Daewoo Shook Up the British Auto Industry; Its Next Stop Is the U.S.

The British automobile world was stunned. The upstart Asian car maker refused to play by the rules.

Daewoo Motors Corp. not only ignored the established way of selling and servicing its cars through Britain’s network of franchised dealers, but its advertising actually attacked the system.

Daewoo, which began operations in Britain in April 1995, also stunned the establishment by offering an unheard-of package of buyer benefits, including free maintenance for three years, free loaner cars and even three years of free liability and collision insurance.

Now the South Korean car maker is coming to the United States, with sales expected to start next spring.

Daewoo Group Chairman Woo-Chong Kim has said that the company intends to sell 30,000 cars in the United States next year and to top 100,000 annually by the end of the decade.

That’s only about 1% of the U.S. market, small potatoes next to the nearly 2.8 million cars General Motors Corp. sold last year. But it would give Daewoo more U.S. volume than Subaru, Saab, Volvo and a host of other European car makers.

Daewoo is keeping its U.S. plans to itself, but it is a good bet that this country’s auto retailing system is in for a few surprises: cars on display at the local Wal-Mart, perhaps, with repairs provided by a Pep Boys-type independent chain.

“They will be bloody aggressive. And if they don’t succeed in your country, it won’t be for lack of effort and resources,” says Ian Ritchie, managing director of Lancaster Group, a British dealership group with 38 locations.

Daewoo, a car maker from a country where factory-owned dealerships are the rule, has spent two years perfecting a leaner, consumer-friendly, Western-style sales and distribution system in Britain, and it’s clear that some of that experience will be exported here.

“We have supplied an awful lot of reports” to the U.S. project planners, says Daewoo U.K. spokesman Mark Carbery.

One thing on tap for the U.S. market is a prelaunch promotion in which scores of consumers will be given Daewoo cars to drive for three months. The company used a similar promotion to kick off its British launch in 1995 and found that it generated considerable name recognition and consumer interest.

Daewoo has set itself a tough task: The U.S. car market is the most competitive in the world, and it has not been kind to most of Asia’s smaller car makers. Even established brands such as Mazda are having difficulties.

But Daewoo is intent on being an international car company, “and it must succeed in the U.S. to realize its goals,” says Seoul-based analyst Hun Sok Kang of the ING Barings Ltd. brokerage.

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The company seems to have the muscle to back up its U.S. plans.

Daewoo Group, founded by Kim in 1969 as a textile maker, has become one of South Korea’s largest industrial conglomerates, or chaebols, with nearly $40 billion in worldwide sales last year. It began making cars in 1978 under a partnership with GM and in 1987 began exporting one of its models to the United States to be sold by GM as the Pontiac Le Mans subcompact.

The venture with GM ended in 1992, and Daewoo agreed to stay out of the United States for five years.

In the interim, it has acquired controlling interest in auto-making plants in 10 Asian and Eastern European countries, expanded its domestic production to five plants in South Korea and set up a product design and development operation under Ulrich Bez, a former head of engineering at both Porsche and BMW.

When Daewoo launches U.S. sales, it will be with a brand-new mid-size car named Leganza, which was developed under Bez and styled by a leading Italian design house.

The Volvo-sized Leganza is expected to have a base price of about $15,000, but options such as radio and air conditioning could push the selling price closer to $20,000. That would put Daewoo in the midst of the nation’s most competitive auto niche.

“It’s going to be tough for them” to meet their sales goals, says industry consultant George Peterson of Santa Ana-based AutoPacific Group.

Two smaller cars, also designed and engineered by Daewoo, are expected to be introduced in 1998.

The most unusual aspect of Daewoo’s U.S. venture is the unconfirmed plan, widely discussed in auto industry circles, to lease space for mini showrooms and sales offices in retail stores. Both the Kmart and Wal-Mart chains have been mentioned, although executives at both say they have no current plans to team up with Daewoo.

Daewoo also has asked several national auto repair chains about handling all of its warranty and repair business. Both Pep Boys and the Penske Auto Centers chains confirm that they have been approached by Daewoo, although Pep Boys just signed a similar deal with new- and used-car retailer Republic Industries Inc. and says it does not have an agreement with Daewoo.

Daewoo uses a similar system in Britain. It has just 26 of its own dealerships, which it calls Daewoo Motor Shows and Daewoo Car Shows. The larger Motor Shows have full-size showrooms, most have service and parts departments, and all have child-care areas, cafeterias and other amenities.

All Daewoos are sold on a fixed-price, no-haggling basis, and the company employs all of its sales personnel on straight salary, no commission.

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To expand its British presence, Daewoo contracted with a major parts and repair chain, Halfords, to provide warranty and repair services for Daewoo owners at 115 locations. At 21 of the Halfords stores, Daewoo has leased enough space for a mini-showroom with a sales desk, interactive video kiosk and two display cars.

