Royal University of Phnom Penh
And
Royal University of Law and Economics
Siem Pichnorak
[email protected]
Sok Vouchneng
[email protected]
Department of International Studies
Department of Law
The Roles of Export-led Policies in Developing
Automobile Industry in South Korea
2013
i
Contents
Abstract ........................................................................................................................................... ii
Acknowledgements ........................................................................................................................ iii
List of Acronyms ........................................................................................................................... iv
Chapter 1: Introduction ................................................................................................................... 1
1.1.
Brief History..................................................................................................................... 1
1.2.
Significance of Research Study........................................................................................ 4
1.3.
Research Methodology..................................................................................................... 6
Chapter 2: Literature Review .......................................................................................................... 6
Chapter 3: Analysis and Discussion ............................................................................................... 9
3.1. Export-led Policies and Implementation ............................................................................ 10
a.
Tax Incentives: ............................................................................................................... 10
b.
Financial Incentives: ...................................................................................................... 11
c.
Establishment of Free Trade Zones and Other Supporting Organization: ..................... 12
3.2. Policies Significances......................................................................................................... 13
Chapter 4: Conclusion................................................................................................................... 17
4.1. Research Finding ................................................................................................................ 18
4.2. Limitation and Recommendation ....................................................................................... 20
Appendix ....................................................................................................................................... 22
Bibliography ................................................................................................................................. 26
ii
Abstract
South Korea automobile industry has caught the world’s attention as it has transformed
itself from cheap low quality producer to high-end global competitor in the world market. In
particular, South Korea has become in 2010 the fifth largest car exporter in the world. The
successful story of South Korea automobile industry cannot be separated from the grassroots
national policies which embarked for ambitious plan since the humble start in 1960s. In this vein,
this research paper would dig out the relevant export-led policies which were utilized to boost up
this industry which forced three major local producers such Hyundai, Kia, and Daewoo to export
in the first place and compete in the global market. The argument of this research is that exportled policies are the main stimulus boosting up the performance of producers which led to drastic
improvement in technology and productivity of Korean auto industry. The first chapter will
briefly describe the historical development of the industry along with significance of research
study and methodology. Next, chapter 2 will review the existing literatures, while chapter 3 will
analyze and discuss the export-led policies implementation and the significance in developing
the industry. Last but not least, the last chapter will conclude with the findings of research study
and suggest recommendations for future study in response to limitations this paper did not cover.
iii
Acknowledgements
This research study on the topic of “The Roles Export-led Policies in Developing
Automobile Industry In South Korea” would not have been possible without active supports,
professionalism, advices, commitments, encouragements and consultation from professors,
seniors, family and peer friends who have always been providing us with valuable assistances.
First, we would like to express our deep and sincere appreciation to Professor Eunyoung
Kim, who has always given us with supports and ideas as well as feedbacks in developing this
research topic despite her tough schedule. More than that, we are also thankful to the
understanding and constructive feedbacks she has periodically given us to update and correct our
research plan and process.
Second, we would also like to express our heartfelt thanks and faithful gratitude to
Professor Seyoung Park, who has devoted time, efforts and resources to give lectures to us and
helped us with the process of our research study. Honestly, without her advices, professionalism
and efforts, our research would have derailed.
Last but not least, we would also like to express our thankfulness and gratefulness to our
family, seniors and peer friends, who have encouraged, advised and assisted us in completing our
research paper. Without their constructive criticism and supports, we are sure that this paper
would not be completed successfully.
iv
List of Acronyms
EIF: Export Insurance Fund
FDI: Foreign Direct Investment
FTZ: Free Trade Zone
HMC: Hyundai Motor Company
HCI: Heavy and Chemical Industry
KAMA: Korean Automobile Manufacturer Association
KCGF: Korea Credit Guarantee Fund
KEIC: Korea Export Insurance Corporation
KIET: Korea Institute for Industrial Economics and Trade
KITA: Korea International Trade Association
KOTRA: Korea Trade Promotion Corporation
KTIC: Korean Trade Insurance Corporation
NIC: Newly Industrialized Country
R&D: Research and Development
1
Chapter 1: Introduction
Started from a humble government-led industry, South Korea (from now on Korea)
automobile industry has achieved such a miracle by quickly becoming the global competitor
amongst producers from relative more advanced economies. Korean auto makers have moved
fast and far as it became the fifth largest in term of production and sixth largest in term of export
volume in 2010 despite economic downturn in 2008. Korea has produced diversified types of
vehicles, and three main producers are dominantly accounted for South Korea auto export,
namely Hyundai, Kia and Daewoo, and later joint by Ssangyoung and Samsung Renault. The
performance and success of Korea automakers cannot be realized without the active contribution
and intervention of government, particularly in term of policies aspect. The paper will generally
analyze the intervention of government in boosting up the auto industry and specifically exportled policies which allow the industry to grow so fast to achieve the competitive edge of today.
