GPAC 2013 in Okinawa
Effects of KORUS FTA on Profitability of Automobile Industry
: In case of Hyundai Motor Company and Hyundai Mobis
Seoul National University
International Trade
Hyungsoo, AHN
Sunwoo, LEE
Sungmin, Cheu
Sungjae, Hwang
Sungkyu, Song
Table of Contents
1. Introduction: Background and Process of KORUS FTA
2. Review on Automotive Provisions of KORUS FTA
2.1. Automotive Sector
2.2. Automotive Goods Rules of Origin Regulations
2.3. Automobile Components Sector
3. Current Status of Hyundai Motor Group in the U.S. Market
3.1. Current Status of Hyundai Motor Company in the U.S. Market
3.2. Current Status of Hyundai Mobis in the U.S. Market
4. Evaluation and Prospect of Hyundai Motor Group
4.1. Evaluation and Prospect of Hyundai Motor Company’s Exports to the U.S.
4.2. Prospect of Hyundai Motor Company’s Earnings in Domestic Market
4.3. Evaluation and Prospect of Hyundai Mobis’ Exports to the U.S.
5. Plans for Reinforcement of Hyundai Motor Group
5.1. Plans for Reinforcement of Hyundai Motor Company
5.2. Plans for Reinforcement of Hyundai Mobis
6. Conclusion: Implications of KORUS FTA
1. Introduction: Background and Process of KORUS FTA
The WTO(abbreviation for World Trade Organization) which was founded in 1995 has
restructured the environment of international trade facilitating free trade and integration
of multiple nations across the world. While the WTO pursues free trade across multiple
nations, the FTA(abbreviation for Free Trade Agreement) pursues free trade between two
countries or countries in the same region. In other words, while the WTO ensures mostfavoured-nation treatment to every nation which has joined, the FTA adheres to the
principle of reciprocity among members such as benefit from zero-tariff and excludes
outside countries by implementing tariff and safeguard. Although the FTA does not
comply with the most-favoured-nation treatment and multilateralism, the FTA not only
makes it easier to trade with member countries but also activate the trade between nonmember and member countries. Due to the possibility of shift to higher level of trade
agreement, the WTO also encourages every country to make free trade agreement.
To take advantage of the global trend, South Korea made an agreement with Chile in
April, 2004, Singapore in March, 2006 and EFTA in September, 2006. After South Korea
made a contract with the U.S. in April, 2007, KORUS FTA was effectuated in March, 2012
through the supplemental negotiation and ratification of the National Assembly which
took five years. To come up with the trend, South Korea is in the progress of making a
free trade agreement with China and Japan, as well. Since South Korea has developed
with a tremendous amount of export, KORUS FTA is expected to be advantageous to
South Korea in spite of the loss originated from some fields.1
[Table 1.1] Main events of KORUS FTA
Date
1
Main events
2006.2
KORUS FTA was announced to be made.
2007.4
KORUS FTA was settled up.
2007.6
Supplemental negotiation was held. (1st in Seoul & 2nd in Washington D.C.)
South Korea made net export of 41,127 million dollars in 2010, 30,801 million dollars in 2011
and 28,494 million dollars in 2012.
2011.10
President Obama signed KORUS FTA bill.
2011.11
President Lee signed KORUS FTA bill.
2012.3
KORUS FTA came into effect.
(Source: KORUS FTA homepage)
[Table 1.1] shows that KORUS FTA process took six years from the beginning to the
end. For this period, several supplemental negotiations were held because of different
points of view for each country. In general, most of South Korean experts anticipated
that KORUS FTA would have a negative effect on agricultural field but South Korean
automobile industry would have advantages rather than the U.S. In this paper, we will
review the provisions regarding automobile industry and look into the expected effects
of KOURS FTA applied to the case of Hyundai Motor Group. Consequently, we will come
up with plans for reinforcement of Hyundai Motor Group in order to improve their global
competitiveness.
2. Review on Automotive Provisions of KORUS FTA
Korea Customs Service announced that from the effectuation of the new agreement to
this January, the export of automobiles to U.S. has increased 21% compared to the same
period in last year. During the same period, the import from U.S. has increased 92.2%
which made 720 million dollars. On the other hand, the export of auto parts to U.S. has
increased 12.6% which made 5.23 billion dollars from last March to this January. During
the same period, the import from U.S. has decreased 16.5% compared to last year which
made 33 million dollars. In automotive sector, it is difficult to conclude whether South
Korea has got benefit from the new agreement because both export and import had
significantly increased. However, South Korea certainly got benefit in auto parts sector
owing to the outstanding increase of net export. Reviewing the automotive provisions of
KORUS FTA will help us to explain the cause of this result.
2-1. Automotive Sector
First of all, it is worthwhile to consider the tariff provisions which affect most the trade
of automobile. The previous agreement said that the U.S. would eliminate the tariff on
autos with the displacement of 3,000cc or less which hold 73%2 of overall exports of
South Korea immediately and on cars more than 3,000 within three years More
specifically, the U.S. would eliminate the tariff on the gasoline autos with the
displacement of 3,000 cc or less, trucks which are restricted to products with chassis3
from 5 to 20 tons, motorcycle and automotive components immediately and on other
automobiles including gasoline cars more than 3,000 and buses within three years. The
tariff on tires would be eliminated within five years while the U.S. agreed to phase out its
25 percent tariff on South Korean trucks including pick-up trucks in ten years.4 South
Korea agreed to eliminate tariff on all types of automobiles except the electric cars and
plug-in hybrids whose tariff would be phased out after ten years. The provisions
regarding automotive tariff are summarized in [Table 2.1].