Industry observers in Britain say Daewoo customers--often shoppers on tight budgets--seem to have accepted the unusual sales and service arrangements quite easily.

Daewoo set a national sales record in its first full year in Britain, garnering nearly 1% of the new-car market, with 20,000 sales.

If the cars the company brings to the U.S. win favorable reviews from the automotive press, Daewoo probably won’t have cause to regret using an unorthodox approach here, either.

Peterson and other industry analysts say they don’t think the average U.S. consumer cares who sells and services cars--an independent dealer or a factory-owned operation--as long as the price is right and the quality is good.

Daewoo still must prove itself on the quality issue, but it has shown that it is possible to eliminate independent dealers and keep the retail process directly under control of the factory--an approach that can shave hundreds of dollars from the cost of a car.

Those savings are the Holy Grail sought by domestic manufacturers in the United States. The average new car in the U.S. cost about $22,000 last year, and 25% of that was tacked on after the car left the factory.

But whether the retailer is an independent Chevrolet dealer or a salaried Daewoo employee, car buyers still want quality and reliability first, says Chris Cedargren of Nextrend, a Thousand Oaks auto industry consultant.

Selling through a discount retail chain hasn’t been done in the United States since Sears, Roebuck & Co. sold Kaiser automobiles in the early 1950s, says Cedargren, but that shouldn’t work against Daewoo.

“They would have to create an environment in the store that says ‘car dealership’ to give themselves credibility, but they did that in Great Britain. I don’t think it would be a problem here,” Cedargren says.

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Daewoo’s British adventure hasn’t been without its problems, however. The company has had trouble establishing itself in that country’s aggressive used-car market.

Many British dealers were angered at what they believe were unfair attacks on them in Daewoo’s advertising, and they mounted an unofficial boycott of the company’s cars, refusing to take them as trade-ins or to buy Daewoos in rental fleet auctions.

One of the television ads that outraged the dealers--apparently far more thin-skinned than their U.S. counterparts--shows a Daewoo being cut apart by a nattily dressed man wielding a huge power saw. Sparks fly as the man slices a section from the center of the car as an off-screen voice talks about the joys of owning a Daewoo.

In the final scene, the man drags away his slice as the announcer promises that with Daewoo, there’s no dealer to take a cut.

“Their tone was that they’re honest and we aren’t,” says Trevor Finn, chief executive of Pendragon, one of Britain’s largest dealership owners, with 70 locations.

Despite their animosity toward the newcomer, British auto insiders say the firm has done a good job of establishing itself and creating a good image with consumers.

Taking 1% of the nation’s new- car market in a single year “is unprecedented,” says industry consultant David Beck, former chief executive of the country’s largest dealership chain, Lex Retail Group. “The quality of their facilities is very high, and they’ve spent a considerable amount of money on advertising and marketing. They’ll do the same in the U.S.”

Several British dealers even grudgingly give Daewoo credit for bringing innovations to the industry.

“We aren’t as advanced in car retailing in the U.K. as is the U.S.,” says Lancaster Group’s Ritchie. “Daewoo was one of the first operations to do one-price selling. They came into the U.K. with a customer-friendly attitude and treated people properly.”

In addition to its no-haggle pricing, Daewoo provides buyers in Britain with three years of free service. The program covers scheduled maintenance and fixes anything that goes wrong with the car, even replacing normal “wear” items such as batteries, tires and windshield wiper blades.

Daewoo also picks up and delivers British customers’ cars, from home or office, and provides a free loan car--with any service, no matter how simple. “If we’ve got your car for an hour, you can have a courtesy car,” says spokeswoman Alison Moran.

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Daewoo also gives its British customers prepaid registration and taxes; a free three-year membership--including roadside repair and towing services--in the European Automobile Assn.; a free mobile telephone, part of a customer security program; and, beginning this year, three years of free insurance--an offer open to customers from 18 to 80 unless they have excessive accidents or citations on their records.

Daewoo won’t say so, but it is clear that the cost of those programs is covered, in part, by the money its customers otherwise would pay in sales commissions and dealership profit.

Robert L. Rewey, Ford Motor Co.’s group vice president for sales and marketing, suggests that Daewoo is engaged in “distress marketing” because its British sales slowed considerably last year.

“That’s the big debate about all of these alternative systems,” says Kevin Allen, head of the Orange County Motor Car Dealers Assn. “Will consumers accept them, and will there be profit enough to sustain them?”

Car makers, though, believe they will be accepted and that dealers are just digging in their heels and rejecting the inevitable.

And whereas Daewoo’s system is far more radical than anything that’s being planned for the United States by other car makers, the fact is that the whole auto retailing system is changing, says AutoPacific’s Peterson.

“And Daewoo,” he says, “could be taking advantage of that at just the right time.”