Cielo-Daewoo Case

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  • Topic: GM Daewoo, Suzuki, Maruti Suzuki
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CIELO – A CAR IN TROUBLE

“Daewoo is good at making cars, but rotten at marketing them.” - An automobile industry analyst, in 2000.

THE ENTRY OF DAEWOO

The entry of the Korean automobile major, Daewoo Motors India Ltd. (Daewoo) in the Indian passenger car market was heralded as a milestone for the industry. This was because Daewoo was the multinational to challenge the might of the market leader Maruti Udyog Ltd. (MUL). Daewoo’s first vehicle, the 1500 cc Cielo was launched in three versions (Cielo, Cielo GLX and Cielo GLE) in July 1995. Consumers who until now had no other option besides the Maruti Esteem in the mid-size segment (Refer Exhibit I), rushed to buy the Cielo. Bookings for the three models reached 114,000 in a short span of time. With the car registering high initial volumes and its plans to become a Rs 100 billion company by 1998-99, Daewoo seemed all set to give MUL serious competition.

However, Daewoo was in for a major shock as around 70,000 customers cancelled their bookings within a few months. Daewoo had predicted an annual turnover of over Rs 10 billion and sales of 20,000 cars by March 1996 - but managed to record a turnover of Rs 6.05 billion and sales of only 9,044 cars. During April-December 1996, only 13,776 Cielos were sold against the targeted 52,000. During April 1997-February 1998, 9006 Cielos were sold, a decline of 41% from the corresponding period previous year. In 1998-99, 5500 Cielos were sold, a fall of nearly 50% over the previous year. The entry of competition in form of General Motors and Ford in 1996 and the general downturn in the mid-size car segment added to the company’s problems. Daewoo recorded a loss of Rs 351.4 million in the six months ended March 1998 as sales declined to Rs 1.22 billion from Rs 2.7 billion in the corresponding period in the previous year. Daewoo was surprised to realize that its globally tried and trusted formula of providing excellent service with low prices had failed miserably in India.

Daewoo’s miseries nevertheless did not come as a surprise to the industry watchers. Even while Daewoo had announced its targets at the time of Cielo’s launch, they were termed ‘too ambitious and unrealistic’ by analysts. Media reports stated that Daewoo itself was responsible for the mess it had landed itself in. A Business Standard report mentioned, “A close look into the performance of the company from the drawing board stage throws up a perfect case study on what an organization should not do.”

BACKGROUND NOTE

Daewoo was a part of the $ 65 billion Daewoo Group, founded in 1967 in Korea. The group, which by 2001 had operations in 123 countries, had begun by exporting readymade garments to US retailers. Over the next decade, the group diversified into general trading, construction, machinery, automotive, ship building, electronics and telecommunications, among other areas.

The group’s automotive business, Daewoo Motors was considered to be one of its most important ventures. In 1977, Daewoo Motors entered into a joint venture with the US auto major General Motors. However, the venture did not prove to be a success with frequent skirmishes between the two partners. In 1991, Daewoo bought out GM’s 50% stake in the venture for $ 50 billion.

Daewoo Motors realized that it would have to look beyond the European and US markets, given the intense competition and higher customer expectations in terms of quality and performance in these markets. Thus, the company decided to penetrate those emerging markets where the demand for automobiles was expected to increase in the future. The markets identified were Eastern Europe, Latin America and Asia. The decision to enter the Indian car market was a part of this strategy. Daewoo Motors took over the 50% equity held by Japan’s Toyota in DCM-Toyota...
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