At the joint White House news conference in June with newly elected South Korean President Moon Jae-in, President Donald Trump drove a new round of debate over the trade imbalance with the following utterance:
“South Korean companies sell cars in America. American companies should have that same exact privilege on a reciprocal basis, and I’m sure we will be able to work that out.”
Politicians are no stranger to hype and over-simplification –with Trump being one of the more prolific. However, what the president bemoaned as the unfair, I see the imbalance as being more a matter of Taste vs. Trade.
Six out of ten customers in South Korea still pick German vehicles over other imported cars with the two German carmakers Mercedes and BMW in a neck-and-neck competition.
As background, under the 2012 U.S.-Korea Free Trade Agreement, when addressing the import of Korean cars to the U.S, the agreement, maintained a 2.5% U.S. tariff in place until the fifth year following implementation.
At the same time, Korea cut the tariff on U.S. auto imports in half (from 8% to 4%), and fully eliminated that tariff in the fifth year.
So, if the playing field is level, is it really taste and preference?
Looking back, during a VIP dinner in 2011, I had the wonderful opportunity to speak at length with Dr. Chung Un-chan a former president of Seoul National University and Prime Minister of South Korea (2009 -2010).
When my work as a consultant for Hyundai and Kia Motors was mentioned in the conversation, Dr. Chung spoke frankly about the automotive market and “that Koreans loved all things American, except when it came to their cars—and they were “wired” to buy German.”
This preference does seem to ring true.
According to a Korea Automobile Importers and Distributors Association (KAIDA) report from January to June 2017, the share of imported vehicles in the domestic Korea passenger car market rose to 15.47 percent from 14.64 percent a year earlier.
KAIDA studies show six out of ten customers in South Korea still pick German vehicles over other imported cars with the two German carmakers Mercedes and BMW in a neck-and-neck competition.
Korea customers are increasingly looking to buy “green” vehicles, with various government subsidies.
However, I also see a shift occurring. For example, environment-friendly Japanese vehicle sales jumped 21 percent to 4,733 units in June compared with a year prior. Worthy of note, Toyota’s Prius Prime, the OEM’s plug-in hybrid electric vehicle (PHEV) model, was introduced into Korea by the Japanese automaker earlier in 2017.
As a caveat, a total of 6,215 units of Korean-made hybrid cars were sold in June, up 140 percent from 2,617 a month earlier, according to the data. Kia Motors new crossover utility vehicle (CUV) Niro spearheading the popularity, with 3,246 units sold last month, taking up 52 percent of the total Korea-made hybrid sales.
Again, when comparing the numbers we see imports still making huge proportional gains in this environmental-friendly category—U.S brands not on the radar. One potential exception is Tesla, which launched in the past few months, and scheduling a test drive now can take up to 6 months.
Broader forces at play
One, Korea customers are increasingly looking to buy “green” vehicles, with various government subsidies that could add up to 22 million South Korea won ($18,328).
And two, in the wake of VW’s diesel-gate, government regulators have applied stricter rules on all diesel-powered vehicles with hybrid and electric cars an attractive alternative. In addition, VW sales have all but halted under a current government ban for which the Japanese automaker has benefitted.
Import car sales do seem to be having an impact on local production, too. According to the Korea Automobile Manufacturers Association, 2.16 million cars were manufactured in South Korea during the first six months, 33,000 less than a year ago and the lowest since the first half of 2010.
In the first half of this year, 785,297 Korean cars were sold at home, down four percent, and 1.32 million cars were exported, down 0.8 percent.
On the positive side, Korean brands like Hyundai Motor Group’s Genesis are tackling the challenge head on and addressing the competition with their new product lineup targeting premium Korean buyers.
This approach may be what is truly needed for U.S. imports, too. Kim Pil-soo, a professor of engineering at Daelim University College, notes, “Upgrading their vehicles [to] meet the luxurious taste of consumers is more important than complaining about non-tariff barriers.”