[Table 2.1] Previous KORUS FTA provisions regarding automotive tariff
Item
Auto
motives
South Korea
Before
Before
After
eliminated
below 3,000cc
8%
above 3,000cc
After
U.S.
eliminated
immediately
2.5%
immediately
eliminated
within 3 years
(Source: KORUS FTA homepage)
2
It is the weighted average of the exported autos from Korea with displacement of 3,000cc or
less from 2003 to 2005.
3
The car structure can be categorized into body shell and chassis. The latter indicates the
products without body shell which means semi-product composed of engine system, motor
system, braking system, suspension and steering system.
4
The tariff on trucks would be eliminated 2.5 percent annually
However, the previous provisions were revised in the supplemental agreement which
was held on February 11th, 2011. Under the 2007 agreement, all tariffs on automotive
would
have
been
immediately
eliminated
gradually
within
three
years
after
implementation of the accord. The new agreement allows the U.S. to keep its 2.5 percent
tariff on autos in place until the fifth year after implementation of the agreement. Since
KORUS FTA took effect on March 15th, 2012, South Korea will get tariff benefit of
automotive from 2016. At the same time, South Korea will immediately cut its tariff on
U.S. auto imports in half (from 8 percent to 4 percent), and fully eliminate the tariff in the
fifth year. Regarding tariffs on pick-up trucks, in 2007, the U.S. agreed to phase out its 25
percent tariff on South Korean trucks in 10 years. But, the new agreement allows for the
U.S. to maintain its tariff until the eighth year and then phase it out by the tenth year.
Besides, under the 2007 agreement, the U.S. and South Korea would have eliminated
tariffs on electric cars and plug-in hybrids by 10 years after the implementation of the
accord. The new agreement calls for South Korea to immediately reduce its electric car
tariffs from 8 percent to 4 percent, and both countries will then phase out their
respective tariffs by the fifth year. The supplemental agreement is summarized in [Table
2.2] which compares the new one with the previous one.
[Table 2.2] Supplemental agreement on automotive tariffs
Item
Country
Previous agreement
Supplemental agreement
∙ Tariff of 2.5%
- Tariff on car with the
displacement of 3,000 cc
will be eliminated
U.S.
immediately
- Tariff on car with the
Auto
∙ Tariff will be eliminated
within 4 years
displacement above
motives
3,000cc will be eliminated
within 3 years
∙ Current level of tariff will be
South
Korea
∙ Tariff of 8% will be
eliminated immediately
decreased from 8% to 4%
immediately
∙ Tariff will be eliminated
within 4 years
U.S.
∙ Tariff of 2.5% will be
eliminated within 10 years
by the fifth year
∙ Current level of tariff will be
Electric
cars
∙ Tariff will be phased out
South
Korea
∙ Tariff of 8% will be
eliminated within 10 years
decreased from 8% to 4%
immediately
∙ Tariff will be phased out by
the fifth year
∙ Tariff will be eliminated
Pick-up
trucks
U.S.
∙ Tariff of 25% will be
eliminated within 10 years
within 7 years
∙ Tariff will be phased out by
the tenth year after kept for
initial 8 years
(Source: KORUS FTA Homepage)
Even though the supplemental agreement allows U.S. tariff on automotive imports to
maintain, the original tariff of 2.5 percent is too low to affect export from South Korea.
Besides, South Korean automobile companies already had great competitive advantage in
terms of price level in the U.S. market so that the automotive export which takes the
most part of overall export will not be affected significantly after the implementation of
KORUS FTA. However, the competition in domestic market is expected to be deepened
since South Korean cut its tariff from 8% to 4%. Accordingly, it will be helpful to review
the rules of origin as they are closely related to the imports from U.S.
2.2. Automotive Goods Rules of Origin Regulations
An automobile consists of approximately 15,000 components. Whether the automotive
model can benefit from tariff depends on its RVC(abbreviation for Regional Value
Content) 5 which indicates how many regional components are used to produce. To
benefit from KORUS FTA, the RVC needs to be above the certain level. As it is difficult to
5
Regional Value Content is a calculated percentage of the value of the product that represents its
North American content.
measure the RVC, the method to measure of domestic components ratio to finished
goods replaced the RVC, which makes some issues such as inspection method and post
inspection. [Table 2.3] shows that South Korea insists the domestic components ratio be
above 70 percent to prevent tremendous import of Japanese automobiles from U.S.
whereas the U.S. requires it to be below 62.5 percent which is standard used in NAFTA.
As a result, the domestic components ratio was rated below 50 percent which brought
great disadvantage to South Korean automobile companies.
[Table 2.3] Domestic components ratio required by each party
Party
Domestic components ratio
South Korea
70 percent
U.S.
62.5 percent
Final agreement
50 percent
(Source: KORUS FTA Homepage)
As the domestic components ratio was rated lower than expected, it is inevitable for
South Korean companies to compete with tremendous Japanese or German imports in
domestic market. The imports from the U.S. which are expected to benefit from tariff cuts
include not only Japanese brands such as Toyota and Honda but also European brands
such as BMW and Mercedes-Benz which were thought to be unrelated to KORUS FTA
because they have low domestic components ratio. In addition to the rules of origin, the
competition in domestic automobile market will be strengthened as the tariff barrier is
eliminated.
2.3. Automotive components sector
Unlike the automotive sector, auto parts companies will benefit by reducing the price
level and gaining earning power in U.S. market as the tariff will be eliminated
immediately. The agreement said that tariffs would be immediately reduced to zero in
each country for auto parts imported from each other. There are however a few
exceptions regarding tires and some plastics. 4 percent of tariff on tires would be
eliminated within five years after the implementation of KORUS FTA. The provisions
regarding auto parts tariff are summarized in [Table 2.4].
