“Daewoo is good at making cars, but rotten at marketing them.”

- An automobile industry analyst, in 2000.

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.”

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 and renamed the company Daewoo Motors India Ltd. In January 1997, DCM Ltd. sold 24% of its shareholding to Daewoo, raising its stake in the company to 75%. By 1998, Daewoo further increased its stake to 92%.

Daewoo Motor's overseas expansions were funded largely on borrowed money. However, the company was unable to keep up the repayment on its debts. In 2000, after the company's labor unions refused to accept a restructuring plan for the company, Daewoo Motors was declared bankrupt and talks were initiated to look for a suitable buyer. GM again evinced interest in the venture amidst stiff opposition from the worker unions.

The lack of a focussed approach and inconsistent policies were reported to be the two main reasons that led to the Cielo's poor performance. However, the seeds for Cielo's downfall had been sown when Daewoo launched the car in an extremely hurried manner - the MoU1 was signed in October 1994 and the first Cielo rolled off the assembly lines in July 1995. In its hurry to start its Indian operations, Daewoo entered the market with a high import content - thereby not being able to keep the prices significantly lower than the competitors. The low indigenisation level also translated into high costs of spares. Experts commented that the Cielo had been launched without any detailed market survey.

Daewoo began production of the Cielo at the Surajpur factory, originally built by the DCM-Toyota venture in 1985 to manufacture light commercial vehicles (LCVs). As the scale of operations increased substantially with not much modification to the plant, quality defects could not be completely avoided. Complaints of poor fuel efficiency soon surfaced. A Daewoo official from Korea remarked, “We had problems due to bad quality of fuel.” Media reports remarked that this had happened because Daewoo did not understand the Indian market properly. Daewoo sought to tackle this problem through its sales staff. However, the sales staff was reported as not being sufficiently trained to counter such problems. They simply could not react to consumer complaints. Like most of the other automobile companies in the mid 1990s, Daewoo had been lured by the much talked about 'Indian middle class market boom,' which never took off in reality. Daewoo had assumed that there was a huge pent-up demand for cars priced above Rs 0.5 million. The company also banked heavily on demand from the taxi/hotel car fleet and corporate segments. However, most of the above did not materialize the way Daewoo had planned. A Business India report revealed that most prospective Cielo buyers already owned an Esteem, and the decision to buy a second or third car could be postponed. The liquidity crunch due to the recession in the economy resulted in demand declining sharply - from the individuals as well as the taxi/hotel car fleet and corporate segments.

In late 1995, Daewoo realized that it needed to give Cielo a strong push to improve the sales. The company then devised a promotional campaign, called the 'Diwali Bonanza scheme' for corporates, offering one Cielo free on purchase of every ten cars. This was followed up with a lottery scheme for individuals, wherein the winner was awarded a car. It was revealed later that the promotional scheme was pushed by Daewoo's marketing head from Korea inspite of the Indian managers vehemently opposing it. A former Daewoo executive said, “There was actually no need of the promotion. People began to look at the car with suspicion.”

The Cielo had till then been promoted as a feature-rich, luxury family car. The free Cielo scheme did immense damage to the car's brand equity, particularly in north India, which accounted for around 80% of Cielo sales. The bonanza scheme somehow projected a picture that Daewoo had substantial non-moving Cielo stocks, thereby turning off the 'status-conscious' buyers. Before this scheme, Cielo was selling about 2,500 cars a month, which fell to 100 by the time the scheme ended in early 1996.

In its desperation to maintain volumes, Daewoo then began offering hitherto unheard of incentives to dealers and financiers, who in turn passed them on to customers through lower interest rates. Daewoo and its financiers were even questioned by the Monopolies & Restrictive Trade Practices authorities to explain how its finance rate could be as low as 14.33%, while the prevailing car finance rate was 23%. The company explained it by claiming that it was offering discounts of up to 10% of the car value (Rs 0.6 million) to financiers, provided they reduced the cost to the customer by keeping the interest rate low. Daewoo later claimed that these inquiries were instigated by its competitors to tarnish its image.

