Growth of Korean Automobile Industry in America Trade Relations

¶ … growth of the Korean automobile industry in the Unites States from a trade and finance perspective.

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Korean Auto Industry

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To begin an investigation into the Korean automobile industry, we first have to start with some basic facts about the Korean Passenger car Industry. The South Korean auto industry is the second largest in Asia and has been one of the key growth industries, along with construction, shipping and electronics.

Passenger cars and multi-purpose vehicles (MVPs) are the main transportation mode in South Korea and is a very competitive industry. Domestic sales of cars and MVPs accounted for over one million units sold last year. In 1944, Kia Motors set up the first assembly plant. Today, there are two main players in this industry -- Hyundai Motor Company and Daewoo Motors. Samsung Motors entered the playing field in 2000. The only foreign presence in the Korean car industry is General Motors Corporation, which acquired Daewoo Motors.

General Motors Corp.'s purchase of Korean-based Daewoo Motors and Hyundai's decision to locate a $1 billion assembly plant in Alabama means Korean auto suppliers will be joining the ranks of Japanese and European suppliers in North America. "A bridge is being built in the auto industry between South Korea and in particular, southeast Michigan," said Daniel Malone, a shareholder with Detroit-based law firm Butzel Long, P.C. Malone has traveled regularly to South Korea for the past six years to build relationships with that country's auto industry, manufacturing and trade associations. "The effect will be establishing an economic bridge between this country, Michigan and South Korea," Malone said (http://www.globalautoindustry.com,2002).

Since the Korean economy has been doing well, there has been an increase in disposable income levels, which has provided greater spending in areas like entertainment, culture, recreation, communication and transportation. The cuts in excise taxes that were continued throughout August 2002 added to the sharp rise in the sales of MPVs.

The Korean car industry also ranks as the 6th largest in the world (www.autoindsutry.co.uk,2001). Imports play a very minimal role in the Korean car market, although the marketplace in Korea is now considered improved and growing from an international standpoint.

It is also important to understand some of the more significant developments in the Korean auto industry and the role that these mergers and acquisitions played in reshaping the country's auto industry.

Early in 1999, Hyundai Motors acquired Kia Motors, the second largest car manufacturer. Renault of France bought Samsung Motors and Hyundai sold DaimlerChrysler a 10% equity to create a strategic alliance. And of course, GM got Daewoo Motors.

The auto industry in Korea has evolved considerably, particularly in the last six or seven years," Malone said. "The component manufacturers have demonstrated they have the capability of manufacturing world-class products at a competitive rate and on a timely basis.

In short, they do good work." Korean suppliers, accustomed to supplying five Korean original equipment manufacturers in the mid-1990s, were forced to expand operations overseas and broaden markets the last several years." When Hyundai acquired Kia and GM purchased Daewoo out of bankruptcy, the effect was to shrink the Korean OEM customer base, Malone said. The remaining OEMs, Samsung and Ssangyang, are not major players. "There is a clear movement for Korean companies to establish a presence and further penetrate the North American market," Malone said. "Hyundai and Kia have successfully proven and demonstrated they are significant in the North American market with a combined 3% to 4% market share" (http://www.globalautoindustry.com,2002).

Changes have been taking place in the Korean auto industry such as General Motors Corp.'s purchase of Korean-based Daewoo Motors and Hyundai's decision to locate a $1 billion assembly plant in Alabama means Korean auto suppliers will be joining the ranks of Japanese and European suppliers in North America. "A bridge is being built in the auto industry between South Korea and in particular, southeast Michigan," said Daniel Malone, a shareholder with Detroit-based law firm Butzel Long, P.C. Malone has traveled regularly to South Korea for the past six years to build relationships with that country's auto industry, manufacturing and trade associations.

Summary

The Korean auto industry has evolved in the last six or seven years by demonstrating that they have the capability of manufacturing world-class products at a competitive rate and on a timely basis. Other factors like the Tariff-free trade environment have helped Korea compete in the United States and Canada.