[Table 2.4] KORUS FTA provisions regarding auto parts tariff
Item
Auto parts
South Korea
Before
8%
After
eliminated
immediately
U.S.
Before
2.5%
After
eliminated
immediately
(Source: KORUS FTA Homepage)
Exports of auto parts to U.S. are categorized into the export to parent company and
foreign automobile company. This helps both the former and the latter to reduce
production cost which chose to use South Korean auto components. As a result of
KORUS FTA, the exports of South Korean components will increase continuously. In case
of Hyundai Mobis which belongs to Hyundai Motor Group, it will benefit from the
connection with Hyundai Motor Company to make synergy effect. Consequently, the
elimination of tariff on auto parts will bring great advantages to South Korean companies.
3. Current Status of Hyundai Motor Group in the U.S. Market
In 2010, Hyundai Motor Group has capacity of manufacturing 6.63 million cars, 3.5
million in South Korea and 3.13 million in abroad. According to Global site, a market
research institute, General Motors(GM) sold 8.43 million cars and Toyota sold 8.32 million
cars ranked first and second respectively, followed by Volkswagen and Nissan-Renault
whose sales are 7.11 million and 6.35 million cars respectively. Hyundai Motor Group was
in the fifth place, which sold 5.75 million cars. Considering the proportion of the U.S.
market to global market and South Korea’s dependence on the U.S. in international trade,
it is persuasive that Hyundai’s sales in U.S. market are considerable for its total sales.
Furthermore, Hyundai’s plants in Alabama State are thought to be strategic point which
links Canada and Mexico in North America. Hyundai Motor Group has invested in the U.S.
plants to make use of this advantage. Subsequently, it is meaningful to review current
status of Hyundai Motor Company and Hyundai Mobis in U.S. market.
3.1. Current status of Hyundai Motor Company in the U.S. market
In 2005, Hyundai Motor Company established 56,340 square meters of plants in
Alabama State. Currently, plants in Alabama State only produce YF Sonata and
Elantra(MD). They have the whole manufacturing process including design, development
of components, production, marketing, promotion, sales and after service so that they
mean more than just manufacturing factories. [Figure 3.1] shows the number of
automobiles produced in America. Except for the period of financial crisis, from 2008 to
2009, it is steadily increasing since 2005. The expected output from trailing 12-month
amounts to 373,570, which is four times more than the output in 2005. Considering only
the total sales of cars, the U.S. market takes about 17 percent of the global market but
its scale is ten times more than South Korean scale whose sales were 1,410,857 cars in
2012. Besides, as many American customers postponed their purchase of automobiles
affected by recession, the demand for automobiles is prospected to increase, which will
accelerate the constant growth in car market. According to [Figure 3.2], it is important for
Hyundai Motor Company to take the U.S. market into account because the amount of
export to the U.S. exceeds 20 percent of total amount of export estimated since 2005.
[Figure 3.1] Number of automobiles produced in America
400,000
Local output
350,000
Rate of change
150
300,000
250,000
100
(car) 200,000
373,570
338,535361,166
50
299,603
150,000
236,177251,023237,102
194,723
100,000
50,000
0
200
91,043
0
-50
(%)
(Source: Hyundai Motor Company IR report)
[Figure 3.2] Proportion of export to the U.S. to total export
(car)
400,000
350,000
Export to U.S.
Proportion of export to U.S.
28.98
28.29 28
300,000
250,000
200,000
150,000
100,000
23.61
23.29
20.25 20.45
20.75
23.13
35
30
(%)
25
20
351,834340,215 15
278,075
240,109
10
217,995224,663214,930222,616
327,855
50,000
5
0
0
(Source: Hyundai Motor Company IR report)
3.2. Current status of Hyundai Mobis in the U.S. market
Hyundai Mobis’ business sector is separated into module(OEM; abbreviation for
Original Equipment Manufacturer) division and components(A/S) division and has three
research centers, ten module factories and sixteen auto parts distribution centers abroad.
According to [Table 3.1], main parts of automobile such as chassis, cockpit, front end
module are produced in module division while it takes charge of supplying electronic
control brake parts and air bag system. In 2008, operating income of Mobis was 12.7
percent. Operating income from module division was 6.6 percent but components
division recorded 24.3 percent of return. Mobis receives auto parts from 673 domestic
firms and 2,001 foreign firms for the operation of module and components business.
[Table 3.1] Current status of Hyundai Mobis’ business
Division
Module
Division(OEM)
Main components and business contents
Chassis module
Suspension, resistance, braking components
Cockpit module
In-panel, gauge, audio, airbag
Front-end module(FEM)
Carrier, head pump, radiator, grill, horn
Safety components
Division(A/S)
air bag
Brake components
ABS, TCS, ESP
Resistance components
Steering column, steering oil pump, MDPS
Emission components
Plastic emission components
Wheel and deck
Components
Driver’s seat, passenger’s seat, curtain, side
Steel whip, deck for 1-ton truck & chassis
frame
Supply and sell repair components for Hyundai and Kia Motors
(Source: Hyundai Mobis homepage)
Hyundai Mobis also established plants in the U.S. for the first time in 2005. [Table 3.2]
shows that plants in Ohio State supply auto parts to foreign auto companies such as
Chrysler and GM whereas plants in Alabama and Georgia States are supposed to supply
parts to Hyundai and Kia Motors respectively. In [Figure 3.3], Hyundai Mobis’ revenue is
increasing at a high rate except for the period of financial crisis from 2008 to 2009 and
this trend is expected be continued. Plants in America are mainly located in the U.S. and
Brazil. Since plants in Brazil were founded in 2012, the growth rate until 2012
substantially was due to increase of output in the U.S. plants.