After the finance schemes, Cielo announced a test drive scheme to lure the buyers in April 1997. The scheme entitled all car owners to participate in a draw where 200 Cielos were given to the winners for 18 months. On completion of this period, the winners had the option of either buying the car by paying 70% of its original on-road price or returning it to Daewoo. The company claimed to have successfully tried out this scheme in the UK and Korea earlier. The scheme was intended to enhance Cielo's credibility in the marketplace. However, the low finance rates and the test drive schemes faced the same criticism the free Cielo scheme did.

Daewoo's positioning efforts for the Cielo were termed 'unmemorable and poor' by analysts -largely due to the frequent changes in the positioning. Initially the car was positioned on the 'technology with aesthetics' plank, which was later moved on to a 'premium family car' positioning. Analysts remarked that the family-car positioning did not match with the premium image Cielo was trying to project in the beginning. This premium communication began to clash with subsequent value-for-money initiatives that followed. Such moves only ended up confusing the customer. S G Awasthi, managing director, Daewoo, defended the company's stand saying that there were no benchmarks in India when Cielo was launched and that market segmentation had not even begun to emerge. He said, “It was difficult to position the car clearly or to communicate it. So we did not position it against any product, but with the idea that Cielo will find its own niche.”

A Daewoo source commented, “Tell me one ad campaign that improved the car's sales by even 0.1%? Cielo began on a luxury plank and ended on a 'Val-You' note.” Media reports remarked that Daewoo's not being able to properly position the car proved to be the biggest reason behind Cielo's failure. An analyst commented, “They must have tried almost every positioning.”

As all of Daewoo's efforts seemed to be failing, the company Daewoo decided to introduce a hefty price cut of Rs 0.15 million in January 1998. After this, the GLE model cost Rs 0.49 million in Delhi showrooms compared to the earlier price of Rs 0.62 million, while the GLX model cost Rs 0.57 million compared to the earlier Rs 0.68 million.

Daewoo's move took the industry players as well as the customers by surprise. It was even reported that a leading Daewoo competitor sent anonymous letters to automobile dealers on 'how the price reduction had seriously eroded customer confidence in Cielo and was done mainly for the 1996 models stuck in their stock.' However, Awasthi preferred to call it 'price correction,' saying that the price slash had been possible because of the company's achieving a higher indigenisation level (70.10%) and better foreign exchange management. He added that the decision was in line with Daewoo's global strategy of working on lower margins.

Ten days before the price cut announcement, Daewoo had stopped delivering the Cielo to showrooms, hoping to minimize the impact of the price reduction on recent customers. To ensure that existing customers did not feel cheated, the company wrote to each customer individually. They were offered the first bookings for Daewoo's yet to be launched small car, besides a customized package of free servicing. They were also explained how the price change did not really compromise the price they had paid. Daewoo held meetings with senior managers from its regional offices, dealers and the finance companies to explain the rationale behind the price cut. Daewoo also began monitoring the reactions to the price correction by sending out nearly 1,50,000 letters to the public. In addition to each of the existing Cielo customers, potential buyers – companies, Government and professionals like chartered accountants and doctors were targeted. Each dealership was put under watch by the regional managers to remove any feelings of 'betrayal' in old customers.

Immediately after the price cut, Cielo's sales increased to 906 per month in January and February 1998 compared to 314 units in December 1997. Although Cielo became the cheapest mid-size car in the Indian market, this move almost wiped out the car's credibility in the market. After the price reduction, Daewoo had to work very hard towards salvaging the car's image. This was done by the new 'value benefits' positioning for Cielo in the mid-size segment. Daewoo launched the 'Valyou' campaign designed to educate the customer on the new positioning, highlighting the Cielo's features. The idea was to convey that the Cielo now offered more value for less money and not just the same value for less money. Thus, the aspects of Technology Valyou, Comfort Valyou, and Safety Valyou were emphasized. As a result of these initiatives, in March 1998 sales went further up to 1102 cars.

For 1997-98, Daewoo increased its advertising budget substantially and released double-page advertisements in leading national dailies carrying pictures of a range of automobiles. This was done to give confidence to customers that Daewoo was not just a single-product company. Also, whereas the earlier advertising focussed on Cielo, it now focussed on the Daewoo brand in the same way as other multinational car brands did. However, these moves failed to have the desired effect and as predicted by industry analysts, the impact of the price cut and new campaigns soon wore off - by February 1999, sales fell to a low of 148 cars per month.

