hankyoreh

By Park Seung-heon, staff reporter

While other South Korean industries are being swept by a sense of crisis, the car industry seemed to be putting up a good fight in the first six months of 2014, at least as far as the figures show. Sales of South Korean cars increased both in the domestic and export markets.

But despite this apparent upturn, the South Korean car industry remains on alert. With stiffening competition around the world and imported cars eating away at South Korean manufacturers’ control of the domestic market, insiders are worried that efforts to maintain the status quo will devolve into a crisis.

According to an automobile industry report released in June by the Korea Automobile Manufacturers Association (KAMA), domestic production for South Korean car manufacturers (Hyundai Motor and Kia Motors, GM Korea, Renault Samsung Motors, and Ssangyong Motor) increased to 2.34 million units in the first half of 2014, 2.6% higher than units produced in 2013 (2.28 million). Over the same period of time, 712,800 units were sold in the domestic market, a 5.2% increase year on year.

Export figures are similar to previous years. Exports in the first half of the year for South Korean firms reached 1.60 million, up 0.4% from the previous year. Exporters also set an all-time record for export value, up 4.1% to US$25.53 billion.

But these ostensibly strong figures conceal troubling market conditions both in South Korea and overseas. Sales of South Korean cars in the domestic market last year were down 1.9% from 2012. This came as the market share of car importers rose from around 8% to 10%, while the size of the market stayed steady. When only sedans are factored in, auto importers’ control of the market jumps to 12.1%.

Domestic sales for Hyundai Motor - around 680,000 units in 2011 - tumbled to 640,000 last year, with Kia Motors and Renault Samsung Motors seeing sales fall by about 40,000 units each over the same period. At the same time, imports of European automobiles will be cut even further from July as part of the free trade agreement signed with the European Union, which is expected to give importers an even bigger share of the market. Furthermore, domestic car manufacturers are embroiled in a labor dispute over regular wages and tied down by regulations, including the low carbon car cooperation fund.

On the global market, South Korean car companies have to endure steep competition from Japanese automakers. Taking advantage of the weak yen to bolster their price competitiveness, Japanese firms sold 5.79 million units in the US in 2013 - an 8.3% increase year on year. Meanwhile, the number of South Korean cars sold in the American market over the same period dropped 0.4% to 1.26 million. Japanese companies saw 0.7% growth in Europe as well, as their South Korean counterparts posted minus negative growth (-1.8%).

A report by the Korea Automotive Research Institute (KARI) titled “The Weak Yen and the Increasing Competitiveness of Japanese Companies” explains that Nissan lowered the price of seven out of 18 models it was selling in the US in 2013 by 2.7-10.7%. Toyota also stepped up its attack, providing an average of US$2,500 of incentive per model. Through May of this year, Japanese firms have sold 7.2% more cars than during the same period last year.

In China, at least, South Korean companies are continuing to grow, with car sales soaring 17.7% last year. Complete optimism is not warranted, however. South Korean companies are being affected by government regulations, including restrictions on new vehicle registration in large cities. Another obstacle is Chinese consumers’ preference for buying luxury cars from the US or Japan.

South Korean companies are not currently threatened by Chinese carmakers, whose technology does not yet meet global standards. In the long term, however, Chinese companies will use their cheap prices to press the attack in emerging economies.

Another thing that is worrying automakers is the value of the won, which is strengthening as a result of the continuing surplus in the national account. “Sales increased at Hyundai Motor thanks to the new car effect (LF Sonata and Genesis), but the unfavorable exchange rate is having a considerable effect on revenues,” said Jeon Jae-cheon, an analyst with Daishin Securities.

One result of the strong won is that operating profits are failing to keep up with growing revenues - or even falling. In 2012, Hyundai Motor posted 84.47 trillion won in revenues with 8.44 trillion won in operating profits. The next year, in 2013, sales at the company had jumped to 87.31 trillion won, while operating profits declined to 8.32 trillion won. Maintaining current levels - and keeping competitors at bay - demands a fierce struggle for survival that involves diligent design of new cars and production at overseas plants.

Expanding overseas production, the survival strategy that South Korea’s automakers are opting for, could turn out to be toxic for South Korean industry overall. The automotive industry currently accounts for more than 10% of production, employment, and exports of the South Korean manufacturing sector. If domestic car production stalls or even shrinks, it could cause problems for the overall economy. Hyundai Motor has already increased the percentage of overseas production from 54% in 2011 to 61% today.

“70% of the exports of domestic automobile part manufacturers go to Hyundai and Kia’s overseas factories, and most of the rest is exported to overseas plants of Renault and GM. If the low exchange rate continues, these companies could switch to local suppliers, which would affect the domestic industry,” said Lee Hang-gu, who is responsible for the machinery and electronics industries at the Korea Institute for Industrial Economics and Trade (KIET). The main thing that the industry must accomplish if it is to maintain growth is to increase its competitive edge in technology to compensate for its weak price competitiveness.

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