1.1.
Brief History
Korean automobile is a catching up industry which started roughly 48 years ago under the
initiatives of the government in order to strengthen strategic HCI (heavy and chemical industry).
The government has the dominant roles in structuring the industry and shaping its future. The
industry has gone through many drastic changes due to internal and external factors. However,
the historical development can be classified into 3 phases – the1960s to 1970s, from 1970-1990,
and from 1990 to the present.
From the outset of Korean War until 1960s, Korea was one of the world poorest nation
with per capital GDP of only ten percent of that of the United States. However, the situation
2
changed when General Park Chung Hee took power in 1960 and initiated first five year
development plan in 1962, which marked the birth of Korean automobile industry. In 1962,
“Automobile Industry Promotion Policy” and “The Automobile Industry Protection Act” were
adopted accordingly in order to promote the growth and protect this infant industry. At the time,
there was no foreign automaker except joint ventures in Korean market. The development plans
mainly focused on creation of domestic automobile industry which utilize of local contents to the
maximum level. As a result, government banned import of complete car but encouraged
acquisition of foreign automobile parts.
However, back at that time Korean auto makers were in their infant stage, in which in
term of technology and productivity were low and dependent on imported components. In this
stage, Korean auto makers imported semi and fully knocked down kits from Japan as well as the
United States to assemble cars and sale in Korean market. In order to improve the capability of
the industry, the government in 1966 put forward the plans to encourage domestic innovation
and production of automobile through subsiding auto part producers and promoting joint venture
investment from foreign major producers to acquire technology.
The first Korean auto maker started in 1955 when Choi Mu Seong a Korean businessman
and his 3 brothers namely Choi Hae Seong and Choi Soon Seong converted a US army jeep into
the first Korean car which was called “Sibal”. In 1960, Sin Jin Publica was launched by Sin Jin
under the technical licensing agreement with Toyota. In the same year, three companies were
formed. Kyeong Seong Precision Industry was first formed in 1964 and the name was changed to
Kia Industry and began assembling car with Mazda assistance. The second one was Ha Dong
Hwan Automobile Industry Co. that was firstly named SsangYong Motor Company; and the last
one was Saenara Automobile that joint with Nissan Motor Co. In 1965, Asia Motors Company
3
was founded, and not until 1968 that Hyundai Motor Company founded under the cooperation
with Ford Motor Company.
In 1973, Sohari Plant was opened by Kia in Gwang Myeong, South Korea. Later in 1975,
Hyundai Pony was built as the first Korean made car. General Motor Korea Saehan Motors was
established in 1976 under the joint venture agreement between General Motors and Sin Jin after
Toyota withdrew in 1970. Besides, General Motor Korea’s annual capacity rose to 50 000
passenger car, 7,000 trucks and 3,000 buses. By 1979, the total production rose to 204 447 units.
Nearly one hundred million dollar worth automobiles were exported to about 67 countries such
as Middle East, Central and South America, Western Europe and Africa in 1979. For instance,
from 1976 to 1982, Hyundai exported Pony to South America countries such as Colombia,
Venezuela, and Ecuador, and made the first the history of first Korean developed car. Even
though it seems to be a small in number, the successive export growth shows the promising
development of Korean automobile industry.
In 1982, Daewoo Motor, the combination of Daewoo Group and Sae Han Motors, was
established. In the same year, “Automobile Industry Rationalization Policy” was enacted in
response to solve the 1979 energy crisis and local recession. However, the main purpose of
passing this act was to have Hyundai and Daewoo merged in order to manufacture passenger car,
while Kia and Asia were supposed to produce small sized trucks. Yet, this did not go smooth as
expected because GM, the fifty percent shareholder of Daewoo wanted to assemble “a world
car”, whereas Hyundai insisted continuing to build “Korean car”. The disagreement led to the
abolition of the act in 1989.