The Korean industry's focus on North America was evident at the 2002 Society of Automotive Engineer's World Congress in Detroit, where Korean suppliers occupied 1,000 square feet more than last year. Financed by the Korean Trade Center, a promotional arm of the Korean government, the Korean supplier trade mission occupied two large pavilions at the SAE exhibition. GM, which has a history of nurturing and bringing along suppliers, has also stated its intent to focus on expanding its markets in the Far East, Malone said. (http://www.globalautoindustry.com,2002).

Hyundai Motors represents the Korean automotive industry and shares 10% of its stock with D. Chrysler. It has the advantage of producing high quality products compared to real cost and has acceptable quality and pricing for small cars. If the alignment with the big 6 companies is accomplished, it will be possible to promote brand power as well as technical introduction. In order to cope with the big 6 companies, it is necessary to raise the strong points. It is considered a priority that specific points must be centered on a small and a medium sized car, and that the alignment with the big 6 companies will enable it to continue stably. Though Daewoo, Samsung Motors were absorbed or will be absorbed, we have to keep supporting, watching and preparing for the possible future crisis of the car industry coming to ruin like the case of England. Whether Korean suppliers will be able to compete on cost in the United States as they have been in Korea, where labor costs are less than half of that in North America, remains a key question.

The situation in Korea is that the potential domestic market is small because of average income levels. As a result there is limited scope for an independent, domestically focused automobile maker. The research and development costs would be too high and other economies of scale would not be achievable. Nevertheless, a domestic automobile industry is seen as a key part of many countries' development strategies and Korea is no exception. In Korea the means of overcoming handicaps caused by being a small market were first, to use imported technological and so avoid R&D expenses, and, second, to export aggressively to allow production to reach an efficient scale. These strategies have allowed Korea to become the only significant new entrant into the world automobile market in the past twenty-five years (Alan Wolff, 1995).

In 1962 imports of finished cars were banned by Korea in an attempt to encourage domestic production. As domestic competence rose, the local content requirements were gradually increased, although by the end of the 1970s production was still only around 100,000 units a year. The Korean economy is dominated by industrial conglomerates known as chaebol, which are similar to the Japanese keiretsu. After the limited success in the 1970s, the government restricted the market to Daewoo and Hyundai for five years, with the former having links with GM and the latter with Mitsubishi Motors. Hyundai invested heavily, targeting the U.S. market with its small and cheap cars, undercutting Japanese competition that was by then facing a strengthening yen. However, after early successes that saw U.S. sales rise to 500,000 units, rising wage costs eroded competitiveness, compounded by problems with quality (Jong-Yu-Ha, 1998).

Until 1998, there were eight vehicle manufacturers in Korea but now there are five. Hyundai is the largest vehicle producer in Korea and ranks 10th in the world for production. Daewoo Motors, the second largest has an annual capacity of producing two million units. Renault/Samsung Motors was launched on September 1, 2000. The company hopes to produce and sell about 200,000 cars by 2004. What's interesting to note about the Korean auto industry is that the majority of Korean auto parts companies sell their products exclusively to one auto manufacturer and only 6.6% of then sell to the other four auto makers. There has also been an increase of foreign auto parts suppliers in the Korean marketplace and this should eventually have an impact on cost competitiveness.

Korean auto exports experienced a negative growth rate for the first time in 11 years because of the September 11th attacks. The value of exported cars, however, hit an all-time high as Korean carmakers have been focusing on shipments abroad of medium-sized passenger models and sports utility vehicles, which usually carry higher prices tags (People's Daily, 2001).

Korean carmakers exports to North America are expected to pick up about 20% as the nation's largest carmaker, Hyundai Motors, has been actively shipping its products to the U.S. marketplace. An increase in the value of car exports will account for an all-time high export of $13 billion dollars worth of vehicles to the U.S.

Bill Lovejoy, GM's former head of North American vehicle sales, service and marketing told reports in October 2002 that GM's most challenging competition comes from Korea. A weak Korean currency and a low-cost manufacturing base allow Korean automakers to offer lower prices and extended warranties that are expensive to match (http://www.auto.com,2003).

