortium of 30 creditors, who in 2003 put a “for sale” sign on a 51 percent stake.
SAIC and Ssangyong started cooperating in 2001, when a SAIC branch bought manufacturing equipment, heavy trucks and buses from the Koreans. And in 2003, SAIC started buying Ssangyong’s light buses.
Then came the chance to buy the company – a tempting opportunity for the Chinese. At the time, Ssangyong was Korea’s fourth-largest automaker and dominated the high-end market for sport-utility vehicles. It also had a strong R&D team and extensive, global sales channels that fit SAIC’s ambitions to produce an independent car and branch out into international markets. Moreover, Ssangyong operated a network of 200 dealers in Korea and 90 around the world. It also enjoyed access rights to 400 Daewoo dealers.
The SUV market in China started taking off in 2003, with sales rising 80 percent from the year before. SAIC wanted a piece of the action, and Ssangyong seemed to offer an open door.
SAIC got a green light from the Shanghai government – its main investor -- which was eager to build a giant global automaker. After a month of deliberating the Ssangyong option, SAIC threw itself into a bidding war for the Korean company.
Competing for Ssangyong
Although many international investors showed interest, including America’s General Motors, the French companies Renault and Citroen, and India’s conglomerate Tata, the final round of competition pitted two Chinese companies – SAIC and Bluestar, a state-owned chemical company.
Bluestar saw Ssangyong as a roundabout way to enter China’s auto market, whose players are controlled by government policymakers.
“The access policy in the auto industry is no access,” industry analyst Jia Xinguang told Caijing in 2003. “To start a car manufacturing company, there must be approvals from the National Development and Reform Commission (NDRC) and the State Council. The agreed-upon principle (among policymakers) is that no new carmakers are to be approved.”
To get a foot in the door, Bluestar proposed a lucrative deal: paying 11,000 Korean won per share of Ssangyong, investing US$ 700 million in the company by 2010, and spending another US$ 300 million to set up 10,000 sales and maintenance shops for Ssangyong in China. The promise called for keeping all Ssangyong employees as well as the management team.
But the battle ended in Beijing before it ever reached the Korean Peninsula. NDRC rejected Bluestar’s plan, and decided only SAIC could move ahead with a Ssangyong buyout.
The deal was signed July 27, 2004. But before the ink dried, a massive strike at Ssangyong gave the Chinese investor a glimpse of a union’s power – and the conflicts to come.
With hard work and pride, Ssangyong’s workers had helped the company rise above frequent ownership changes and bounce back from downturns in 1997 and 2001. By 2002, the company was building 163,000 vehicles a year and had grabbed 40 percent of the Korean SUV market.
The Korean workers asked SAIC to sign a special agreement to protect their interests. One clause called for setting up an overseas operations strategy commission, allowing union members to sit in on board meetings and participate in decision-making. They also sought promises that there would be neither job cuts nor transfers of equipment to China.
In fact, Ssangyong workers organized several strikes even during the negotiation period. Their aim was to shut out the Chinese investors. SAIC worried about the union’s influence, but both the Chinese and Korean governments -- as well as consultants hired for the talks -- reassured the Shanghai automaker, pledging to give them full support and promising the union could be tamed.
At first, Ssangyong’s management was cooperative. Then-president Soh Jin Kwan supported an SAIC acquisition. An SAIC official publicly praised the company’s management and workers for turning the debt-laden company to profitability after 2001, and promised the Shanghai investors would keep the successful team intact.
But Ssangyong’s workers were suspicious of the Shanghai investor whose name no one knew. When striking, the workers raised concerns about Chinese company ownership, saying it would blemish the Korean brand, and predicting that SAIC would abandon Ssangyong after stealing its technology.
Soh’s view was different. He knew the consortium would sell out sooner or later, and that Ssangyong needed a stable investor for R&D, expanding overseas and maintaining growth momentum. His opinions reflected the Korean auto industry’s shift to exports from the domestic market in 2002. Moreover, several Korean automakers were challenging Ssangyong’s dominance by seeking a foothold in the profitable SUV market.
Soh saw SAIC as a cash source and a door to the Chinese market. His calculations greased the deal with SAIC. But it wasn’t long before the friction began.
