Royal University of Phnom Penh
And
Royal University of Law and Economics
Department of International Studies, RUPP
Siem Pichnorak
[email protected]
Department of Law, RULE
Sok Vouchneng
[email protected]
The Roles of Export-led Policy in Developing
Korean Automobile Industry
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 .......................................................................................................... 7
Chapter 3: Analysis and Discussion ............................................................................................. 10
3.1. Export-led Policies and Implementation ............................................................................ 10
a.
Tax Incentives: ............................................................................................................... 11
b.
Financial Incentives: ...................................................................................................... 11
c.
Establishment of Free Trade Zones and Other Supporting Organization: ..................... 12
3.2. Policies Significances......................................................................................................... 13
Chapter 4: Conclusion................................................................................................................... 18
4.1. Research Finding ................................................................................................................ 19
4.2. Limitation and Recommendation ....................................................................................... 20
Appendices .................................................................................................................................... 23
Bibliography
ii
Abstract
South Korean automobile industry has presented an interesting case study as it has
transformed itself from cheap low quality producer to a high-end global competitor in the world
market. In 2010, South Korea has become the fifth largest car exporter in the world. The success
story of South Korean automobile industry cannot be separated from the roles of the government,
which had embarked for an ambitious plan and determination to develop this particular industry
since 1960s. In this connection, this research paper is missioned to investigate relevant exportled policies which were utilized to spearhead this industry, forcing 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 paper is that export-led policy was the main factor that help push up the
performance and lead to drastic improvement in technology and productivity of Korean
automobile producers. To shed light for further discussion, the first chapter will briefly describe
the historical development of the industry in South Korea along with the significances of
research study and methodology used in the investigation. Next, chapter 2 will review the
existing literatures, while chapter 3 will analyze and discuss in-depth the export-led policy
implementation and its significance in the development process of the industry. Last but not least,
the final chapter will sum up the discussion with research findings and suggest recommendations
for future study in response to limitations of this paper.
iii
Acknowledgements
This research study on the topic of “The Roles Export-led Policy in Developing Korean
Automobile Industry” 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 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 along the way.
Second, we would also like to express our heartfelt thanks and faithful gratitude to
Professor Seyoung Park, who has devoted time, efforts and resources giving us lectures and
helped us with the process of our research study. Without her advices, suggestions, 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 Korean (from now on Korean)
automobile industry has achieved such a miracle by quickly becoming a leading global
competitor amongst producers from relative more advanced economies. Korean auto makers
have moved fast and far as it became the fifth largest in terms of production and sixth largest in
terms of export volume in 2010 despite economic downturn in 2008. Korea has produced
diversified types of vehicles, and three main producers that dominate Korea auto export include
Hyundai, Kia and Daewoo, later joint by Ssangyoung and Samsung Renault. The performance
and success of Korea automakers cannot be realized without an active contribution and
intervention of the government, particularly in terms of policy. The paper will generally analyze
the intervention of Korean government in boosting up the auto industry and specifically exportled policy which allows the industry to grow so fast and gain 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 nations
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 also marked the birth of Korean automobile industry. In 1962,
“Automobile Industry Promotion Policy” and “The Automobile Industry Protection Act” were
adopted accordingly 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 the creation of domestic automobile industry which could make use 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. Production
technology and productivity were low and highly 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 a plan to encourage domestic innovation and
production of automobile through subsiding auto part producers and promoting joint venture
investment from major foreign 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 American countries such as Colombia,
Venezuela, and Ecuador, and made the first the history of first Korean developed car. Even
though it seems to be 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 the 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 to 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 our topic of “The Roles Export-led Policy in Developing South Korean
Automobile Industry”, 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 policy. 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 Korean 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 have contributed a lot to the development of the nation. In this case, this is a good lesson
learned for other developing countries that seek to industrialize and achieve such rapid growth.
This can be a good experience and implication for our country, Cambodia to learn from Korea’s
lessons. In this relation, it is very interesting to explore the stages of automobile industry
development in South Korea by focusing on the implementation of export-led policy.
