Daewoo loses E2,500 on every Matiz it sells in Europe, says Fiat Auto Managing Director Roberto Testore.
That amounts to more than a third of the price of the hot-selling Daewoo minicar in Italy.
Testore, whose company has lost substantial market share to Daewoo and others in the mini segment, says the numbers were uncovered as Fiat and partner General Motors studied a possible acquisition of Daewoo Motor.
After its introduction in Europe in spring 1998, the low-priced Matiz boosted Daewoo sales in both in western and eastern Europe - and cut deeply into Fiat sales.
'I know all the Daewoo products very well,' says Testore. 'We have dismantled all of their cars piece by piece in our Mirafiori headquarters, trying to understand how they were able to price them so competitively.
'After a deep analysis, my people told me they thought Daewoo was losing E500 for every Matiz sold in western and eastern Europe. I told them: That's not good enough - go to South Korea and try to discover how much they pay for parts, because maybe their prices are right and our costs are wrong.'
A team of Fiat engineers went to Korea in late 1998 to talk to suppliers.
'When my people came back from South Korea, the picture didn't change much,' says Testore. 'Losses per Matiz could have ranged between E250 and E500, we believed.'
Then, earlier this year, Fiat and GM began preparations for a possible bid for Daewoo.
'As we started to talk with Daewoo Motor about a possible acquisition - and got to see their real numbers - it came as an absolute surprise to discover they were losing E2,500 per Matiz,' says Testore.
'I was sure they were not making money at those prices,' he says, 'but, honestly, I didn't imagine they were losing so much on a car that I consider a good product, a car which I personally like.'
The Matiz list price in Italy ranges from E7,300 to E9,560 with scrapping incentives of E600 to E800. Fiat Seicento prices range from E7,025 to E9,170 with scrapping incentives from E400 to E800.
'We don't know the production costs of Daewoo, we just buy cars from them,' said Alison Moran, a spokeswoman for Daewoo-owned Daewoo Cars Ltd. in the UK. 'But we are surprised about this number being quoted because coming from a due diligence it should have been confidential.'
Korean carmakers have come under mounting criticism for their practices.
At the recent Paris auto show, Toyota Chairman Hiroshi Okuda said: 'In South Korea, the Daewoo and Hyundai holding companies are bankrupt, but their automotive subsidiaries abroad continue to do busines as usual. Frankly, we do not understand how this works.'
Fiat dominated Europe's mini segment before the Matiz arrived. In 1997, with the Cinquecento and Panda, it had 75.6 segment share in western Europe and a 95 percent share in Italy.
In Poland, with the ancient 126 and the Cinquecento, Fiat accounted for virtually the entire mini segment.
By 1999, after the arrival of the Matiz and competitors such as Ford Ka, Hyundai Atos/Atoz, Seat Arosa and VW Lupo, Fiat's mini segment market share had fallen to 37.8 percent in western Europe and 71.6 percent in Italy.
Much of the share has been lost to Daewoo. In 1998, Daewoo sold 159,921 units in western Europe, up 54.5 percent from 1997. The Matiz contributed 26,797 sales, almost half of Daewoo's growth that year.
But Daewoo's real boost came in 1999. Matiz sales rose to 89,663 units, taking Daewoo up 25.2 percent to 200,283 units and 1.3 percent of the western European market.
In eastern Europe, Fiat was market leader from 1993 to 1995. But it was passed by VW in 1996 and by Daewoo in 1998 and 1999.
Daewoo acquired Polish maker FSO in 1996 and by 1999 had taken the sales lead in Poland - eastern Europe's largest market and a traditional Fiat stronghold. The Matiz is now the second-best selling model in Poland.
Daewoo also began outselling Fiat in the Czech Republic, Slovakia, Bulgaria and Yugoslavia.
Fiat and GM lost out to Ford in June for the right to enter exclusive talks with Daewoo.
But they showed renewed interest when Ford pulled out of negotiations suddenly on September 15.
A fact-finding team from General Motors and Fiat began undertaking due diligence on the troubled Korean firm earlier this month.
GM and Fiat said they would enter into talks to buy assets of Daewoo Motor and its related companies.
'We are working hard in trying to collect information, which at the moment remains very fragmented, to decide whether we might be interested in buying all or part of Daewoo Motor,' Testore said.
'A lot of time has passed since our first offer [with GM in late February] and many things have changed. The banks want to accelerate the process, but first we have to understand how things really are.'