[Table 3.2] Current status of Hyundai Mobis in the U.S.
Location
Year of
establishment
Main parts
Mobis Alabama
Mobis Georgia
Mobis Ohio
2005
2010
2006
Top three modules
Parking brake, lamp,
Driver’s seat module,
(chassis module,
intellectual battery
bumper
driver’s seat module,
sensor, audio, head
front-end module)
pump, etc
Hyundai Motor
Company production
Main clients
Kia Motor production
branch in Alabama
branch in Georgia
State
State
U.S. northeastern
automobile cluster
such as Chrysler, GM,
Mitsubishi, etc
(Source: Hyundai Mobis homepage)
[Figure 3.3] Hyundai Mobis’ revenue in America
6000
Revenue in America
($ million)
140
Growth rate of revenue
127.35
(%)
120
5000
100
4000
80
74.34
3000
5,315
41.61
4,285
2000
3,026
1000
1,576
904
5,580
24.04
1,477 1,331
-6.28
-9.88
0
60
40
20
0
-20
(Source: Hyundai Mobis IR report)
4. Evaluation and Prospect of Hyundai Motor Group
KORUS FTA came into effect in March 15th, 2012 and many forecasts are made for the
effect of actual trade. As we saw earlier in this paper, elimination of tariff on auto
motives is postponed for four years. So, it is difficult to find the effect in that sector
immediately. Conversely, tremendous amount of foreign brands are expected to be
imported since the tariff barrier was weakened as a result of provisions on rules of origin.
On the other hand, the tariff on auto parts were eliminated immediately so that domestic
auto parts firms need to make both aggressive and protective plans at the same time. As
Hyundai Motor Company and Hyundai Mobis belong to Hyundai Motor Group, they will
have synergy effect in trade with the U.S. after KORUS FTA. In this chapter, we will
evaluate the effect of KORUS FTA in terms of profitability.
4.1. Evaluation and prospect of Hyundai Motor Company’s export to the U.S.
Based on amount of export to U.S. from 2005 to 2013, it is uncertain to decide
whether the tendency in Hyundai’s U.S. export is going up or down. [Table 4.1] shows
that the output from Alabama plants had shrunk back since 2005 but it turned to
increase in the recovery period from 2010 to 2011. As elimination of tariff on auto
motives is deferred to 2017, there is no evidence that KORUS FTA had any effect on its
increment on U.S. export. In the same context, the increment of sales in recent years is
due to the U.S. demand for Hyundai’s automobiles. On the other hand, local output had
shrunk back during the period of financial crisis and is increasing at a considerable rate.
Since current level of U.S. tariff on auto motives is only 2.5 percent, elimination of tariff
will have little effect on increase of export to U.S. Of course, when the tariff is fully
eliminated, it will have a positive effect on competitiveness by reducing the price level.
The total sales in U.S. after the effectuation of KORUS FTA amount to 713,785 slightly
more than sales in 2012. But, increase of 785 cars is due to increase in local output
because export to U.S. decreased for the same period. That is, Hyundai’s gradual
increment in total sales is largely due to its performance in U.S. local output.
Furthermore, the market share almost doubled compared to 2005 but it has been in
steady state recently. Consequently, KORUS FTA has little effect on export of Hyundai’s
automobiles to U.S.
[Table 4.1] Hyundai’s export to U.S. and local output in U.S. branch (Unit: car)
Item
2005
Sales
in U.S.
Export
to U.S.
Local
output
Market
share
2006
2007
2008
2009
2010
2011
2012
Trailing
12-Month
418,898 476,286 469,018 461,765 409,653 522,219 616,610 713,000
713,785
327,855 240,109 217,995 224,663 214,930 222,616 338,535 351,834
340,215
91,043
373,570
2.5%
236,177 251,023 237,102 194,723 299,603 338,535 361,166
2.8%
2.9%
3.0%
4.2%
4.6%
5.1%
4.9%
-
(Source: Hyundai Motor Company IR report)
However, local output in U.S. includes only Sonata and Elantra. Since automobile
industry requires enormous amount of initial investment cost, it is impossible to invest in
enlargement of facility and production lines without conviction of demand for other
types of auto motive. If U.S. customers have enough demand for various types of
Hyundai’s automobiles, the total amount of export to U.S. will rise up. Though the
benefit from tariff is low, there is a possibility to increase sales in U.S. market with variety
of products.
4.2. Prospect of Hyundai Motor Company’s earnings in domestic market
Basically, trade includes both export and import and KORUS FTA affected import as
well as export. As KORUS FTA eased rules of origin and cut tariff on auto motives, great
amount of foreign brands are invading to domestic market. Looking into [Figure 4.1],
market share of Hyundai has not shown off remarkable increase for ten years while that
of foreign brands has been gradually increasing, which means the competition in
domestic market became intense. According to KAIDA, market share of foreign brands in
January, 2013 reached 13 percent and if this trend is to be continued, their annual
market share will exceed 10 percent.