A Great Honeymoon
SAIC sent five executives to Ssangyong’s offices in March 2005, including Chief Deputy Director Zhang Haitao. Ten days later, the Korean company’s board of directors expanded to include Zhang and SAIC President Chen Hong, who replaced Soh as board chairman. Earlier, the Ssangyong board had given a seat to SAIC Vice President Jiang Zhiwei.
SAIC plotted its course carefully. From early on, the company relied on the services of the Llinks law firm in Shanghai, Deutsche Bank, Credit Suisse and others. It also undertook a systematic effort to understand Korean laws and culture.
SAIC hired management consultant Hewitt Associates in 2004 to survey Ssangyong’s human resources, including compensation at each Korean plant. Compensation packages for Ssangyong’s post-acquisition management and key staffers were meticulously planned.
In addition, Hewitt interviewed Korean workers and found some “did not understand SAIC,” and instead worried that “after three years, SAIC would learn all it could about Ssangyong technology and sell off company.” Other workers worried that “SAIC didn’t understand Ssangyong or Korean companies, and would cast aside Ssangyong’s cooperative culture for a Western-style system of individual assessment.”
It’s unknown how many of Hewitt’s proposals were adopted by SAIC. But SAIC executives went to great pains to narrow the gap with Ssangyong workers. Zhang attended as many weddings and funerals of Korean workers as possible, following local customs by kneeling and praying in family mourning halls. When traveling to Seoul from Shanghai, Deputy Director Shen Jianping often brought paintings for Korean colleagues. A number of Korean workers even studied Chinese to adapt to the new management.
For the first three months, everything seemed harmonious.
Delusions of Harmony
In buying a Korean auto company, SAIC followed the example of previous investors including France’s Renault, which bought Samsung Motors in 2000, and General Motors, which invested in Daewoo in 2002. Each of these foreign investors faced intense pressure from Korea’s powerful trade unions, which are run by full-time union stewards elected by the workers. Korean workers at American and Korean auto companies typically struck several times a year with a clear goal: higher wages.
Despite strikes, each foreign company before SAIC enjoyed a degree of success. But the strikes at Ssangyong were entirely different. Some 5,200 of Ssangyong’s 7,100 employees were union members divided into more than a dozen factions. And bother workers and managers complained that SAIC was using the Koreans.
The conflicts escalated over the years, and the insecurity of Korean workers and managers was increasingly apparent. A symbol of the differences between Koreans and Chinese was a slogan Caijing saw on a factory floor at Ssangyong’s Pyeongtaek factory: “Strangle SAIC’s neck!”
The deal was not necessarily doomed from the start. Both sides had obvious common interests; making Ssangyong profitable would be a win-win. And it would be wrong to say the union and Korean managers left no room for success.
Actually, the marriage began in harmony. But the Korean side’s insecurity grew, especially after they discovered a plan for moving the production of certain Ssangyong products to China.
The March 2005 plan called for modifying Ssangyong’s SUV and MPV vehicles for manufacture in China under the SAIC brand. The modification costs and intellectual property rights issues would be handled by SAIC. SAIC optimistically predicted annual production of a modified SUV launched at the end of 2006 would grow to 30,000 vehicles by 2008.
In May 2005, SAIC put Zhang Haitao in charge of the company’s China operations. His first duty was to select a site for a second Chinese factory. In addition to importing Ssangyong motors, SAIC hoped to move production of other components to China and give priority to SAIC suppliers.
Policymakers saw an urgent need to encourage long-range growth. But labor costs stood in the way. Ssangyong’s planning executives said labor costs made up more than 20 percent of an average vehicle’s cost, compared to around 10 percent for other Korean automakers. This analysis set the stage for layoffs in Korea – a move that clashed with SAIC’s verbal promise to the union in which layoffs was ruled out.
Under pressure, SAIC shelved the restructuring plan. It was a fateful decision; the opportunity for restructuring vanished in a flash. Layoffs would have been difficult but not impossible during the ownership transition. But the Koreans lost trust as soon as they learned of SAIC’s plans to move SUV production to China.
Pressure from the union was far stronger than SAIC imagined. After learning of SAIC’s plan, the union demanded Ssangyong negotiate an agreement with the union before building any new factories, or launching joint ventures or cooperation projects, in China. The union also said Ssangyong could not build factories abroad, and that any foreign-made models could not be sold on the Korean market. Other demands had to do with personnel.