The Korean auto making industry must maintain the capacity to produce over four million cars per year for survival in the future. The following factors are needed for the Korean industry to survive in competitive markets with other countries:

investments in research and development strategy to strengthen core technology and to outsource common technology reinforcement of the cooperation system among the industry, the academy, the research institutes, and administrative agencies.

Obviously, the free market at the national level has opened the avenues to the international exchange of goods and services. Economic exchange and multilateral trade liberalization has helped to spur the Korean auto making industry and provided the catalyst for increasing the globalization of the world auto industry. After Japan and European Union, Korea is the third largest auto exporter in the world. The country has an aggressive export strategy and strong competitive pricing.

The fast growth in demand for automobiles in Korea as well as in the other part of the world acted as a strong measure for the development of the Korean auto industry. The quick and steady growth in auto demand inside Korea was even decisive. Nowadays, the unbalance between supply and demand in the world auto industry is getting worse. When Korean automakers started to cooperate with their overseas counterparts, advanced technologies were what they liked the most, and the foreign enterprises were limited in terms of volume in direct investment and stock right ratio. Hence none of the foreign enterprises really obtained active control over the auto industry in Korea (Jong-Yu-Ha, 1998).

Competition in the U.S. auto marketplace has grown increasingly competitive because of the economy. As with any market, when consumers are not spending, the sellers look for ways to create the greatest economic growth. In the case of the highly competitive Korean auto industry, the early success 1980s and early 1990s can be attributable to some accidental factors. The oil crisis in 1979 made smaller cars with lower fuel consumption super popular on the global market. In early 1980s, most of auto makers in Japan were trying to make more of large- and medium-sized vehicles and the appreciation of yen became a noticeable obstacle for Japan's auto exports.

Korea exported a lot more vehicles in this period and gradually built its reputation among the vehicle importers. Apart from being small and affordable, the Korea-made cars are also duty-free when they are marketed to the U.S. With merge and rapid expansion, the Korean government pushed the automotive industry in the country forward to reach scale economy in a relatively closed situation. By introducing advanced technologies from abroad and continuing localization efforts, Korea formed an complete and independent auto industry which later started to eye the world market. One can see from the above that it could be very difficult for auto makers in China to get the chance as did those in Korea some 20 years ago (Chen Qingtai, Lu Zhiqiang, 1998).

Interestingly enough, Korea has not been open to foreign imports. In 1995, they liberalized their standards and certification practices, reduced taxes that discriminate against imports and made a commitment not to introduce any new measures that would adversely affect market access. As with many parts of the world, Korea's growth prospects are dependent on the U.S. marketplace. Since the U.S. is currently experiencing an economic slump, the auto industry and Korea will not likely see any changes until the second half of 2003.

Hyundai Motor sales in the United States have risen by 10% to date in 2003. The company plans to design some racy new car models, improve quality and create extended warranty policies to boost sales. The United States remains Korea's biggest export marketplace.

Although, stronger local players such as Hyundai Motor and Kia Motors are now on an even keel and are making a mark on the global market, Daewoo Motors has just set sail for new ground. It has been a gut-wrenching four years since commencing the workout process but with GM as its new owner, the future seems promising for the new company.

GM with 42.1% of the shares has a controlling stake in GMDAT with Suzuki Motors (14.9%), Shanghai Automotive Industry Corporation (10%) and creditors hold the remaining shares (33%). GMDAT's new CEO will be Nick Reilly, a GM veteran who has worked at GM subsidiaries GM Isuzu and Vauxhall, of which he is the current chairman. GM had been particularly selective when deciding which Daewoo operations it will undertake when investing in the defunct Daewoo Motors. In the end, GM decided to absorb Daewoo Motors' Kunsan and Changwon manufacturing plants together with ten overseas subsidiaries in order to establish GMDAT (Korean Business Review, 2002)

The economic outlook for the Korean auto industry is still good despite the current economic slump because they have largest incremental value for growth opportunities. Korea imports fewer cars than any other country and has kept its quota from the U.S. very low. Korea has always maintained a severely closed market with an assortment of tariff and non-tariff barriers.