[Figure 4.1] Market share of Hyundai and foreign brands in domestic market
(Unit: %)
52
Hyundai
Foreign brands
9.5
50
8
48
6.7
44
47.3
47.4
1.5
40
38
6
5.8
46
42
10
0
2002
49.5
2.1
48.8
2.6
4.7
4.1
47.6
3.3
47
4.2
48.4
43.9
4
42.6
43.6
43.5
2
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
(Source: Korea Automobile Manufacturer Association homepage)
Since Hyundai and Kia Motors already entered the stage of maturity in domestic
market, their growth mostly depends on profitability in foreign market. Revenue from
domestic market contributes most to the overall profitability despite slight decrease of
importance. Subsequently, the stability of competitive structure still affects the
profitability of automakers. As the competition in domestic market becomes intense, that
is, the profitability of automakers tends to decrease. Especially, foreign carmakers plan to
increase amounts of export to South Korea, which will aggravate profitability of luxury
cars of domestic firms in the long run. Also, the tariff cuts will accelerate elevation of
foreign brands’ market share in domestic market. Based on this effect, foreign
automakers develop various types of brand new models and they have spread rapidly in
domestic market due to their appeal to customers.
On the other hand, it is noteworthy that through supplemental negotiation, South
Korea and U.S. agreed to augment the standard number of approval for safety regulation
from 6,500 to 25,000. This change implies American auto firms are supposed to
make sales of 25,000 cars in domestic market, which is not significant scale to
domestic market.
However, this regulation is not applied to other foreign brands in U.S. Furthermore, not
only U.S. products but also Japanese and German brands have benefit from tariff cuts
since the provisions on rules of origin are relaxed and the market share of these brands
will show gradual increment. German products take 63 percent of total imports and
Japanese cars like Toyota are imported from the U.S. as they establish A/S centers in
domestic market. 6 Especially the price of cars of Volkswagen, Toyota and Honda fell
significantly so that the gap between the prices of domestic cars and theirs has narrowed.
Foreign cars are in competitive relation with Genesis and Equus of Hyundai because of
their brand value and quality. Hyundai also focused on sales of luxury brands such as
Genesis and Equus so as to make enough profitability in domestic market. Since luxury
cars make more profit margins than medium sized cars such as Sonata, Grandeur, Elantra
and etc, decrease of their sales caused by competition with foreign brands will damage
the profitability. According to KAMA, imports from the U.S. have increased to 21,061
whose increase rate reached 78.9 percent. Meanwhile, Japanese and German cars from
U.S. amounted to 6,950 and 3,685 respectively in 2012. The total number of Japanese
and German cars from U.S. sums up to 10,645. While domestic sales of Genesis and
Equus in 2012 decreased from 36,546 to 27,361. Considering these estimates, the
demand for luxury cars of Hyundai seemed to shift to foreign brands. Since domestic
demand for foreign auto motives has increased recently, the elimination of tariff will stir
up this trend. Consequently, domestic firms need to make plans to protect their share in
domestic market rather than focusing on increase of export to U.S. market.
4.3. Evaluation and prospect of Hyundai Mobis’ export to the U.S.
Most of tariffs on auto parts were eliminated as effectuation of KORUS FTA and some
tariffs will be phased out within five years. [Table 4.2] shows that most of parts benefit
from zero-tariff.
6
The ranks of foreign brands in domestic market from January to April, 2012 are as follow; 1st
BMW(Mini), 2nd Mercedes-Benz, 3rd Toyota(Lexus), 4th Volkswagen, 5th Audi
[Table 4.2] Change of tariff on main auto parts (Unit: %)
Item
Tariff before KORUS FTA
Tariff after KORUS FTA
5
0
Parts
2.5
0
Engines
2.5
0
Gear Boxes
2.5
0
Radial Tires
4
Ignition Wiring Set
Tariff will be phased out
within five years
Starter Motors
2.5
0
Airbag Parts
2.5
0
Generators
2.5
0
Drive Axies for Tractors
2.5
0
Mounted Brake Linings
2.5
0
(Source: Analysis of export competitiveness in automobile industry after KORUS FTA)
[Table 4.3] shows the revenue in domestic and foreign market. Except for the period of
financial crisis, revenue in domestic market is in stable phase. Revenue in foreign market
is constantly increasing since 2006 and the elimination of tariff on auto parts will
accelerate this trend. Generally, auto parts companies try to make contracts with auto
motive firms for long terms. This is because lots of contracts were made before KORUS
FTA came into effect in 2012. Hyundai Mobis also made 1.07 billion dollar long term
contracts with GM and Chrysler to supply core parts. Besides, Mobis participated in auto
components exhibition in Detroit on March 13th, 2012, two days before the effectuation
of KORUS FTA and brought the greatest amount of visitors. Most experts think that the
global R&D networks in the U.S., Germany, China and etc. led to this success in the
exhibition. Especially, the research center in Detroit founded in 2002 supported client
companies by collecting data updates, acquiring brand new technology and developing
new platforms suitable for local products dealing with the U.S. automakers to make a
contract with Mobis. Mobis has established research centers in global market since early
2000 and it built competitive advantages of technology. As a result, a lot of foreign
carmakers showed their interest in Hyundai Mobis, which leads to contracts to supply
various type of auto components.
