Cielo - A Car in Trouble

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Themes : Marketing Mix
Period : 1995-2000
Organization : Daewoo Motors India Limited
Pub Date : 2001
Countries : India
Industry : Automobile & Automotive

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Case Code : MKTG010
Case Length : 8 Pages
Price: Rs. 200;

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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 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 Mistakes

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.

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1] DCM-Daewoo had signed a MoU with the Government to import CKD (completely knocked down kits). The MoU had to be signed since imports of CKD items for cars was banned and required a license.