hankyoreh

By Park Seung-heon, staff reporter

In 2011, K Repair Shop, which sells and repairs Volkswagen vehicles in South Korea, submitted a 37.79 million won (US$36,800) claim to an insurance company in connection with three cars it had been asked to repair, including a Golf 2.0 TDI and CC 2.0 TDI. The insurer sued K, saying that it could not accept such a ridiculous claim.

The Hankyoreh analyzed the cost of car parts based on data from the court’s recent decision. The analysis found that the price of Volkswagen parts listed by K Repair Shop - the price charged to the end user - was 26.5% higher than the price of parts supplied by the domestic importer.

The sum of the supply price of 216 parts in 148 categories was 15.53 million won, but the final price that was charged jumped to 19.64 million won. SK Networks, which imports parts for imported cars, sells 141 of those parts, and K Repair Shop’s prices were 5.6% higher on average even compared to SK Networks.

If these prices are compared with what is available on websites overseas, there are even more surprises. The left bearing in the Golf can be bought for around US$98 on eBay, while the Korean repair shop for imported cars will ask three times as much for the same part, or 349,000 won (US$339.66).

Controversy is not dying down about the shocking cost of repairing imported cars in South Korea. While the parts supplied to the end user are expensive enough, the high cost of labor and the considerable time taken for the repairs also jack up the price in many cases.

In one real-life example, the rear end of a Volkswagen Golf 2.0 TDI was damaged during a collision with a Hyundai Accent, and 31 parts needed to be replaced. The cost of supplying all the parts was 3.03 million won, but the part cost on the repair bill that was charged to the insurer jumped to 3.78 million won.

Then there was a Volkswagen CC 2.0 TDI with a damaged rear and right side. The repair shop replaced 104 parts worth 11.70 million won and then asked the insurers to pay 14.80 million won for those parts.

The labor costs that import car repairers charge insurers are very high as well. K Repair Shop asks for 55,000 won in labor per hour, even for simple tasks such as attaching parts. This is nearly double the hourly labor fee of 24,250 won calculated by the Ministry of Land, Infrastructure, and Transport in 2010 in accordance with the Guarantee of Automobile Accident Compensation Act.

In the past, import car companies had claimed that the price of parts was appropriate if low domestic sales, along with high tariffs, and logistics costs are all considered. But part prices did not change even after the market share of imported cars increased from 10.1% in 2012 to 12.1% in 2013, and even after tariffs fell under the European Union-South Korea Free Trade Agreement.

In a 2012 survey, the Korea Consumer Agency (KCA) examined the prices charged by South Korean dealers for front and rear bumpers and hoods for a Volkswagen Golf, Benz S350, E300, and Audi A4 2.0. Compared to this survey, the prices that Benz, Audi, and Volkswagen Korea quoted to the Hankyoreh on July 21 were 11.3% lower. However, considering that the dealer price is around 25% higher than the supply price, the cost is essentially the same.

BMW Korea did not respond to the Hankyoreh’s request for a disclosure of the price of parts.

The price bubble results from the practice of only selling consumers so-called “authentic” parts that are provided by the car manufacturer. There is little interest in replacement parts, and pricing information is not easy to come by, making things even harder for consumers.

Further driving up the price of parts is the complicated network leading from the part company to the car manufacturer’s South Korean office to the domestic dealer and finally to the service center.

Benz, BMW, Volkswagen, and Audi - the four German carmakers that controlled 70.1% of the domestic import car market with sales of 109,084 units in 2013 - each have 8.8 dealers on average. The car manufacturers provide the dealers with parts and vehicles, leaving sales and service up to them. The fact that supply is controlled by the car company’s South Korean branch is the cause of many problems.

“Car companies’ Korean branches and dealers take advantage of the vertical limitations to double their margins. Negative externalities result when the branch office delegates all marketing to the dealer,” said Song Yun-ah, researcher at the Korea Insurance Research Institute. Song explains that since the dealers are always under pressure from the branch office to improve their performance, they end up taking steps to inflate the cost of repairs.

This takes some of the air out of comments made by Kim Hyo-joon, president of BMW Korea, during the ribbon-cutting ceremony for the BMW Korea Driving Center on Yeongjong Island on July 7. “The role of the Korean branch of BMW is to use our dealers to deliver our brand value to customers,” Kim said.

The chronic problem with repair costs also affects people driving South Korean cars. Critics argue that the high cost of repairing imported cars only lines the pockets of the imported car manufacturer, with drivers of South Korean cars forced to foot the bill.

According to a presentation by Lee Sang-dong of the Korea Automobile Insurance Repair Research and Training Center (KART), a subsidiary of the Korea Insurance Development Institute (KIDI), during a debate held in Sept. 2013 about how to streamline car insurance by improving the cost of repairs, imported cars only made up 6.5% of the cases of insurers paying for repair costs, including parts, paint, and labor, but they accounted for 17.45% of the total cost of those repair jobs.

Data provided by the KIDI shows that 703,000 imported cars had been insured as of the end of Dec. 2013, a 135.1% increase from 2012. Insurance premiums have increased accordingly.

While Hyundai Motor has developed a system for reporting unnecessary maintenance and domestic automobile manufacturers are computerizing claims for repair costs in order to block excessive claims, imported car companies have taken little action of this sort.

There is some hope that things will change, though. The National Assembly passed a revision to the Automobile Management Act in 2013, which makes it possible to use replacement parts, and beginning in August, the prices of parts for imported cars will be posted online.

"Along with using legal mechanisms to shatter the monopoly on supplying parts, we also need to improve practices and examine whether there is a structural tendency for imported car manufacturers to use expectations about performance to indirectly pressure dealers to price gouge on repairs,” said New Politics Alliance for Democracy lawmaker Min Byeong-du, who sponsored the bill.

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