Korean auto industry has moved to another turning point when import restriction of
automobile was relaxed. In 1986, SsangYong Motor Company replaced Dong-A Motor Co. that
4
took over Geo Haw Co., the successor of Sin Jin Automobile, in 1981. In 1980s, Hyundai first
exported the Korean made Pony model to the US and receive a successful response. On the
contrary, it was notorious for low quality. In 1989, Sonata, a medium sized sedan was assembled
to export to United States. It is noteworthy that the success of Korean export was because the
demand of cheap car at the low end market while Japan was on Self-Restraint period.
In 1990, Hyundai’s export to the United States was exceeding one million. Elantra,
Accent, and Avante were Hyundai products that won Australia Best Car in 1993, Canadian Best
Buy in 1995, and Asia- Pacific Rally in 1995 respectively. In 1993, Hyundai Elantra was
nominated as the Best Car of 1993 in Australia. In 1995, Accent won Best Buy Award. However,
because of the bad reputation of Excel poor quality, franchises were cancelled by car dealer in
the United States. To clear off the bad image, Hyundai invested heavily in quality, design,
manufacturing and R&D.
Asia Motor merged with KIA Motors Company in 1999. In 2000, facing with financial
issue, Samsung that starting selling cars in 1998 sold its seventy percent share to Renault and the
company was renamed as Renault Samsung Motors. Korean automobile industry received great
attention by North America due to the purchase of Daewoo Motor by General Motors
Corporation in 2002 and the completion of one billion dollar assembly plant of Hyundai in
Alabaman in 2005. As the result, Hyundai is the sixth Asia automaker to build a United States
factory, the third foreign maker to pick Alabama, and the sixth automaker that is situated in the
Southeastern United States since 1990. In 2009, there is another factory in West Point.
1.2.
Significance of Research Study
Concerning to our topic of “The Roles Export-led Policies in Developing Automobile
Industry in South Korea”, this small research study will explore and analyze the significance of
5
government intervention in shaping the future of Korean auto industry, especially the roles of
export-led policies. First of all, the paper will summarize the development history of automobile
industry in South Korea from the early 1960s. As evidenced, Korean automobile industry has
been playing an important role in pushing country’s economic growth, particularly in the epoch
which Korean competitive edge has changed from cheap labour to technology and capitalintensive. Starting from one of world’s poorest war-torn economy, South Korea has managed to
become an advanced country in such a short period. The booming industries, let alone auto
industry has contributed a lot to the development of the nation. In this case, this is a good lesson
learned from other developing countries that seek to industrialize and achieve such fast growth.
This can be a good experience and implication for our country, Cambodia to learn from Korea’s
lessons; therefore, it is very interesting to explore the stages of automobile industry development
in South Korea by focusing on the implementation of export-led policies.
Secondly, this research paper will contribute to the understanding of the roles
government intervention and export-led policies played in boosting up the automobile industry in
South Korea. On the one hand, this paper will highlight various government interventions and
export-led policies which stimulate the development of the industry. On the other, the paper will
analyze the relation between export-led policies and development as well as prospect of Korean
auto industry. Therefore, this paper will prove that export-led policies which led by government
were effective in developing the automobile industry.
Last but not least, by understanding and analyzing both significances and weaknesses of
government intervention as well as export-led policies in developing the automobile industry and
current status of the industry, the paper will present some suggestions and future prospects in
which Korean automakers will be facing.
6
1.3.
Research Methodology
The targets of this research are to understand the phase of Korean auto industry
development, export-led policies initiated under government intervention, and relation between
export-led policies and the growth of industry. Therefore, it is important to analyze the industry
development from both policy and economic perspectives. For this small research paper, the
research process will mainly base on qualitative analysis and observations as well as secondary
data. Previous scholastic journal articles, statistics data and policy documentations will be
utilized for analyzing the significant relation between export-led policies and auto industry
growth. The secondary data will be collected from both economic and policy journals which
outline the significances of three aspects: government intervention, export promotion and
automobile industry analysis. It is also interesting to gather the information with regard to auto
industry in other NICs which embarked for automobile industry development at the same time
but failed so that we can compare and jump to the conclusion that Korea is a role model and an
outstanding one.
Chapter 2: Literature Review
Industry evolution and economic development in South Korea are the result of effective
by the government policies and regulations under statist model. In this sense, many scholars have
agreed that government intervention and out-ward looking policies played dominant roles in the
miracle success of Korean automobile industry (GreenAndrew, 1992; MukherjeeAvinandan &
SastryTrilochan , Automotive Industry in Emerging Economies: A Comparison of South Korea,
Brazil, China, 1996; LeeDaechang, 1997; HuangYasheng, 2002; KimLinsu, 1997). This is
mainly the hypothesis of this research. This paper will seek to analyze the government
7
intervention, specifically export-led policies effectiveness in developing automobile industry in
South Korea.
