Encouraging signs of automotive life in South Korea

The painful restructuring process of South Korea’s automotive industry that came in the wake of the 1997-98 regional economic crisis is far from complete. But it is now becoming clearer what final shape the industry will take. Amazingly, some of the signs are encouraging and some of the larger companies have emerged from the crisis in better shape and with a much brighter future. Among these is the Hyundai-Kia group, which has been integrating at a rate that even Renault-Nissan would envy. Tony Pugliese reports.

Hyundai-Kia is fast becoming a strong global competitor with net margins that are among the highest among the world’s top vehicle manufacturers.  The group’s global sales are rapidly approaching three million units per year thanks to an extremely intense new product development programme. 

“Its [Hyundai-Kia]cost-base is among the lowest in the global automotive industry. “

Its cost-base is among the lowest in the global automotive industry.

Other companies are also securing a bright future for themselves, albeit under foreign ownership.  Samsung Motor, now 70%-owned by Renault of France, is generating unprecedented monthly sales and new models are to be introduced in the next two years.  Eventually, the company is expected to engage in export activity in support of Renault-Nissan operations in the region.  Ssangyong Motor has been working hard at separating its operations from Daewoo Motor, having merged with the company three years earlier.  Although it depends on DaimlerChrysler for its core technology, it has been implementing a recovery plan which it hopes will see it through to financial health.  Although its future is not certain, it is expected to become a more integrated part of DaimlerChrysler.

A much stronger focus on the export market since the crisis, and the very strong recovery in the domestic market has underpinned the industry’s recovery from the brink of collapse.  Annual domestic sales volumes have almost doubled since the 1998 cyclical low, and overseas sales have increased by a third.  North America, and the US in particular, has accounted for most of this increase.  New markets are being successfully targeted, mainly by the Hyundai-Kia group.

The deteriorating global economic conditions and rising uncertainty are forecast to affect the South Korean domestic vehicle market, and so the next twelve months are expected to be negative.  We are forecasting a tough fourth quarter for the domestic market, and a tough first half of 2002.  Annualised, we expect domestic vehicle demand to decline in 2001 and 2002, before a more sustained recovery takes place from the second half of 2002.  The prospects of growth for overseas sales, including CBU exports, are forecast to be negative in the short term.  Hyundai-Kia’s strong new model programme currently in play, as well as more favourable currency exchange rates, should help improve its overseas market share, though this is not expected to be enough to offset declining demand.

“A big question mark remains with Daewoo Motors Corporation..”

A big question mark remains with Daewoo Motors Corporation, which has been buried under a mountain of debt for some time.  It has been haemorrhaging market share in almost all markets recently, as uncertainty has increased.  Sadly, most of the heavy investments the company has made over the last ten years are worth a fraction of what they originally cost, and some plants are likely to be closed down.  Creditors have accepted in principle a bid by General Motors for part of the Daewoo Motor assets, leaving out the largest domestic assembly plant and the vast majority of its overseas assembly capacity.

The deteriorating global economic conditions will make it even more difficult to attract buying interest in many of these facilities.  Virtually none of the 4.37 million-unit vehicle production capacity in South Korea has been eliminated since the economic crisis, and capacity utilisation is currently at around 70%.  This is unlikely to change in the short term, making the long-term prospects for Daewoo’s Pupyong plant bleak.  The operations for which GM has bid have a much more secure future, as they are gradually integrated into GM’s global supply network.

Domestic vehicle market

Expert Analysis The South Korean vehicle industry: a strategic review A strategic review published by just-auto.com: assesses how this increasingly important industry is performing in both a domestic and global context. The report covers the trends within South Korea’s automotive industry and its role in the global marketplace together with sales data and company forecasts to 2005.

Despite the worsening economic environment domestically and abroad, the South Korean passenger car market has held up rather well.  In 2000, vehicle sales overall grew by almost 13% compared with the previous year.  Even in 2001, with economic growth falling sharply and the outlook for employment worsening, the vehicle market has been very resilient.  Volumes fell by approximately 2% during the first seven months of the year.  New passenger car sales fell by 2.5% during this period, while the commercial vehicle market fell by less than 1%.  The economy has been severely affected by the drop in global demand for electronic

“the South Korean passenger car market has held up rather well”

products, and export revenues have been weakening since the end of 2000.  The domestic economy has performed more strongly, however, with the service sector and growth in small business start-ups preventing the economy from slipping into recession.

The availability of new and revised passenger car and recreational vehicles has stimulated replacement buying among vehicle owners.  Growth in small businesses and the service sector has helped fuel demand for light trucks and vans—segments that have shown continued growth over the last two years.  The economic situation is not improving, however.  We expect the domestic vehicle market will weaken further in the short-term, as consumer confidence continues to decline.  The result will be increasing delays in vehicle replacements.  The global economic weakness is expected to last well into 2002, with the US economy now expected to contract for at least two quarters from September 2001.  This will affect export volumes even more than it has already, and will prompt companies into more defensive strategies which will inevitably include capacity adjustments, delayed procurements and workforce redundancies.

We expect vehicle sales in the fourth quarter will contract quite sharply, with full-year new vehicle sales now expected to contract by 7%.  A further 2.8% drop is forecast for 2002, with the domestic economy improving markedly in the second half.  Co-hosting the FIFA World Cup football competition will give the economy a lift, both in terms of consumer confidence and business activity.  We do not expect the market to go into free-fall like it did in 1998, but a moderate drop in volumes in the coming months will be inevitable.