GM Korea's contingency plan provokes union ahead of talks

General Motors Co has warned it could shift operations from South Korea in the longer term due to rising tension with the North, angering its Korean union which accuses the firm of using the instability as leverage ahead of tough annual labor talks.

North Korea has issued a stream of threats of war with South Korea and the United States in recent weeks, and on Tuesday it effectively shut down an industrial park operated with South Korea a few kilometers inside its border.

The rhetoric prompted GM Chief Executive Dan Akerson to say late last week that the company, which has four car manufacturing plants and one transmission factory in South Korea, was making contingency plans for employee safety there.

Akerson said it would be difficult to shift production from South Korea, but that the continued escalation of tensions on the Korean peninsula would cause the No.1 U.S. automaker to look at moving production long-term.

The comments also come as GM's Korean labor union, which staged the first strike in four years last year over a new shift system, is gearing up for annual wage negotiations and talks on a broader potential restructuring of its production system.

"It is a message by Akerson to the union saying 'don't make excessive demands'... They want to make the union feel jittery," Choi Jong-hak, a union spokesman, told Reuters. "It is a threat, as the labor union here is seen as a stumbling block for its restructuring of its global production system."

COMPETITIVE EDGE

South Korea is one of biggest overseas manufacturing bases for GM, producing more than four out of 10 Chevrolet vehicles sold globally, but it has been losing its competitive edge due to a fraught relationship with the trade union and a rising won currency, executives have said.

GM Korea told its union in November that it would not produce the next-generation Cruze compact in South Korea, prompting speculation the output may move to Europe to support GM's ailing Opel unit.

Akerson's intervention followed a series of warnings from other GM executives that labor issues are one of the key business risks it has to deal with in South Korea.

"We want... to move to a much more collaborative relationship like we have with our trade unions all around the world," Tim Lee, GM's international operations chief, said at a recent news conference in Bupyeong, near Seoul.

GM's Korean union, which starts summer wage talks later this month, is known for its uncompromising stance. Union activists have in the past stormed into executives' offices to press their demands - in one case in pursuit of better canteen meals - and have threatened "a war" should GM Korea move output overseas.

"It's not different when you look after a child," Sergio Rocha, head of GM Korea, told Reuters in a recent interview. "I'm not saying that the union is a child. I'm just saying you need to teach, coach, guide, instruct, support until they go by themselves."

KEY MANUFACTURING SITE

GM, like other big U.S. automakers, has for the past several years used a two-tier wage structure in the United States to bring labor costs closer to overseas rivals, with new hires paid a lower initial wage than their veteran unionized peers.

Increasing flexibility at its South Korean operations is seen as critical for GM's global ambitions, because the unit serves so many other markets, especially Europe.

GM, South Korea's second-biggest automaker after Hyundai Motor Group, which includes Hyundai Motor and its affiliate Kia, exports 85 percent of cars manufactured there.

"If you look to the past 10 years, the cost of labor in Korea has increased too much. One of the few countries that has increased its labor costs higher than Korea is Spain for example. I don't need to tell you what's going on in Spain today right?" Rocha said.

"Is this the right place to invest? ... we're taking a bet that may be a risk for the future of the industry here," he said, citing the rising won and a potential increase in labor costs stemming from ongoing litigation with the union.

Labor risks make it even less attractive to maintain production in South Korea given the domestic dominance of Hyundai and Kia, which control more than 70 percent of the market. GM's Korean market share is less than 10 percent.

South Korea is the world's fifth-biggest auto manufacturing country after China, the United States, Japan and Germany, but in terms of domestic market it ranks 11th, according to data from IHS Automotive.

"We are not as optimistic about the Korean production location," Henner Lehne, director at IHS Automotive, said, noting "strong movements to other production locations" by Hyundai Motor.

Hyundai, the world's fifth-biggest automaker along with Kia Motors, saw its global sales more than double over eight years until last year, but was assembling just 43 percent of its total output in South Korea in 2012, almost half the level in 2004, data from the company shows.

(Additional reporting by Ben Klayman in DETROIT and Choonsik Yoo in SEOUL; Editing by Alex Richardson)