From the early stage of industrialization, the government of Korea provided the seed
capital and incentives to develop the strategic industries. Many kinds of policies and
interventions were and are being implemented to catch up the advanced countries and to stay
competitive in the market. The growth process of Korea’s automobile industry clearly shows the
role played by the government in the “developmental state”. Green (1992) maintained that South
Korean government was the main force behind the successful story of automobile industry; and
the evidences could be found in its actions. The roles of the state in developing automobile
industrial sector are very clear through the intervention of state in protecting and forcing those
automakers through “carrots and stick” method. Many scholars have related the effectiveness of
government intervention to the relationship between government and chaebol, statist model.
Green (1992) has also pointed out that the key source of power government has on industrial
giants is its ability to cause liquidity and force them into bankruptcy as necessary. The
relationship between government and chaebol is parental or family affair in which government is
the father and chaebol are children. Chaebols are supposed to cooperate and take order so that
government goal can be realized and firms continue to grow.
Huang (2002), in his comparative studies over the coordination failure of automobile
industry policy in China and South Korea, suggested that the policies adopted and implemented
by Korean government at the time was so effective that the automobile industry could develop
into a mature stage; while the same model was a failure in China. In this sense, the
institutionalization of policies in South Korea was effective provided that the type of government
which differentiated it from other NICs.
8
In addition, the government, with an ambitious plan, had the strong commitment and
clear vision to elevate its automobile car makers to the world class player by investing in R&D
as well as acquiring product development capacities so that industry can develop fast
(MukherjeeAvinandan & SastryTrilochan , Automotive Industry in Emerging Economies: A
Comparison of South Korea, Brazil, China, 1996). In the same vein, Korean government is
equipped with a strong power to restructure the industry environment to adapt to its economic
goals. In particular, government also put forward the “Big-Push” policy, which forced the car
maker from phase I to Phase III, meaning that the firms needed to jump from assemblers to new
product developer (SuhJoonghae, 2004).
More importantly, grown under government-led plans such as Long-Term Automobile
Production Plan, Korean carmakers are now achieving the global competitiveness in
international market. During this stage, the government efforts should also be emphasized. The
government support schemes along with intensive learning and leveraging process from linkage
with the advanced competitors were the main components which allowed South Korean
manufacturers to transform from contract assemblers to technologically independent
manufacturers (RitterLarissa, 2010). Besides, Kim (1997, 1998) and many other scholars came
to conclusion that incentive policies and preferential condition generated by government policies
such as income tax reimbursement, subsidies, loan, access to foreign reserve and many others
played the crucial roles in boosting up the export and overall the production capacity of the
manufacturers.
Export-led policies are part of government efforts to push auto industry development.
Many scholars have identified the correlation between export promotion policies and export
growth. Government provided tax and financial incentives and export-promoting organizations
9
to selected industries which commanded export potentials. Government put forward industry
policies because it wanted auto makers to achieve economies of scale by exporting to
international markets and international competitiveness which in turn improve the productivity
and capacity of the industry (GreenAndrew, 1992) (MahJai, October 2010).
Above all, these previous research studies have made the postulation crystal clear that
policies and government intervention, particularly government efforts to push automobile export
helped develop and leverage Korean automobile producers to become a global player. Various
studies have proved that Korean government was an effective one which successfully adopted
and implemented the designed policies. However, these previous literature seems to capture
dominantly the general aspect of policies and government roles. Also, the analyses were
relatively out-dated which left the future prospect of the manufacturers unclear. Therefore, this
paper is seeking out to elaborate the significance of government intervention from export-led
policies implementation perspectives. That is, the paper will analyze the government intervention,
mainly export-led policies which led to the improvement of production and competitive
capability.
Chapter 3: Analysis and Discussion
Started in 1960s, South Korea was the late entrant in the automobile market, yet it
managed to achieve enviable outcome and progress compared to other NICs which embarked for
auto industry at the same time or relatively earlier. Back in the early stage, South Korean
automobile industry was fragmented and undeveloped, established under the knock-down kits
imported from Japan and the United States. Among Newly Industrialized Countries such as
Mexico, Brazil, Argentina, India and China which embarked for automobile industry
10
development as a strategic pillar in relative same period, South Korean automobile industry was
the outstanding one. Therefore, it is relevant to compare South Korea to those Newly
Industrialized Countries because of government role in the boosting up the industry. While
government intervention proved successful in South Korean case, the same model implemented
in those above mentioned NICs revealed ineffective. It is said that Korean endeavor to develop
its industry was at the right time with right policies. Therefore, the following section will outline
the export-led policies and the implementations.
