General Motors (NYSE:GM) said on Tuesday that it will close one of its four assembly plants in South Korea, a move it characterized as a "first step" in a major restructuring of its operations in the country.
The closing will generate about $850 million in one-time charges, GM said. Here's what we know.
About the factory that's closing
GM said that its Gunsan manufacturing complex will cease production and close by the end of May. The facility in Gunsan, located about 110 miles south of the South Korean capital of Seoul, includes an assembly plant as well as a stamping facility that makes body panels. It currently manufactures the Chevrolet Cruze compact sedan and a Cruze-based wagon called the Orlando.
But it's not making very many of either car at the moment, and that's why it's closing.
GM said that Gunsan has been running at only about 20% of its capacity for the last three years. (In the auto industry, "capacity" is generally defined as the output that would be generated by two shifts of workers working at full speed five days a week.) As a rule of thumb, auto factories break even at around 70% of capacity: Gunsan has almost certainly been losing a considerable amount of money.
Will GM move production elsewhere?
GM has other factories around the world that build both the Orlando and Cruze. Rather than setting up a new assembly line elsewhere, it may just boost production at one or more of its other factories to make up the volume that will be lost with Gunsan's closing.
The cost: An $850 million hit in the second quarter
Kaher Kazem, CEO of GM Korea, said the company is "committed to supporting all of our affected employees through this transition." That won't be cheap: Gunsan currently employs about 2,000 workers, and GM expects to take a one-time charge of "up to $375 million" in employee-related expense.
GM will also take a non-cash one-time charge of about $475 million in "asset impairments," essentially a writedown of the value of the facility. Most or all of those charges will be taken by the end of the second quarter, GM said.
The loud hint from GM: There's more to come
General Motors CEO Mary Barra dropped a loud hint last week that changes to its Korean operation were in the works:
The current cost structure [in GM Korea] has become challenging, and we're going to have to take actions going forward to have a viable business. We've already begun conversations with the key stakeholders in GM Korea, including our minority owners and the union, and being very clear that we need to improve the financial and operating performance.
Tuesday's announcement contained another strong hint from GM International chief Barry Engle, likely aimed at some of those stakeholders -- including the labor union and government officials:
The performance of our operations in South Korea needs to be urgently addressed by GM Korea and its key stakeholders. As we are at a critical juncture of needing to make product allocation decisions, the ongoing discussions must demonstrate significant progress by the end of February, when GM will make important decisions on next steps.
Translation: The decision to close Gunsan shows that we're serious about ending our losses in Korea. If those stakeholders don't agree to some big concessions by the end of February, GM could take even more drastic action.