[Table 4.3] Hyundai Mobis’ revenue in domestic and foreign market (Unit: $million)
Year
Total revenue
(Unit: \ 100million)
Foreign revenue
(Unit: $ million)
Domestic revenue
(Unit: \ 100million
2006
2007
2008
2009
2010
2011
2012
81,680
84,909
93,734
3,812
4,997
6,066
7,914
11,769
77,868
79,912
87,668
98,416
125,188 247,795 281,724
106,330 136,957 262,946 299,493
15,151
17,769
(Source: Hyundai Mobis financial statement)
5. Plans for Reinforcement of Hyundai Motor Group
Considering the expected sales from KORUS FTA, it is reasonable not only to reinforce
the competitiveness of export power but also to prepare for the plans to improve
profitability against imports from the U.S. In other words, if domestic companies just
focused on increasing the amount of export to the U.S. market, they will be threatened
by imports from foreign companies. Moreover, domestic customers already have negative
thought of Hyundai Motor Company because of frequent strikes and conflicts between
labor union and management group. If foreign cars with good quality are imported at
the reasonable level of price, it is difficult to induce potential customers to purchase
domestic products. On the other hand, Hyundai Mobis needs to make plans for the
worst scenario despite its high growth rate because all the firms cannot continue to grow
at the higher rate than that of the economy. This brings the necessity to make plans for
reinforcement of Hyundai Motor Company and Hyundai Mobis in terms of KORUS FTA.
5.1. Plans for reinforcement of Hyundai Motor Company
The plans to strengthen competitiveness can be separated into export side and import
side. In the export side, Hyundai Motor Company can take advantage of various types of
auto motives. [Table 5.1] shows that the Hyundai Motor Company’ North American plants
in Alabama State manufactured only YF Sonata and Elantra(MD) and sold them in the U.S.
market. Hyundai Motor Company already have competitive advantages in medium-sized
vehicles in the U.S. market because of their reasonable price. However, [Table 5.2] shows
the number of local sales of auto motives exported from South Korea. The total local
sales of cars from January to May, 2013 are 296,003 and the local sales of cars
manufactured in Alabama State during the same period sum up to 147,508, which brings
148,495 cars of export. As a result, approximately a half of total local sales are originated
from exports of domestic companies. Sales of Sonata and Elantra occupy about 77
percent of total local sales and remains are acquired by other types of vehicles. Despite
their low composition of total local sales, there is possibility to make great earnings by
building a strong brand power through aggressive promotions in the U.S. market.
[Table 5.1] Sales of Alabama factory from January to May, 2013 (Unit: car)
Type
Jan.
Feb.
Mar.
Apr.
May
Total
YF Sonata
17,351
15,207
15,551
17,602
16,832
83,543
Elantra(MD)
11,613
12,626
12,456
13,878
14,392
64,965
Subtotal
28,964
27,833
28,007
31,480
31,224
147,508
(Source: Hyundai Motor Company IR report)
[Table 5.2] Hyundai Motor Company’s sales in the U.S. from January to May, 2013
(Unit: car)
Type
Jan.
Feb.
Mar.
Apr.
May
Total
Accent
3,495
4,750
5,669
4,730
5,578
24,222
Elantra
12,174
16,219
26,153
24,445
25,090
104,081
928
970
1,277
1,086
1,138
5,399
13,247
16,007
18,031
16,077
20,194
83,556
797
795
1,117
1,409
861
4,979
1,544
1,547
1,847
1,498
1,629
8,065
253
270
291
261
257
1,332
Veloster
1,759
1,905
2,693
3,120
2,826
12,303
Subtotal
34,197
42,463
57,078
52,626
57,573
243,937
Genesis Coupe
Sonata
PC
Grandeur
Genesis
Equus
RV
Santa-Fe
5,991
6,339
7,116
6,940
7,116
33,502
Tucson
3,493
3,444
4,073
3,733
3,664
18,407
Veracruz
32
65
39
16
5
157
Subtotal
9,516
9,848
11,228
10,689
10,785
52,066
43,713
52,311
68,306
63,315
68,358
296.003
Total
(Source: Hyundai Motor Company IR report)
With the diversification of types of exports, quality of products needs to be improved.
Raising market share by reducing price level is achievable only in temporary period
because it is not fundamental method to promote competitiveness. The most important
thing to consider is to improve quality of products, thereby making a progress in the
long term. According to [Figure 5.1], Hyundai Motor Company was ranked 9th on average
of last ten years based on the Initial Quality Study on brands7 (including luxury brands)
surveyed by J.D. Power.8 The rank of Hyundai Motor Company fluctuated extremely for
last ten years. Hyundai Motor Company was ranked 3rd which was 6 grades above the
average in 2006 but ranked 12th and 13th respectively in following years. Although
Hyundai Motor Company was ranked 4th and 6th respectively in 2009 and 2010, the rank
in 2012 was 18th. In contrast, the volatility of Japanese brands was relatively low. Except
that Toyota was ranked 21st as a result of large scale of recall in 2010, Japanese brands
were ranked high relative to Hyundai Motor Company. Actually, most of quality problems
were related to dissatisfaction of operation such as hands-free voice system, bluetooth
manual and navigation system rather than defect of auto motives. It is originated from
the reliance on development of new technology. Since the convenience of operation is
concerned with sentimental quality, it should be considered more important than others.
In other words, the improvement of quality in consideration of customers can be linked
to reinforcement of substantial competitiveness.
7
Initial Quality Study on brands represents index of customer dissatisfaction from the purchase of
new car within three months.
8
J.D. Power is a global marketing information services company operating in key business sectors
across a variety of industries, providing customer satisfaction research, market research, social
media research, and performance improvement programs.