In October 1998, Daewoo launched its small car 'Matiz,' which soon became very popular amongst the customers. Though Matiz did not fare as well as its rival Santro (from Hyundai) initially, over the next few months, its demand increased significantly. While 23,265 units were sold during April-December 1999, demand increased by 52.2% to 35,398 cars during April-December 2000.

Analysts claimed that Daewoo seemed to be neglecting Cielo after the launch of Matiz. In May 1999, Daewoo stopped production of the GLE and GLX versions of Cielo and replaced them with the Cielo Executive and the Nexia. While the former was positioned as the basic Cielo version with the best features of both GLE and GLX, the Nexia was promoted as being an upgraded version of the Cielo. The move failed badly because the dealers as well as the customers failed to see any worthwhile additions to the earlier Cielo model.

Referring to Nexia as a slightly modified Cielo, a Daewoo dealer commented, “We have the Rs 0.4 million Cielo and the Rs 0.6 million Cielo (i.e. the Nexia).” This was not surprising, for while Nexia's engine and interiors had been substantially changed, Nexia's exterior was very similar to Cielo. Daewoo said that it was not able to create a perceptual difference between the two cars amongst the consumers. Nexia failed to catch the customer's fancy and sales never really picked up. Daewoo attributed the low sales to the fact that the market for mid-size cars had become rather crowded.

During the pre-launch and launch period of Nexia, Daewoo completely stopped advertising for Cielo. This created the impression that the Cielo was going to be completely phased out. This prevented the company from positioning both cars independent of each other. From 2553 cars sold during April-December 1999, Cielo sales declined by 45.8% to 1385 cars during April-December 2000. Daewoo's plans to launch a Compressed Natural Gas (CNG) version of the Cielo were yet to materialize even in mid 2001.

Matiz had a 70% market share in the Korean market and had received a good response in most of the 114 countries it was sold in. However, its performance in India was nowhere near its global success and Daewoo continued to run into losses. In 1999-00, the company had a loss of Rs 1.16 billion on gross sales of Rs 12.78 billion. The loss increased to Rs 3.4 billion on gross sales of Rs 11.84 billion in 2000-01. Daewoo's rivals were quick to comment that the Matiz was also bearing the brunt of the company's poor marketing skills, adding that the poor legacy of the Cielo experience would be hard to shake off.

Daewoo though, was still hopeful of succeeding in the Indian car market. The company expected the market to reach the one million mark by 2005-2006. Kim said, “Who would want to lose an opportunity to be part of that?” He added that Daewoo would break even in 2001-02. To meet this target, Daewoo was working towards enhancing its dealership and sales and servicing network as part of the restructuring programme. The company also undertook a massive cost cutting exercise, which involved cutting down on staff strength. In order to reduce the wage bill, Daewoo reduced the working hours and also reduced the number of workers from 3000 in 1998 to 1951 in 2001. The company's prospects however showed no signs of improving as for the first quarter of 2001-02, Daewoo posted a net loss of Rs 1.21 billion - almost double the Rs 607 million figure in the corresponding period in 2000-01. At this juncture, the company even had to postpone its plans to launch three new top-end cars, Lanos, Nubira and Magnus. In August 2001, Daewoo revealed plans to change the positioning of Cielo once more. The company's new managing director Young-Tae Cho claimed that the Cielo in its current form could not be continued. Until Daewoo managed to boost the car's sales, one would have to agree with the industry experts - who claimed that the company would never be able to make a success of Cielo.

1. Analyze the reasons behind the failure of Daewoo Cielo. Do you agree that the company itself was responsible for its problems?

2. In spite of being the first MNC player in India after MUL, Daewoo could not make its automobile venture a success. How far was the Korean parent responsible for the Cielo debacle? Discuss.

3. Was Daewoo neglecting Cielo after the launch of Matiz? Do you agree with Cho's decision to change Cielo's positioning once again? Justify your answer with reasons.

Exhibit I
Categorizing Indian Cars

Source: IBS Center for Management Research.