3.1. Export-led Policies and Implementation
By 1962, export promotion policies was introduced to replace import substitution policy
that was implemented by the early of 1960s, which was considered as the starting point of
Korean economic recovery after years of Korean War and division of Korean peninsula (Charles
Harvie, Hyun Hoon Lee). Responding to advancing export, in 1962 export led policies was
announced to provide new force for the industry and to transform Korean carmakers from cheap
car assemblers to global players. The export-led policies are comprised of three main parts,
namely tax incentives, financial incentives, establishment of free trade zones and the supporting
organizations (Mah, October 2010).
a. Tax Incentives
Tax incentives policy mainly consists of two main points which are tax incentive in
general and duty drawback schemes. For tax incentive in general, export firms were provided
with tax deduction according to the 1961 Tax Exemption and Reduction Control Law. To
illustrate, in 1964 government imposed 50 percent reduction of profit tax of export firms and
endorse export finance schemes at the low interest.
11
Moreover, tax benefits such as 80 percent of reduction of profit tax were given to export
firms to support other R&D activities and FDI inflows. Since 2005, foreign visitor investment
FDI areas are exempted from profit and income tax for first ten year of establishment, and 50
percent tax of new R&D expenditure can be claimed as tax deduction.
On the other hand, duty drawback schemes were used to reduce cost of the producing
exported products. Basing on 1997 Special Act for Duty Drawback in Korea, the imported raw
materials that were used to produce export products within two years from import were qualified
for duty drawback. The drawback rate was defined as the amount of duty drawback divided by
exported value. Obviously, it increased from 0.3 percent in 1975 to 2.6 percent in 1990 and ratio
of duty drawback, and the rate further increased from 17 percent to 27 percent between 1990 and
2009.
b. Financial Incentives
Financial incentives cover policy loan, export finances and export insurances. Policy loan
played a role as facilitator to provide the preferential interest rates. During the 1970s, preferential
interest rate of total bank rose from less than 40 percent in 1975 to over 55 percent in 1976 and
1977, and this preferential interest rate reached 70 percent in 1978. However, the financial
incentives encountered changes in 1980s when government liberalized interest rates to give
managerial autonomy and privatize of commercial banks.
In addition, export finances gave exporters huge amount of interest rate subsides with the
supports from Export-Import Bank and commercial banks. Interest rate for export finance was 3
percent during 1998 to 1999, which was much lower than that of market rate ranging from 8.5 to
20 percent in 1999. Besides, SME’s debt related to export that was withdrawn from commercial
12
banks is protected by KCGF under guaranteeing the repayment that was up to ten billion won,
reaching 4.2 trillion won and 4.6 trillion won in 2006 and 2007 respectively.
Last but not least, export insurances helped exporters increase exports by protecting them
against the loss through the 1969 Export Insurance Act. Later, EIF (Export Insurance Funds)
were established to support the implementation of Export Insurance Act. EIF accumulated 1.5
trillion won in 2008. From 1968 to 1972, the value of export supported by export insurance was
1 percent, and remained stable around 3 percent during 1980s. KEIC was established in 1992 to
support export incentives.
c. Establishment of Free Trade Zones and Other Supporting Organization
FTZs, exclusive areas outside the national customs boundary that is exempted from
customs requirements, have been governed by the Law on Free Trade Zones. In FTZs,
streamlined import procedures, exemption from import tariffs and tax relief including value
added tax/corporate tax are applied. Also, foreign cargos are allowed to enter and leave the zones
freely, yet to enter FTZS industries shall have more than 50 percent of total sale amount of
export, and invest more than 50 million won. Until now, FIZs are situated in many places. The
Masan Free Trade Zone (FTZ), originally Free Export Zone, was formed in 1970 under the name
of first Korean foreign exclusive individual complex to appeal more FDI inflows. It is so
beneficial for export activities mainly due to its favorable location.
In addition to establishment of free trade zones, there is a focus on exchange rate. The
exchange rate system was in 1980 changed to the managed flexible system that was basically
determined by market forces in foreign exchange markets. Exchange rate was devalued from
time to time. Korean Won exchange rate shifted from 255 won/USD in 1964 to 484won/ USD in
1974.