[Figure 5.1] Brand rank of initial quality study by JD power from 2004 to 2013
Rank 25
20
15
Hyundai
10
Toyota
Honda
5
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Year
(Source: Initial quality study surveyed by JD power)
However, if Hyundai Motor Company is devoted to elevating exports, its position in
domestic market can be threatened. Because of the expected effects of FTA, tremendous
amount of foreign auto motives are supposed to be imported. Invasion of foreign brands
to domestic market deteriorates the global competitiveness of Hyundai Motor Company,
which leads to the trend that the market share of Hyundai Motor Company decreases in
domestic market. Of course, considering brand power, convenience of after service,
distribution channels and maintenance cost, there is little possibility that market share of
Hyundai sharply decreases for the short period. However, Hyundai needs to maintain
their market share in constant level in order to improve profitability because the export
condition has been unstable. Specifically, Hyundai should invest in R&D cost to enhance
the quality of luxury brands to survive in intense competition with foreign brands as
luxury products bring much more profit margin. Hyundai also needs to catch niche
market utilizing brand new technology. For instance, if it produces Genesis with diesel
engine which improves fuel efficiency and cuts the maintenance cost, Hyundai is capable
of raising profitability. BMW and Volkswagen already succeeded in developing diesel
engine and have manufactured thousands of automobiles with diesel engines. They even
manufacture electric cars with eco-friendly technology. Hyundai also developed diesel
engine cars and electric cars. However, Hyundai has always missed first mover’s
advantage in global market. To catch up with foreign brands such as BMW and Toyota, it
is essential to invest in R&D sector and make create demand for new products.
Moreover, Hyundai-Kia Motors recently announced that they will recall about 160
thousand cars in domestic market preceded by the recall9 of 1.9 million cars in the U.S.
market. Hyundai Motor Company will recall old-fashioned model of Avante manufactured
from July, 2009 to March, 2010, old-fashioned model of Santa-Fe manufactured from
June, 2010 to June 2011 and Veracruz manufactured from September to November, 2008,
which approximately sum up to the total number of 110 thousand cars. The status of
recall for last three years is summarized in [Table 5.3]. This is because automobile
manufacturers use the same components regardless of types of auto motives in order to
reduce production cost and Hyundai Motor Company manufactures various types of auto
motives with only six platforms. Although Toyota recalled more than 10 million cars in
2010, public opinion of their reaction is positive because it was not originated from
decease of driver but from dissatisfaction of customers. By paying attention to voice of
customers and reacting quickly, Hyundai Motor Company could make a positive appeal
to customers. It is necessary to prevent the recall caused by the same reason considering
that it occurred in May and July, 2012. It is important to develop new products with ecofriendly technology but the priority is to secure the competitiveness of quality which
raises satisfaction of customers.
[Table 5.3] Status of recall from 2011 to 2013
Date
Contents
2011.3
Recall 189 thousand cars of Elantra(Avante) (Malfunction of air bag sensor)
2011.8
Recall 41 thousand cars of New Sonata (Defect of steering)
2012.5
Recall 123 thousand cars of Elantra (Defect of air bag)
2012.7
Recall 220 thousand cars of Sonata and Santa-Fe (Defect of air bag)
2012.11
Decrease the fuel efficiency
9
A product recall is a request to return to the maker a batch or an entire production run of a
product, usually due to the discovery of safety issues or a product defect.
2012.12
Recall 13.5 thousand hatchback10 models of Veloster (Defect of sunroof)
Recall additionally 6.1 thousand hatchback models of Veloster
2013.2
(Defect of sunroof)
The U.S. NHTSA(abbreviation for National Highway Traffic Safety
2013.3
Administration) examined suspension defect of Sonata
(Source: Korea Automobile Manufacturer Association homepage)
To meet customers’ satisfaction and enhance the competitiveness in domestic market,
Hyundai Motor Company is required to improve the relations between labor and capital.
[Table 5.4] shows the status of strikes of Hyundai Motor Company since 2001. Strikes
occurred so frequently except from 2009 to 2011 that non-strike period was considered
to be weird. Although most strikes were based on labor rights 11 , a series of strikes
brought great loss. Labor union caused a great amount of loss by frequent requests of
wage negotiation, which weakens the competitive power of Hyundai. In this context,
demand on domestic auto motives can easily shift to foreign brands which benefit from
tariff. In contrast to Hyundai Motor Company, Toyota has raised efficiency of production
by converting the relations between labor and capital to be cooperative. By
benchmarking the case of Toyota, Hyundai Motor Company could elevate the efficiency
of production and meet customers’ satisfaction so as to enhance the competitiveness in
domestic market.
[Table 5.4] Status of strikes of Hyundai Motor Company since 2001
Loss
Loss
($billion)
(Unit: car)
2001
1,032
83,900
11.28-12.27
2002
550
43,000
06.17-06.28
Year
10
Strike period
A hatchback is a type of car which has both a sloped back and a rear door that swings
upwards when opened.
11
Labor rights or workers’ rights are a group of legal rights and claimed human rights having to
do with labor relations between workers and employers, usually obtained under labor and
employment law. One of the most central of these rights is the right to unionize.
2003
1,385
104,900
06.24-08.05
2004
263
19,000
06.25-07.01
2005
591
42,700
08.23-09.08
2006
1,296
9,900
06.23-07.27
44,600
08.28-09.26
79,400
07.10-09.04
2007
2008
Non-strike
691
2009
Non-strike
2010
Non-strike
2011
Non-strike
2012
1,646
(Source: South Korean relations between labor and capital in comparison with Japanese)
5.2. Plans for reinforcement of Hyundai Mobis
Hyundai Mobis is strongly bound up with Hyundai Motor Company by supplying auto
parts. With the growth of Hyundai Motor Company, Hyundai Mobis has shown surprising
growth recently. To make good use of KORUS FTA, increase in sales of auto parts should
be accompanied with the improvement of quality. Since Hyundai Mobis is already
supposed to supply components to Hyundai and Kia Motors, it has competitive
advantages in domestic market. However, it needs to settle up aggressive exporting
strategy to the U.S. In 2010, according to [Table 5.5], Hyundai Mobis supplied modules
on a scale of 2 billion dollars to Chrysler, which was the biggest trade among American
Big 3 automobile companies12 and signed a $160 million contract with U.S. carmaker
General Motors co. to supply ICS(abbreviation for Integrated Center Stack). Also, Hyundai
Mobis celebrated auto parts technology exhibition to make contract with Ford in the
same year. Recent subsequent success of contract has encouraged sales of auto parts in
the U.S. market, which provides blueprint for Hyundai Mobis.
