Following a disastrous period in automotive manufacturing history, which has seen plummeting sales set against the backdrop of a global economic downturn, comes the announcement that from late-December General Motors (GM) will suspend production in South Korea for about two weeks. The announcement is generally considered one of the most significant indicators that the global car manufacturing crisis is about to hit Asia – a market which has, until now, been regarded as the antidote to flagging profits in the West.
The closure will affect all five of GM’s Korean plants previously owned by Daewoo. GM says the temporary closure in Korea is due to slowing demand and a need to manage production and rising inventories. Since GM took over Daewoo in 2002, the company has been investing fairly heavily in Korea, both in engineering and research and development facilities, says GM’s president of Asia-Pacific, Nick Reilly. “Korea has a very competitive supplier base, there is no shortage of engineers and we’ve found the manufacturing productivity is very high,” he says.
Until now, Asia has helped GM to mitigate its global losses, particularly through strong market growth in China and robust demand for Korean-built cars. GM-DAT, GM’s Korean joint-venture, had been operating at 110% capacity this year. Last year it produced about two million vehicles, exporting 85% of them to other Asian countries, Australia, and elsewhere. “We’ve been increasing production capacity in Korea during the past two years, opening a new manufacturing plant which tripled capacity from October 2008,” says Mr Reilly.
Despite the planned Korean closure, Mr Reilly believes GM Asia’s growth will continue, as will the company’s investments in Asia. The Chinese market represents the biggest growth potential in Asia, according to Mr Reilly, despite the firm having ramped up capacity in India, with the launch of a mini car, and manufacturing facilities in Thailand and Indonesia. “We’ve invested heavily ahead of the curve in China because the market is growing so fast,” he says. Although Mr Reilly expects continued growth, it will not be at the 30% to 40% annual growth rate highs. And being well placed from a capacity point of view means that the firm can focus its investment on new product ranges.
To compensate for rising costs on China’s eastern coast and Shanghai, the firm is opening manufacturing plants deeper into mainland China, where costs are considerably lower. So far, the Chinese government has done a good job in developing infrastructure ahead of industry in these areas, says Mr Reilly. In China, GM operates within a joint-venture with the state-owned Shanghai Automotive Industry Corporation.
“One has to have particularly good understanding of how to get things approved in China and of the direction the government wants to go with its policies,” says Mr Reilly. “Once you understand the system, you realise it is a very efficient system that has been positive for us but it is very different from countries such as Thailand and Indonesia, where the government is involved in setting policies but not in the decision making of individual companies,” he says.
Mr Reilly’s five- to 10-year outlook on the future of the Asian market remains positive despite the global credit crisis. “There may be some countries which have a higher percentage growth during the next few years but nothing on the scale of China. We have enough capacity to absorb a market increase during the next couple of years and we will be making decisions early next year for the next wave of capacity increases, looking four or five years out, and I am very confident we are in a good position.”