13
Lastly, many supporting organizations were established. KITA and KOTRA were built to
assist firms overcome the export barriers such as motivational, informational and operational
issues. KOTRA, established in 1962, plays a role as national trade promotion organization by
facilitating export led economic growth through trade promotions including oversea market
survey and business matchmaking. With the expanding mandate of KOTRA, It was renamed as
Korea Trade Investment Promotion Agency in 1995 in order to mainly promote cross border
investments and to support technical and industrial cooperation projects. Until 2009, there have
been 100 Korea Trade Center in 73 countries around the world. In addition, KAMA (Korean
Automobile Manufacturers Association) was created in 1974 to facilitate and support the auto
industry.
3.2. Policies Significances
The industrialization and rapid economic growth in South Korea has been explained as
the outcome of outward looking policies which forced Korean firms to be more competitive
particularly in international markets. In the same way, the growth and export expansion of auto
industry in Korea could happen thank to various government interventions and policy resources,
especially export-led policies. As mentioned earlier in this paper, Korean automakers have
transformed from the cheap unqualified producers, utilizing borrowed technology from abroad,
to a global competitor with self-technology and high production capacity. Korea first exported
six cars to Ecuador in exchange for bananas in 1976 (GreenAndrew, 1992). However, ten years
later the industry has changed when Hyundai successfully exported Excel to North America,
particularly United States in 1986. In this sense, it is arguable that export-led policies helped
boost Korean auto industry in two aspects, economies of scale and productivity and improvement.
14
In the early stage Korean auto industry suffered greatly from diseconomies of scale due
to small domestic demands and fraction in size. Economies of scale are gravely indispensible and
sensitive for automobile industry since the shortage of demands would lead to the waste of
production capacity and sustainability of producers. Economies of scale refers to the cost
advantages the firms obtain by the reducing the cost and increase the outputs. In the motor
vehicle industry, the minimum economies of scale are affixed at 250,000 units per year
(HuangYasheng, 2002). Though the production increased rapidly from 9,069 cars in 1974 to
112,324 cars in 1979, the industry was still in the struggling stage because the domestic market is
too small to absorb the outputs, and as KIET report indicated, the industry can only survive if the
production was expanded large enough to capture economies of scale (GreenAndrew, 1992).
Thus, the only survival strategy, as one Korean newspaper pointed out “the last resort for
survival”, was to force auto makers to export to foreign markets, especially the big market such
as United States. Figure 1 indicates the increase in production and export which helped Korean
automakers achieve economies of scale. Korea exported less than 35% of its automobile
production in 1985, but from 2004 until 2012 Korea has exported from 50% to 70% of auto
outputs. It is already clear that the export volume is much greater than domestic sale volume, and
the figure implies that the export-led policies, which pushed Korea to export its automobile since
1970s, helped the industry itself to develop in the sense that export allowed those automakers to
reach economies of scale in order to survive and grow.
Figure 1: Total production, domestic sale and export volume between 1977 and 2012
Year
Total Production
Domestic Sale
Export
1977
1978
1979
–
–
–
–
–
–
9,136
26,337
31,486
15
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
–
–
–
–
–
378,162
601,546
979,739
1,083,355
1,129,470
1,321,630
1,497,758
1,730,161
2,049,968
2,311,609
2,526,400
–
2,818,000
1,954,000
2,843,000
3,115,000
2,946,000
3,147,584
3,177,870
3,469,464
3,699,350
3,840,102
4,086,308
3,826,682
3,512,926
4,271,741
4,657,694
4,561,766
–
–
–
–
–
246,282
258,251
420,048
523,476
762,959
954,271
1,104,184
1,268,374
1,435,967
1,555,602
155,902
–
1,513,000
780,000
1,273,300
1,430,000
1,451,000
1,622,268
1,318,312
1,093,652
1,142,562
1,164,254
1,219,335
1,154,483
1,394,000
1,465,426
1,474,637
1,410,857
25,253
26,384
20,317
24,510
52,350
123,110
306,369
546,310
576,134
356,640
347,100
390,362
456,153
638,557
737,943
978,688
–
1,305,000
1,362,000
1,510,000
1,676,000
1,501,000
1,622,268
1,814,935
2,379,563
2,586,088
2,648,220
2,847,135
2,683,965
2,148,862
2,772,107
3,151,708
3,170,634
Source: KAMA
From another aspect, by pushing auto makers to exports and compete in foreign markets,
where the competition environment was very fierce, those firms willing or not had to improve
16
quality, technology as well as production capacity in order to capture the market share. Since the
domestic market was highly restricted, the competitive seemed to be neglected; yet, the
preservation of domestic market allowed those firms to produce and improve their products
before exporting by using on trials and errors method. The domestic market is also the backdoor,
for the government allowed dual pricing strategy in which domestic consumers paid higher than
the foreign consumers.
