Lessons learned from Daewoo Motors' experience in emerging markets

Multinational Business Review, Fall 2002 by Pak, Yong Suhk, Lee, Jiman, An, Jung Moo

This article studies and assesses Daewoo Moors' entry into the Central and Eastern European markets. While this international venture enjoyed some initial success, it has been largely deemed a failure. Causes ofthis failed penetration include unreasonable promises of acquisitions,excessive investments, passive image building, and the ineffective transfer of R&D. Daewoo Motor's experience provides valuable lessons for companies that are interested in entering emerging markets.

INTRODUCTION

Central and Eastern Europe (CEE) has been recognized as one of the new emerging markets full of potentials since the last decade of the 20th century. Korean companies have aggressively entered into this market as they wished to experience first-mover advantage ahead of its competing multinational enterprises (MNEs). The intention of Korean firms to preempt the emerging markets and to secure a platform for the entry of the European Union (EU) markets was well matched with the goals of local governments to solve the urgent issues of privatization and of attracting foreign direct investments. Consequently, Daewoo Motors (DM) acquired automobile companies in Poland and Romania in 1996. DM recorded successful entry into the market with a high market share and seemed to enjoy first-mover advantages in CEE.

However, despite the initial success from 1996 to 1999, the sales of Daewoo-FSO Corporation and RODAE, the local automobile-- manufacturing corporations of DM in Poland and Romania respectively, have plummeted since 1999. Now, five years after its entry, DM is facing serious difficulties due to its poor sales performance. Daewoo-FSO reported a loss of $540 million in 2000 and its monthly sales has dropped by sixteen times between 1999 and 2002 (Financial Times, 2/28/02). RODAE has also been experiencing serious financial difficulties. After all, Daewoo's van-making unit in Lublin, Poland has filed for bankruptcy in September 2001.

Many researchers have blamed the breakdown of the Daewoo Group, the mother company of Daewoo-FSO and RODAE, as the major cause of DM's failing ventures in CEE. The bankruptcy and break-up of Daewoo Group should have negatively influenced the performance of Daewoo-FSO and RODAE, but may not have had the full responsibility of the current situation of DM in CEE. There may have been affiliates who were exploring their own destiny independent of the success or failure of their mother company. One example is Daewoo Shipbuilding & Marine Engineering Co. (DSME), which acquired a local shipbuilding company in Mangalia in 1997 that used to be run by Romanian government. The company entered the CEE market around the same time when DM entered Romania. DSME established Daewoo Mangalia Heavy Industry S.A. (DMHI) by acquiring 51% of the stakes of the state-owned shipbuilding company. Despite the bankruptcy of its mother company, DMHI reported a profit of $130 million in 2000 after a three-year deficit from 1997 to 1999. These two contradicting cases, i.e., the failure of DM and the success of DSME in the same CEE markets, suggest that the performance of parent MNEs may not be directly related to the success and failure of their foreign subsidiaries.

Therefore, it seems meaningful to review the factors that may have caused the sudden turnaround to a poor performance of DM's ventures in CEE. We agree that the bankruptcy of Daewoo Group should have had a negative impact on the performance of its foreign subsidiaries. However, we are reluctant to concede that the breakdown of a mother company explains everything for the failure of its foreign subsidiaries.

The goal of this paper, therefore, is to identify the factors that recently drove RODAE and Daewoo-FSO in the red and provide managerial implications from Daewoo's experience in the emerging markets. We believe that DM's failure in the CEE markets presents valuable lessons to those who wish to extend their global presence into emerging markets. After we briefly review the initial operations of DM in CEE, we are going to review various factors such as the unreasonable promises of acquisitions, excessive investments, low brand image, limitations of technology development, and ineffective transfer of R&D efforts as the key determinants that have lead Daewoo-FSO and RODAE to their current crisis. The conclusion will summarize the implications for global managers and international business researchers who are interested in foreign direct investment in emerging markets.

INITIAL MANAGEMENT STRATEGY AND RESULT

Investment motives of Daewoo Motors in CEE Markets

Daewoo Group, a Korean conglomerate under the umbrella name of Daewoo, has started to build foreign subsidiaries in CEE after it separated from General Motors in 1992. After signing the contract for the joint corporation (RODAE) in Romania in 1994, DM completed another (Daewoo-FSO) in Poland two years later. With its goal of producing two million cars overseas by 2001, Daewoo had expanded production sites one after another. It had planned to produce 750,000 cars per year at its production sites in Middle and East Europe. The local automobile production facilities in that region have taken a major role in Daewoo's global strategic management. The investment by Daewoo Group was the largest in scale by a Korean firm, as it reached 90% of the Korean investment in that region.