Fearing SAIC would pursue a production-transfer strategy and neglect sales of Ssangyong vehicles in China, the union also demanded a plan for domestic marketing and promoting Ssangyong vehicles. The union sent representatives to Shanghai in hopes of meeting Chen, the new chairman, and asking him to fulfill SAIC’s post-investment promises.
A few months later, SAIC executives gave the union a new plan for an SAIC-Ssangyong joint venture in China. According to the plan, each side would fund 50 percent of the venture, and major motor components would come from Korea. Production was to start in 2007, with a goal of 100,000 units a year. But the union was strongly opposed, arguing that Ssangyong could lose its core technology and talent, while local suppliers and regional economies would suffer as well.
Driving Out Soh
While the debate stewed, relations between SAIC and the automaker’s former leader Soh worsened.
“I understand the synergies,” Soh later told the Korea Daily News. “Ssangyong makes mid- and high-market cars, and SAIC focuses on low-cost.”
Soh worked at Ssangyong for 30 years, working his way up from the bottom and guiding the company from 2001 to ’04 with a steady stream of new models, sales and profit records. But in 2005, he disagreed with the joint venture plan, the proposed technology exchange between Ssangyong and SAIC, and the idea of casting aside local suppliers in favor of global procurement. But with SAIC dominating the board, Soh no longer had the upper hand.
Soh was dismissed in November 2005, four weeks before the end of his term. The company blamed him for “failure to deliver on promised profit targets.” He was replaced by the 48-year-old director of product development, Choi Hyung-Tak. More than 20 higher-ups close to Soh were dismissed as well, and were replaced by managers close to SAIC.
Soh demanded US$ 1 million in pension and severance payments. His demand was rejected. SAIC then released results of an investigation into Soh’s alleged misdeeds, including kickbacks. SAIC said between the acquisition negotiations and the acquisition itself, Soh had pocketed recruitment fees from hundreds of new hires.
But Ssangyong workers saw things differently. Seo Jae-Cheol, the company’s production planning group manager, told Caijing that Soh’s departure has been hard to swallow. Seo said Soh’s dismissal was widely seen as the result of personal conflict.
In fact, Soh never really left. “After he was forced out by the board, his first phone call was to the labor union, asking them to organize a strike,” a Ssangyong executive told Caijing. More importantly, expelling Soh alone could not resolve problems with the union.
Four days after Soh’s departure, 87 percent of the union members backed an assault on SAIC’s joint venture plan and demanded the resignation of Jiang Zhiwei, who represented SAIC on the board of directors and oversaw Ssangyong management.
As the situation became increasingly difficult to control, SAIC started looking for a new executive.
Enter Philip F. Murtaugh, who spent more than 30 years at General Motors in England, Japan and other locations. In 1996, Murtaugh was named executive vice president at Shanghai GM. From 2000 to ’05, he served as chairman and CEO of General Motors China.
In August 2006, Murtaugh succeeded Jiang as SAIC representative on the Ssangyong board. Murtaugh was picked for his background at General Motors and international experience. The Chinese also thought he could quickly build trust with the Korean staffers.
Murtaugh joined Choi Hyung-Tak and Zhang Haitao at the helm as SAIC set about reviving the plan to produce modified Ssangyong vehicles in China. SAIC hoped the new models would be sold under their own brand, but Korean executives at Ssangyong continued pushing the intellectual property rights issue.
Meanwhile, Ssangyong’s business was slipping. An internal Ssangyong report in May 2006 discussed “sluggish operations” and “cash flow interruptions” that were expected in July and August. Based on this prediction, SAIC decided to cut staff and salaries.
The company submitted a plan to the union in July 2006 that was rumored to have been engineered by Murtaugh. It called for cutting 986 jobs, including 728 workers and 204 managers. A few days later, strike broke out. Although expected, the walkout lasted longer – 49 days -- and was more intense than Murtaugh and Chinese management ever expected.
City officials in Pyeongtaek helped coordinate a one-year agreement in which the union agreed not to strike. Meanwhile, SAIC would honor its commitments and temporarily suspend its joint venture and integration plans.
The next year, Ssangyong reported a profit for the first time since the acquisition. Annual sales in 2007 rose 5.7 percent to US$ 3.1 billion, while its operating profit climbed 61 percent to US$ 44.1 million. The company produced 131,000 vehicles, including 71,000 for export -- a record.
Later in the year, Murtaugh resigned after 15 months in office. He had helped Ssangyong win some breathing room. But the price was high, according to Lan Qingsong, who later replaced Zhang as deputy CEO.