12
American Big 3 refers to GM(General Motors), Ford and Chrysler.
[Table 5.5] Series of contracts with foreign auto companies from 2009 to 2011
Company(Nation)
Year of
contract
Types of components
Audio and intellectual
Scale of dollars
Daimler(Germany)
2009
Chrysler(U.S.)
2009
Chassis module
2 billion
BMW(Germany)
2009
Rear lamp
8 thousand
GM(U.S.)
2010
ICS
160 million
Mitsubishi(Japan)
2011
Head lamp
200 million
Subaru(Japan)
2011
Rear lamp
3.3 thousand
battery sensor
130 million
(Source: With branching out into Japanese market, Hyundai Mobis spurs to export
abroad (2011. 6. 9.). Asia Today)
On the other hand, Hyundai Mobis invested in R&D most among domestic auto parts
firms in order to improve quality. [Figure 5.2] shows that R&D cost of Hyundai Mobis is
continuously increasing since 2008 and it has 1,400 employees in research and
development center which is the most in auto parts industry.13 In the long run, as the
competitiveness of quality requires continuous investment, it is substantial to establish
more research centers abroad to supply suitable parts to local auto motive firms.
Hyundai Mobis should invest in development of eco-friendly technology in case of
exporting electric cars, as well. Besides, by taking advantage of great amount of capital
power of Hyundai and Kia Motors, it is favorable to proceed M&A with foreign auto
parts firms so that Hyundai Mobis could acquire core technology and improve quality.
With competitive advantages of quality, therefore, Hyundai Mobis will accomplish
remarkable growth in both quantity and quality at the same time by facilitating contracts
with foreign companies.
13
Ratio of R&D cost to revenue in 2010 looks lower than others. However, it rises up to 5.2%
excluding A/S parts which do not need R&D process and module design provided by automakers.
[Figure 5.2] Investment of Hyundai Mobis in R&D field from 2008 to 2010
3,000
(￦ billion)
2,500
R&D cost
proportion of R&D cost to revenue
2.5
(%)
2
2,000
1.5
1,500
1
1,000
0.5
500
0
0
2008
2009
2010
(Source: Hyundai Mobis annual report)
6. Conclusion: Implications of KORUS FTA
KORUS FTA took long time until it was effectuated last year. Both South Korea and U.S.
have negotiated prudently considering advantages and disadvantages of each field. Of
course, FTA is not only related to economic perspective. It is also related to political and
diplomatic perspectives and it is general to reflect public opinions on negotiation. When
it comes to KORUS FTA, South Korean government already expected a great amount of
loss in agricultural field because of deficit of productivity while it expected tremendous
profit from automobile industry which would exceed the loss from agricultural field.
However, some provisions were agreed to be unfavorable to South Korean domestic
companies, which made experts reconsider the profitability of domestic companies
regarding trade with U.S. As we reviewed earlier the case of Hyundai Motor Group, the
largest automobile company in South Korea, KORUS FTA has both positive and negative
effect on profitability. As South Korean tariff on auto motives dropped half, there is a big
threat of import from foreign companies in the U.S. By strengthening the quality of
goods to compete with imports, however, KORUS FTA can provide a great opportunity to
domestic companies. Besides, as domestic auto parts companies have a chance to export
to foreign automobile companies with benefit from zero-tariff, South Korean companies
are entitled to make considerable profits through trade with U.S. in automobile industry.
South Korean government has plans to contact FTA with developed countries. For
instance, FTAs with China and Japan are now in progress. Since both Chinese and
Japanese companies have competitive advantages of export, domestic companies need
to prepare in advance to compete with them reviewing the results of KORUS FTA. In
automobile industry, especially, domestic automobile companies should make both
aggressive and protective strategy to maintain profits from the threat of Japanese
companies such as Toyota and Honda. When making strategies, it is important to
consider protecting domestic market from foreign imports as well as strengthening
exports. Although executive members of corporation can affect little the negotiation
process, it is desirable to prepare for the competition with foreign companies in advance.
Therefore, those who seek for external competitiveness based on internally stable
environment could survive in the international trade war.
Reference
- Data from Korea International Trade Association
- Data from Korea Automobile Manufacturers Association
- Data from Korea Automobile Importers & Distributors Association
- Data from National Statistics Office
- Hyundai Motor Company IR report
- Hyundai Mobis IR report
- Original text of KORUS FTA
- Korea Automotive Research Institute, 「Automobile industry」
- KOTRA, 「Top 35 promising export goods of medium and small firms propelled by
KORUS FTA」, 2011.8.
- Samsung Economic Research Institute, 「Analysis on current status and case study of
Open & Global R&D of Korean companies」, 2012.6.
- Byungsoon Lee, 「KORUS FTA and Korean automobile industry: Expected effect and
counterplan」
- Jeongsun Lee, 「Analysis on survey of American auto parts buyers related to KORUS
FTA」, 2010.12.
- Sangyong Park, 「KIS Industry Outlook on Automotives」, 2013.1
- Sunmo Koo, 「Change of international trade in automobile industry and countermeasure research on Free Trade Agreement: In case H Motor Company」, 2008.2.