This story might explain some of the reasons why the Korean auto market has not been accessible to US car makers. Pay particular attention to the posted comment at the end.
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Korea Trade Pact: No Easy Ride for Detroit
The U.S.-South Korea accord will lower tariffs, but U.S. automakers still face a bumpy road in wresting market share from European rivals
This week?s U.S.-South Korean free-trade deal is being trumpeted by both nations as a historic landmark and a potential economic bonanza. Yet in the auto sector, Detroit carmakers face a long slog ahead in Korea, Asia?s third-largest car market.
There's no denying U.S. automakers will enjoy huge advantages over other foreign competitors from Japan and Europe. South Korea has agreed to eliminate an 8% tariff, which could translate into a 10.5% cut in retail prices when taking into account other local taxes levied on top of the import tax.
Yet few industry observers expect a surge in Korean sales of U.S.-built vehicles anytime soon. "American makers simply don?t offer attractive products here," says Park Chanik, Seoul-based research head at brokerage Morgan Stanley (MS). "The 10% or so price difference will make little difference in the luxury auto market here [which is] dominated by the Germans and Lexus."
"Buy Korean" Runs Deep
South Korea has one of the least friendly markets on the planet for auto importers. Until six years ago, when consumers frowned on owning foreign cars, less than 1% of autos sold in Korea were imports. The "buy Korean" mentality of local consumers runs very deep and no trade pact, however historic, is going to change that.
Still, attitudes have evolved. Of some 1 million sedans sold in Korea last year, 40,530 cars were built abroad. That?s just over 4%, or nearly five times the 0.7% level in 2001. Most of them are luxury sedans. About three-quarters of foreign cars sold in Korea fetched more than $40,000. The Asian country is now the world?s fifth-largest market for BMW?s flagship 7 Series (see BusinessWeek.com, 2/22/06, "A Kinder Seoul For Foreign Cars").
Americans, however, have been unable to take advantage of the improving appetite for foreign cars among wealthy, younger Koreans. Last year U.S. makers sold 4,556 cars in Korea, which pales against the nearly 800,000 Korean cars sold in America. "The U.S. has been at the vanguard of cracking open the Korean auto market, only to let Germans and Japanese reap the benefits," says a senior manager at Hyundai Motor. Foreign Cachet in Demand
Detroit?s Big Three have had an image problem. Affluent Korean consumers who buy imported cars have long preferred models with greater cachet, such as Mercedes-Benz, BMW, and Lexus, the top-selling import brand last year.
It is telling that officials at Hyundai and other Korean carmakers say they would have been disconcerted if a free-trade arrangement similar to that with the U.S. was made with either Japan or the European Union.
After 10 months of negotiations with the U.S., South Korea on Apr. 2 agreed to eliminate its tariff on all U.S. autos and parts immediately after legislators of the two countries approved the accord. Seoul is also agreeing to change its auto tax structure for larger vehicles, which the U.S. claimed was discriminatory.
A Big Payday for GM
In return, the U.S. agreed to abolish its 2.5% import tax for South Korean cars with 3-liter or smaller engines, as well as for car parts. The tariff for sedans with bigger engines will be removed over three years, while a 25% U.S. tariff for pickup trucks will be gradually phased out over 10 years. "Although the extent of the U.S. tariff cut is much smaller, Korea-based automakers will enjoy meaningful sales or profit growth from the free trade deal" says Cho Chuel, an auto expert at the state-funded Korea Institute for Industrial Economics & Trade.
General Motors (GM) will be the biggest U.S. beneficiary of the trade pact. That?s because it took over bankrupt Daewoo Motor in 2002. The Korean unit, now called GM Daewoo Auto & Technology, is selling Korean-built small cars under the Chevrolet brand in America. GM Daewoo shipped about 120,000 cars to the U.S. last year. Company officials expect the U.S.-bound shipments, which will benefit from tax-free access to the market, to top 200,000 cars in the near future. GM Daewoo will also benefit from tax-free imports of parts from the U.S.
Cho and other researchers point out that the free-trade agreement will be a win-win in the longer term. "It would be short-sighted if you brush aside the significance of a zero-tariff arrangement for the U.S. carmakers" says Yoon Dae Sung, executive director at the Korea Automotive Importers & Distributors Assn. (KAIDA). "The FTA will surely serve [as] the basis for a turning point for the American."
Yoon points out that in 1995, when Korea imported less than 10,000 cars a year, Ford (F) accounted for almost 50% of all foreign cars in Korea with its Taurus model. KAIDA expects the sales of imported cars to reach
100,000, or some 8% of total Korean car sales, by 2012. And by that time foreign makers of less-expensive cars will find it easier to break into the Korean market.The strength of local manufacturers at the low end of the market will continue to present a big impediment. But competition from nonluxury brands is beginning to heat up. Last year, Honda (HMC) seized a 9.6% import market share while Volkswagen (VLKPY) took a 9% share. "Once American carmakers come up with the right products, the 10%-plus difference will be a huge weapon," says Yoon at KAIDA. True enough. Now all Detroit has to do is execute.
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One of the posted comments to the above story:
Two points: I served as an infantry officer in Korea and later on loan to the Office of Economic Coordinator for the rebuilding of the Korea economy. The corruption aided and abeted by US officials was rampant, and our military backed their military as they suppressed democracy for some 30 years to our detriment. This makes relations even with South Korea a bit of love-hate. When I returnd a few years ago Koreans were slashing the tires of imported US vehicles. I think it behove us to realize we created the two Koreas after WWII, a major policy mistake. I support a trade agreemnent with Korea, and think we could well rethink our policy to back the Koreans in seeking the unity of their nation. It is very much in our interest, and as the late Senator Mike Mansfield once said: "We are a Pacific Power and not an Asian Power and advocated that US troops not be committed on the Asian land mass.