Experienced from severe competition abroad, Korean automakers, especially Hyundai
which took the first step, pulled resources into R&D efforts. Technology and innovation is
known to be deathly important for auto makers if they wish to compete or to at least survive. The
initial stage of Korean auto industry R&D was mainly to adopt and develop foreign technology
to achieve the maximum local content. The later stage R&D effort was to achieve the design
specification and engine technology specifically to meet the US emission standard and to catch
up the technology it lagged as well as to produce car by utilizing indigenous technology. In
particular, HMC became the first Korean automaker that could produce engines and transmission
independently. It is clear that the market competition in foreign market, along with government
supports, stimulated the R&D efforts conducted by Korean firms to improve production and gain
competitive edge. To indicate, the private auto industry expenditure on R&D increased
remarkably from roughly 26% in 1975 to 75% in 1985 and remained very high until now. HMC
increased its R&D significantly in 1990s; for example, in 1995 invested $625 million in R&D
budget, equal to 5.2% of its sale revenue. In recent years, Hyundai and Kia together spent $3
million on R&D annually, equivalent to 5% of total sale revenue, to achieve more fuel efficient
engine technology (OnhsmanAlam, 2009) (OkaneTony, 2012). Various R&D efforts did not only
help Korean automakers produce the qualified outputs but also helped them save the royalty
17
payment they had to pay to foreign company. As appendix table 9 illustrated, the royalty
payments paid by Hyundai and Kia decreased significantly during 1990s.
The competition is the answer to the question of live or death. Since the domestic market
of Korea is highly restricted from foreign car producers, the competition was less likely. On
contrary, the competition in foreign markets such as in North America and Europe where many
mature and advanced had already dominated the market is another story. To compete in such a
catch-up process, Korean automakers were left no choice but to improve and develop by putting
more efforts on R&D and innovation. In short, it is very obvious that export-led policies had
forced Korean automaker to shift from low technology producers to a global competitor by
prompting firms to increase their efforts in R&D and improvement.
Chapter 4: Conclusion
In a broad aspect, Korea Inc. dictated the development of the country based on statist
model and outward-looking policies. In the same way, Korean auto industry has developed under
the initiatives and protective wing of the government. Many scholars and observers have come to
conclusion that Korean government intervention was very effective back then in shaping the
development of the country and especially the development and prospects of Korea auto
producers. The government played roles as the initiator and supporter. In the aspect of Export-led
policies, government has provided firms with tax incentive, financial support and establishment
of various organizations to facilitate exports and further growth.
The relations between chaebols and government is known to a parental one in which state
both persuaded and force firms to realize the goals the government put. The government took
strong hold over banking sector so that it could allocate resources to whichever industry in favor.
18
In the efforts to boost up export, government from the early stage provided R&D supports which
in turn allow Korean automakers conduct reverse engineering and finally produce vehicles based
on indigenous technology.
Korea auto industry entered the new age when it successfully exported the first “made in
Korea” car to the United States. Thanked to the export promotion policies which helped the
development of Korean auto industry, and the significance of such outward policies can be
summarized into two. First, export allowed firms to meet economies of scale which they cannot
reach by capturing domestic market alone. Second, the experience from severe competition
abroad gave automakers lesson and force them to improve productivity and innovative
technology to survive and compete internationally.
Headed by the big three Hyundai, Kia, Daewoo and later joint by Ssangyoung and
Samsung Renault in 1990s, Korean auto industry has grown very fast, and Korean cars are now
conquering the world markets directly with other major world-class producers. Despite economic
downturn in 2008, Korea auto industry continues to grow and in 2012 Korea exported 3,200,000
vehicles, amounting to $718 billion. In other word, despite many shortcomings and problems
Korean automakers are facing today, the prospect of Korean auto industry is very promising.
4.1. Research Findings
Responding to the research hypothesis which is the significance of government Exportled policies on Korean automobile industry, the paper has outlaid various actions taken by the
government in order to industrialize as well as to develop the auto industry in South Korea. From
broad perspectives, we can conclude that the development of auto industry in Korea has gone
through three major stages.
