Korea Trade Pact: No Easy Ride for Detroit

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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April 3, 2007

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.