Rising labor costs and a strengthening South Korean Won may drive General Motors Company (GM) out of South Korea, according to Reuters. While the exit is expected to take time, the company has been avoiding manufacturing new versions of its Chevrolet Cruze and Opel Mokka in the country. This is being viewed as the first step in the automaker’s withdrawal from South Korea.
General Motors has been having trouble with labor unions in South Korea recently. Last month, labor strikes resulted in production losses of over $90 million, forcing the company to reach a wage settlement, including yearly bonuses of 10 million Won ($9,000 million) per member. This will significantly add to the already increasing labor costs in the country.
Moreover, a South Korean high court ruling from last year states that the base pay of workers, which is used to calculate overtime and pension payments, should include regularly paid bonuses. This ruling is currently under review by the Supreme Court. However, if it is approved by the court, it could lead to a double-digit increase in General Motors’ labor costs in the country.
General Motors currently manufactures about one-fifth of its cars in South Korea, mostly for export. Thus, any problem faced in the country impacts the company’s performance.
However, labor union leaders have a divided opinion about the accuracy of the report of General Motors’ pullout from South Korea. While some leaders believe that the company’s diminishing reliance on the country for manufacturing new models indicates that it could close some manufacturing facilities in the country, other leaders believe that the rumor is just a ploy by the company to scare the union to avoid further wage hikes.
Nevertheless, General Motors is not the only car manufacturer facing labor union trouble in South Korea. The union of Hyundai Motor Co. Ltd. (HYMLF) is reportedly planning a strike soon.
China and Spain are expected to be the gainers from General Motors’ decision. While the car maker has already revealed that a large portion of the redesigned Opel Mokka (sold in China and U.S. under the name Buick Encore) will be manufactured in Spain, even the new model of Chevrolet Cruze is expected to be manufactured in that country. Meanwhile, General Motors is planning 4 new manufacturing facilities in China and will launch about 17 new and upgraded car models through its Chinese joint ventures.
General Motors carries a Zacks Rank #3 (Hold). Some companies in the auto industry that are worth considering are Ford Motor Co. (F) and Volkswagen AG (VLKAY). While Ford carries a Zacks Rank #2 (Buy), Volkswagen carries a Zacks Rank #1 (Strong Buy).Read the Full Research Report on F
More From Zacks.com