19
First, from 1962 to early 1970s, the government embarked the initiatives for MCI (heavy
and chemical industry) in which automobile industry is the main pillar in development of Korea.
In this stage, Korean automakers relied greatly from on foreign technology, license and reverse
engineering of foreign technology. Many analysts have agreed that Korea had skipped from
phase 1 to phase 3 in term of car production during its catching-up process. Though the
involvement of foreign firms is visible, their significance was downplayed since the government
tried to limit the control of foreign firms, and the managerial control was mainly under domestic
firms, even in the case of Daewoo where GM hold 50% of ownership.
Secondly, from later 1970s to the end 1990s, it is the period of booming and struggling.
Korea automakers had successfully developed their own model, whether by foreign assistance or
indigenous efforts. In this stage, the export-led policies played great roles in shaping and
restructuring the industry because the mid 1980 saw the rationalization of banking sector and
trade liberalization in Korea. Major firms like Hyundai, Kia and Daewoo pulled their resources
to R&D sector to achieve competitive edge in both domestic and foreign markets, and the same
period saw the increase in national players such as Ssangyoung and Samsung Renault that
entered the market in early 1990s.
Last but not least, the turn of century came along with a clear prospect of Korean
automakers. The market share in foreign market continues to increase, and Korean cars are now
competing directly with other world-class producers. Korean cars are exported to every continent
in the world, and more and more factories were established abroad. At the meantime, various
R&D efforts are to achieve competitive edge in innovative technology to compete or supersede
other mature producers.
20
With regard to the importance of export-led policies, two significances were found. On
the one hand, Export-led policies forced Korean automaker to go abroad and in turn allowed then
to meet economies of scale that they cannot capture in local market. On the other hand, the
severe competition abroad pushed Korean carmakers to put more efforts in improving
productivity and innovative technology through R&D efforts.
4.2. Limitation and Recommendation
Since the mid-1980s, the rationalization and democratization of Korea limited the
intervention of government over the industry; therefore, the industry growth is mainly
determined by the market mechanisms. Though, the Korean auto industry prospect is very
promising as the continuous growth continues to be seen.
Despite the bright successes, Korean auto industry still faces some challenges. First, the
image of Korean cars is still perceived as cheap and low quality even the industry has become
mature and a competitive global player. In term of technology, Korean auto industry is still
lagging behind major producers such as Toyota and Honda. In 2009, Hyundai and Kia combined
spent only $3 billion on R&D while its Japanese counter parts Toyota and Honda invested $8
billion and $5 billion respectively (OnhsmanAlam, 2009). On the other front, Korean auto
industry remains to compete in the lower end of the market where the new entrants such as China
and India are also entering. While most advanced countries’ producers are now moving to
luxurious models, Korea is stuck in the middle between the most advanced and new giant
entrances.
To counter the challenges, the image of Korean cars should elevated through the
improvement in specification design and innovative technology such fuel efficient engine, which
21
Japanese firms such as Toyota and Honda took the lead. Plus, the Korean automaker while
competing in the lower end market should seek to gain more recognition in the luxurious car
market, but not mainly basing on price competition. However, it is quite hard to realize and this
requires time to take effects.
This research mainly focuses on the internal factor which internally embarked by the
government of Republic of Korea during the development stage of automobile industry, meaning
that the standpoint is placed upon the significance of various policies, particularly export-led
policies and government intervention in combination. Now that Korean automobile industry has
moved from cheap humble assembler to a global competitor, the future prospect of the industry
is very favorable. More importantly, this research paper has disregarded the external factors
which also explain the success of Korean automakers such Hyundai, Kia, Daewoo in relation
with export-led policies. In other words, it is recommendable that the future research should be
conducted to modify clearly the external causes which enabled Korea to develop its automobile
industry, for the national policies are not the sole causes of successful export-oriented industry.
The success of Korean auto industry is a coincidence between the international environment,
which allowed it to industrialize and export, and sound national policies. In this sense, many
international factors which are out of Korean government control are also important in shaping
the future of auto industry development.
22
Appendix
Table 1: Global production by country
Table 2: Production by makers
Table3: Key Elements of Government Policy
23
Table 4: Worldwide automobile production ranking, 1992 and 1995
(Unit: thousand)
Table 5: South Korea: international cooperation of the leading auto producers
24
Table 6: Production, Domestic sales, Exports and Imports, 2004-2011
Table 7: Export by makers
Table 8: Export by regions
25
Table 9: HMC and Kia Motors: royalty payments and sales, 1992-1995
26
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