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S. Muralidhar

CHENNAI, March 28

FACED with the prospect of not being part of the global sale of Daewoo Motor Corporation's assets to General Motors, Daewoo Motor India Ltd (DMIL), the majority-owned subsidiary of the bankrupt Korean automobile company, is mulling entering into contract manufacturing arrangements with other domestic automobile companies.

Contract manufacturing would involve the use of the existing DMIL assembly line for the manufacture of current or proposed models of other carmakers for a fee. The practice, which is employed by a few multinational automobile companies in Europe and in some cases in the US, enables such companies to productively utilise excess capacity.

Contract manufacturing as a practice is solely driven by the prospect of cost savings for the company that seeks to lease the manufacturing facility. The typical profile of companies that take to contract manufacturing are ones that want to make a back door entry into a new automobile market without setting up a greenfield project, existing manufacturers that are strapped with insufficient production capacity or companies that may save on freight costs if the spare production facility is closer to the company's largest market.

While DMIL sources were unavailable for comment, industry sources said the company had already made presentations to two other automobile manufacturers in the country and was currently scouting for possible contract manufacturing tie-ups with overseas carmakers that are not present in the Indian market now.

Earlier this year, General Motors Corporation of the US had announced that it was willing to take over two of Daewoo's domestic plants in Korea and a few of its overseas plants. The buyout plan, however, did not include the Indian plant, which at an original cost of about $1 billion was touted as one of the largest foreign direct investments in the country.

DMIL is, by its own parent's admission, on the brink of bankruptcy. The Indian subsidiary's accumulated losses till date had exceeded 80 per cent of its share capital, the sources said.

Daewoo Corporation holds about 91.6 per cent of DMIL's equity. Faced with mounting financial pressure from accumulating losses, DMIL had unsuccessfully tried to sell its large engine and transmission plant located in Noida, near Delhi. The plant, which has been lying idle since mid-2000, did not find takers among existing car manufacturers, most of whom already have considerable engine manufacturing capacities of their own.

DMIL's contract manufacturing efforts could help mitigate some of the losses that the company is currently incurring due to the huge spare capacity that it is forced to carry. As against the installed production capacity of over 72,000 cars per annum, its total production this year would be less than 30 per cent of capacity, sources said.

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