Daewoo-FSO rescued - for now

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Since its main shareholder, Daewoo of South Korea, went bankrupt in 2001, the fate of the Polish car producer, FSO-Daewoo, has hung in the balance. A deal on reducing FSO-Daewoo's debt reached with the Korean investors and Polish banks and authorities in September 2003 has now rescued the company, at least in the short term, However, the restructuring plan involves around 1,500 job losses out of a workforce of 3,000.

In the early 1990s, the Polish automobile market was a very attractive one for the world’s major producers, given its size and pent-up internal demand. Of the major multinational car manufacturers, only the Italian-based Fiat had staked a claim to the Polish market; it had been present in the country since the 1970s, when it invested in FSM at Bielsko-Biała (the facility became Fiat’s property in 1992 and was renamed Fiat Auto Poland). Poland’s other large producer of passenger cars, FSO Warsaw, had been seeking a strategic investor from the automotive sector for years. In the mid-1990s, Daewoo-Motor (South Korea) and General Motors (USA) were the sole contenders. Daewoo eventually won the day; its offer appeared more attractive on account not only of the value of declared investments (three times that of General Motors), but also of an undertaking to maintain employment at the current level – a promise welcomed by the trade unions active at FSO.

March 1996 saw the establishment of Daewoo-FSO, with Daewoo taking a 70% stake in the new entity and the Polish State Treasury and the employees taking 15% each. The first years of Daewoo’s Polish operations brought a string of successes, measured in terms of output (in 1999, the number of cars turned out by the Warsaw plant passed the 200,000 mark), share of the Polish automotive market (30%), and the range of models (six different cars, either assembled from kits or built from scratch). In 2000, however, sales began to founder. The Korean parent company went bankrupt in the spring of 2001 and for Daewoo-FSO, this heralded the end of new investment. A 'cherry-picking' investment by General Motors (GM) which left it with selected elements of the defunct Daewoo’s holdings in South Korea and in other countries did not include Poland (Gliwice, in the south of the country, has been the home of a GM-owned plant since 1998).

The debts of Daewoo-FSO, meanwhile, continued to increase. It eventually owed PLN 3 billion to the Korean owners, PLN 634 million to the Polish State Treasury, and PLN 591 million to six Polish banks. With this level of liabilities, the operation is, for all intents and purposes, bankrupt, although it retains a production capacity estimated at 250,000 vehicles per year. It is for this reason that FSO’s Polish creditors have been reluctant to countenance its liquidation. The authorities have also been keen to preserve the jobs at the facility. Accordingly, FSO has spent the past two years searching for a new investor. In 2002, talks were held with the UK-based MG Rover but, in the end, the parties failed to reach an agreement.

A restructuring programme which has been negotiated during 2003 offers hope for FSO in the form of a capital boost and of a debt-for-equity swap, and also an extension of the period during which the Polish producer is entitled to use the Daewoo brand. Polish banks have agreed to halve FSO’s debts. The greatest challenge lay in persuading Daewoo-Motor, the largest shareholder in FSO (with an 88.67% stake), to agree to a debt-for-equity swap. The negotiations were held under time pressure in that, as of 1 October 2003, new legislative provisions concerning bankruptcy were to come into force in Poland, with the effect that FSO’s room for manoeuvre would be considerably curtailed. A general meeting of shareholders held on 18 September took place in a very tense atmosphere. The Korean representatives made little pretence regarding their dissatisfaction with the proposed restructuring programme, under which they would have to forgo any prospect of recouping their debts in pecuniary form. For the duration of the talks, trade unions organised picket lines at the Warsaw plant, hoping to exert pressure on the Korean owners. Bankruptcy of the plant would bring unemployment for the 3,000-plus workforce of FSO as well as for another 4,000 workers employed by its various cooperating entities.

In late September, a Polish government delegation headed by Jacek Piechota, the Deputy Minister of the Economy, travelled to Seoul for the decisive round of negotiations. It succeeded in hammering out a final deal with the Korean owners, which acceded to an increase in Daewoo-FSO’s share capital under the condition that the Korean courts agreed to such a move (necessary insofar as the Korean parent company is bankrupt). The Korean courts gave their approval, and the general meeting of shareholders definitively approved the restructuring programme on 29 September. Apart from its provisions for a share capital increase of PLN 2.25 billion and for debt reductions, the programme also envisages the redundancy of some 1,500 workers. The management is to consult trade unions on the terms of the job losses. There remains, however, a need to obtain GM’s assistance for continued use by the Warsaw producer of the Daewoo brand; fees in this respect may be settled as part of the 'offset' programme accompanying Poland’s recent purchase of F-16 fighters from the USA ( PL0309107F).

FSO is now in a position to survive for the next few years. In the longer term, however, its prospects are likely to be bleak unless it succeeds in finding a new strategic investor..