Despite SAIC’s support, Ssangyong slipped behind other Korean auto companies on the Chinese market. In 2007, Hyundai’s joint venture-produced Tucson vehicle sold 44,000 units in China, while sales of Ssangyong imports amounted to just over 6,000. Kia, another Korean automaker, also beat Ssangyong in China.
Lan blamed labor costs and tariffs for the fact that SUVs cost about 40,000 yuan more than counterparts made at the Hyundai factory in China. Ssangyong was the first Korean automaker with a SUV on the Chinese market “by a long shot,” Lan said. “Yet we never caught up with the pack.”
SAIC blames the union for the stumbling in China, although Hyundai and Kia also had problems with unions while forming Chinese ventures. A major difference, however, was that SAIC wanted to produce joint-venture vehicles under its brand name. Chinese-made Hyundai and Kia vehicles still carry the Korean badges.
Park Jae-yoon, section chief responsible for Ssangyong logistics management, told Cajing that while he didn’t endorse the union’s radical methods of resistance, most Koreans agreed with its basic assertions. Park said the unions were responsible for 20 percent of the debacle, while another 20 percent could be pinned on the market environment. The rest, he said, could be blamed on management.
Ssangyong’s internal strife sapped the company’s vigor, leaving it unprepared for financial crisis in 2008. Ssangyong’s production capacity was around 210,000 units. An industry expert close to SAIC told Caijing that Ssangyong’s profit/loss inversion point was around 125,000 units. When the economy was good, margin contribution was quite sizeable, but as soon as sales volume slid, fixed costs began exerting considerable pressure.
The global financial crisis in 2008 was a catastrophe for the auto industry worldwide. But it was especially dire for Ssangyong, since its main products were SUVs and mid- to high-end sedans. Moreover, its exports mainly headed to recession-hit western Europe and North America. Ssangyong exported only 5,000 vehicles to Europe in 2008 – one-sixth the amount shipped in previous years. By the end of the year, the company had sold only 90,000 vehicles – far short of its annual production capacity of 210,000 vehicles.
Lan told Caijing the Korean market downturn, credit contraction and a volatile foreign exchange rate hit Ssangyong sales hard. Credit is needed by 80 percent of Koreans who buy cars, especially those buying large cars, he said, but Ssangyong was the only major Korean automaker without its own financial services company and second-hand dealers. Instead, the company relied on a partnership with Daewoo Capital Partners. Once bank credit vanished, Daewoo Capital couldn’t help Ssangyong buyers. At one time, Daewoo Capital’s credit limit fell to 500 million won per month -- a far cry from the company’s normal monthly limit of 45 billion won.
Ssangyong’s cash flow faltered in September, forcing it to seek help from its biggest creditor, the Korea Development Bank. But KDB refused the loan request.
By December, the Ssangyong board desperately recommended “slimming down for the winter” through an immediate restructuring that included laying off to 2,000 workers. This set off another conflict between labor and management. From mid-December to mid-January, union workers demonstrated in front of the Chinese embassy in Seoul. A group of union members, citing illegal transfer of core technology, blocked Chinese managers at the Pyeongtaek factory.
Negotiations between the two sides reached an impasse over a “invest first or lay off first” controversy. And SAIC projected 2008 profits would fall by more than half.
“Under these circumstances, SAIC could only decide to protect its domestic business,” an SAIC insider told Caijing.
Meanwhile, SAIC applied for but was refused a US$ 200 million bridge loan from the Korea Development Bank. It needed the money because two Chinese banks – Bank of China and ICBC –in July 2008 had turned SAIC’s request for an extension for a US$ 200 million, one-year loan obtained in 2007. Caijing learned neither bank had confidence in SAIC’s ability to repay the loan.
On January 9, Ssangyong applied for bankruptcy protection and asked a Korean court for permission to restructure. President Choi and Chief Deputy Director Zhang resigned. SAIC handed over control of Ssangyong to the Korean court. And four days later, Ssangyong’s factories fell silent.
Since then, two factories have resumed operations and announced plans for a new line. But will SAIC get another chance? Moreover, do the now-relieved Chinese even want another chance? Company executives aren’t ready to answer these questions. At the same time, though, they don’t want to be called quitters.
“Bankruptcy protection is indeed a reincarnation process,” said Hu Maoyuan, chairman of SAIC. “That means SAIC did not give up.”