Daewoo FSO shapes up for MG Rover

By Kamil Tchorek

Daewoo FSO has rationalized its production base by laying off half of its 3000 staff at its Żerań plant and restructuring its debt. The development will heighten the appeal of the company to potential partners such as Britain's MG Rover, who began an inconclusive courtship with Daewoo FSO earlier this year.

According to auto industry analysts, MG Rover is in search of low-cost manufacturing for a new CityRover small car model based on the Indica, produced by its Indian associate Tata Motors. Tata has already arranged for DSP Merrill Lynch to prepare its bid for a Daewoo truck unit in South Korea, indicating that the axis of Daewoo, MG Rover and Tata may finally center in on the Daewoo FSO plant outside Warsaw.

Earlier this year MG Rover was reportedly prepared to buy 25 percent of the Daewoo FSO plant for $250 million. However, due to the temporary reservations of both parties, the investment was not completed.

"Though MG Rover were not invited to the shareholder meeting, we continue to be very interested in investing in Poland and we continue to be interested in the Daewoo FSO plant," says Suzanne Bartch of MG Rover's communications consultancy group Maitland.

"The restructuring will make the plant more attractive to Rover" says Krystyna Danilczyk, spokeswoman for Daewoo FSO. "Debts to Polish and Korean banks needed to be reduced, and the offer made by MG Rover needed to be modified and provided with more details. At this moment there is the right setting for continuing the negotiations."

Daewoo FSO had debts of zl.4 billion (around $1 billion) until the current debt-for-equity swap with South Korean Daewoo, its chief creditor. Following the bankruptcy of Daewoo Motor in 2001 - which did not affect Daewoo FSO - the company's attempt to avoid its own bankruptcy has caused it to shed its truck construction plant and smaller car production plant outside Lublin. The Żerań plant outside Warsaw is its final asset.

According to Wojciech Drzewiecki, president of auto analysts Samar, there are many big questions surrounding the FSO plant, but at the very least its future seems to be safe for another two years. "Daewoo wanted to get out," says Drzewiecki, "though it seems that a creative solution was found. A big question is about which of their models will last, and also about how the State will treat the plant now that it is the only representative in negotiations with foreign investors."

Analysts observe that the six investment banks previously involved, as well as the Daewoo parent company, will no longer be present at the negotiations with MG Rover, which will now be conducted entirely by the State Treasury. This may streamline the talks, as FSO's Danilczyk argues; but it may also add a political element to business decisions, says the auto analyst Drzewiecki.

"Though we have a market economy," comments Drzewiecki, "the FSO plant is a symbol for the Polish workforce. Pride, history and politics will affect the States's decisions. They may care more about securing jobs than about efficiency, and this will not necessarily help the relationship with MG Rover that they so dearly need."

If the MG Rover investment does finally materialize thanks to the restructuring of the plant, Drzewiecki asserts that MG Rover's own car models are too highly priced to seriously compete on the price-sensitive Polish market. In mid-September, Tata Motors released the CityRover, the new version of its Indica model, improved by MG Rover, which, according to a press statement, they hope to sell in Europe from November 2003.

Representatives of the Żerań plant say that it is ready to produce a new car model.