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Title Korea's car industry to face strong headwind in 2019
Write admin Date 2019-01-11 Hit 169

Though Korea celebrated its exports surpassing $600 billion for the first time in 2018, it is doubtful whether the country can maintain that level, because the country's car industry, one of the main pillars of its outbound shipment, is faltering.

The industry saw various indicators gauging its sales, earnings, manufacturing volume and other indices all going negative throughout last year, and faced the New Year without making a rebound.

Looking ahead for 2019, carmakers and parts makers pin their hopes on future cars, represented by "green" cars, but it is uncertain whether those mid- and long-term goals can resuscitate the industry which is expected to drop further this year.

Engine losing power

According to the Korea Automobile Manufacturers Association (KAMA), seven domestic carmakers sold 3.64 million vehicles in 2018 between January and November, down 3.6 percent from 3.78 million during the same period a year earlier.

The carmakers were Hyundai Motor, Kia Motors, GM Korea, SsangYong Motor, Renault Samsung, Zyle Daewoo Commercial Vehicle and Tata Daewoo.

Along with the sales, their manufacturing volume also declined by 4.1 percent from 3.67 million to 3.83 million during the cited period. Korea has produced more than 4 million vehicles in the past eight years, but it is likely to fail to reach that target in 2018.

Exports also dropped, with the aggregated car export volume from January to November last year shrinking to 2.23 million, down 5.2 percent from a year earlier. It will also be the first time in eight years that the country's yearly car exports stood below 2.5 million.

As the volume drops, Korea will likely fall to the world's seventh-largest automaker from No. 6 at the end of 2018, ceding the position to Mexico. In 2016, Korea gave its No. 5 status to India to become No. 6.

A more compelling fact is the earnings of Hyundai Motor Group, whose share in the Korean car industry is "absolute."

Hyundai Motor Group, which owns Hyundai Motor and Kia Motors, has posted more than 1 trillion won in operating profit in the second and third quarters of 2017, but has been logging numbers below 1 trillion won since then.

Sending the biggest shock was a 288.9 billion won operating profit in the third quarter of 2018, which dropped by a whopping 76 percent from a year earlier.

GM Korea also had a rough year, as it closed its plant in Gunsan, North Jeolla Province, due to plunging sales. After hassles with its unions, headquarters and state-run lender Korea Development Bank, it proclaimed a "normalization" of its operation but is still in conflict with the unions which are strongly opposing a spinoff of GM Korea.

Renault Samsung also had a disappointing year with its sales from January to November 2018 dropping to 209,125, down 16.4 percent from 25,759 during the same period a year earlier.

Manufacturers' downturn led to parts makers' suffering. According to the Ministry of Trade, Industry and Energy, 31 out of 90 listed auto parts makers posted losses in the third quarter of last year, up from six in 2015, and the average operating profit ratio dropped from 3.6 percent to 1.8 percent during the same period.

Lurking risks surface

Experts say the downturn is largely attributable to the declining demand in Korea's major export markets of the U.S. and China, even though emerging markets such as Brazil and Russia showed growth. Also, they cited domestic carmakers' strategic mistake of not focusing enough on SUVs.

"The demand for Korean cars in the U.S. and China declined sharply because domestic carmakers failed to expand their SUV portfolios," Korean Academy of Motor Industry Chairman Kim Yong-jin said.

"About three years ago, the global oil prices plunged, jacking up the demand for SUVs explosively across the world. Especially in the U.S. and China, growing numbers of consumers were showing interest in SUVs, but companies were not agile enough to change their focus from conventional sedans."

According to market tracker IHS Markit, SUVs accounted for 25.2 percent of the total car sales in 2015 and grew quickly to 28.8 percent in 2016, 32 percent in 2017 and 35.1 percent in 2018.

In the U.S., SUVs account for 36 percent of the total market in 2017, up from 13 percent in 2013.

Also, the long-stalled issue of high labor costs deteriorated the price competitiveness of domestic carmakers, while the purchasing power of consumers in Brazil and China was weakened during their economic downturn.

Korean cars had their strength in price competitiveness compared to that of other global carmakers, but the continued conflicts with militant unions over wages have raised their labor costs, leading to carmakers allocating smaller budgets for R&D.

In 2017, Hyundai Motor and Kia Motors invested 4.1 trillion won in R&D, accounting for 2.8 percent of its sales. The ratio was far lower than that of other sizable automakers, such as Toyota with 3.8 percent or Volkswagen's 5.3 percent.

"Among Chinese consumers, there is a clear preference for new technologies," Kim said. "However, there have not been many wow-factors in Korean cars in the Chinese market recently, which has led local consumers to lose interest."

Cloudy outlook

In a recent report, the Korea Institute for Industrial Economics & Trade (KIET) expected Korea's car manufacturing volume for 2019 will decline 2.3 percent from 2018. If that comes to pass, it will be the fourth consecutive years of contraction, following a 3.3 percent decline in 2018 and 2.7 percent in 2017.

The KIET also anticipated a 0.2 percent drop in exports for this year, continuing its contraction since 2017.

"Manufacturing volume will decline by 2.3 percent due to continued slumps in exports and domestic demand, coupled with stronger labor policies such as the minimum wage hike and working hour cap," the report said.

"Also, large-scale demand drops are expected in not only major markets but also emerging markets, dragging down exports."

Hyundai Motor Group is also casting a gloomy outlook for this year.

"The car industry will likely slow in 2019 because three major markets in the world ¡ª the U.S., Europe and China ¡ª will stay sluggish," Hyundai Motor Group Global Business Intelligence Center chief Lee Bo-sung said in a seminar on Dec. 20, adding that global car demand will end up growing 0.1 percent from 2018.

Of this, the U.S. market will shrink by 1.4 percent due to rising interest rates and companies' strategy to limit fleet sales.

The European market will also decline by 0.2 percent, while China will see a tepid growth of 0.2 percent, according to Lee.

"Though emerging markets including Russia, India and Brazil are expected to show growth, it will not be enough to offset the slump in the top three markets," he said.

The center expected the growth of SUVs across the world will continue this year, but the pace will be slower than previous years, because demand for cheaper SUVs is declining in the Chinese market.

Breakthrough with SUVs, green cars

To make a breakthrough in this cloudy outlook, Hyundai Motor Group Executive Vice Chairman Chung Eui-sun held a meeting recently with the group's overseas body chiefs and stressed a "market-oriented" strategy, prioritizing consumers in every decision the group makes.

To meet consumers' continued demand for SUVs, the group decided to expand its SUV portfolio in the U.S. market by releasing the Hyundai Palisade and the Telluride. The Hyundai brand will add another compact SUV in its U.S. lineup to attract consumers there with five SUVs.

For China, the group decided to enhance its partnerships with tech firms including Baidu, so its cars can offer new technologies. This year, the Hyundai brand will roll out the ix25 in China, the Santa Fe and the Sonata, and Kia will launch the K3 and the KX3.

For green cars, the group will release upgraded versions of the Kona Hybrid Electric Vehicle (HEV), the Sonata HEV and the Ioniq HEV, plug-in HEV and EV.

To cope with China's enhancing regulations on internal combustion vehicles, the Avante PHEV, the Kona EV, the Lafesta EV and the K3 PHEV will hit the market there.

"As we have noticed in 2018, SUVs and green cars are the juggernauts of the automotive market," Kim said. "Along with manufacturers' efforts to enhance those segments, the domestic auto parts industry also needs to be restructured so they can enhance their R&D capacity."
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