Secondly, this research paper will contribute to the understanding of the roles
government intervention and export-led policy played in boosting up the automobile industry in
Korea. On the one hand, this paper will highlight various government interventions and exportled policy which stimulated the development of the industry. On the other, the paper will analyze
the relation between export-led policy and development as well as the prospect of Korean auto
industry. Therefore, this paper will prove that export-led policy which led by government was an
effective tool 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 policy initiated under government intervention, and relation between
export-led policy 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 to analyze the significant relation between export-led policy 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 related 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.
7
Chapter 2: Literature Review
Industrial 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 outward looking policy 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
intervention, specifically export-led policies effectiveness in developing automobile industry in
South Korea.
From the early stage of industrialization, the government of Korea provided seed capital
and incentives to develop the strategic industries. Series 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 Korean automobile industry clearly shows the role played by 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 Chaebols, 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 Chaebols are children.
8
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 policy 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 policy in South Korea was effective provided that the type of government which differentiated
it from other NICs.
In addition, the government, with an ambitious plan, had a strong commitment and clear
vision to elevate its automobile car makers to become a 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 global competitiveness in international
market. During this stage, the government efforts should also be emphasized. The government
supported schemes along with intensive learning and leveraging process from linkage with the
advanced competitors were the main components which allowed Korean manufacturers to
9
transform from contract assemblers to technologically independent manufacturers (RitterLarissa,
2010). Besides, Kim (1997, 1998) and many other scholars came to conclusion that incentive
regimes and preferential conditions generated by government policies such as income tax
reimbursement, subsidies, loan, access to foreign reserve and many others played a crucial role
in accelerate the export and overall the production capacity of the manufacturers.
Export-led policy is part of government efforts to push auto industry development. Many
scholars have identified the correlation between export promotion policy and export growth.
Government provided tax and financial incentives and export-promoting organizations to
selected industries which commanded export potentials. Government put forward industrial
policy 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
government policies and interventions, 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 implementing agent which
successfully adopted and enforced the designed policies. However, these previous literatures
seem to capture dominantly the general aspects of policy and government roles. Also, the
analyses were relatively outdated which left the future prospect of the manufacturers unclear.
Therefore, this paper is seeking out to elaborate the significance of government interventions
from export-led policy implementation perspectives. That is, the paper will analyze the
government interventions, mainly export-led policy which led to the improvement of production
and competitive capability.
10
Chapter 3: Analysis and Discussion
Started in 1960s, South Korea was a late entrant in the global 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, 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 development as a strategic
pillar in relative same period, 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 boosting up the industry. While government intervention proved successful
in South Korean case, the same model implemented in those above mentioned NICs revealed
ineffectiveness. It is said that Korean endeavor to develop its industry was at the right time with
right policy. Therefore, the following section will outline the export-led policy and the
implementation.
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 policy was
announced to provide new force for the industry and to transform Korean carmakers from cheap
car assemblers to global players. The export-led policy is comprised of three main parts, namely
tax incentives, financial incentives, establishment of free trade zones and the supporting
organizations (Mah, October 2010).
11
3.1.1. Tax Incentives
Tax incentives policy mainly consists of two main schemes which were tax incentive in
general and duty drawback schemes. For tax incentive, 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 a low interest rate.
Moreover, tax benefits such as 80 percent of profit tax reduction 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 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, the ratio of duty drawback increased from 0.3 percent in 1975 to 2.6
percent in 1990, and the rate further increased from 17 percent to 27 percent between 1990 and
2009.
3.1.2. Financial Incentives
Financial incentives included 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
12
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 withdrawn from commercial 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 losses 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.
3.1.3. Establishment of Free Trade Zones and Other Supporting
Organizations
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) was formed in 1970 under the name of first Korean foreign
13
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.
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 auto
industry.
3.2. Policy Significances
The industrialization and rapid economic growth in Korea has been explained as the
outcome of outward looking policy 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 policy. As mentioned earlier in this paper, Korean automakers have
14
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 policy helped boost
Korean auto industry in two aspects, economies of scale and productivity and improvement.
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 indispensable
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 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 exportled policy, which pushed Korea to export its automobile since 1970s, helped the industry itself to
15
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
1977
1978
1979
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
Total Production
–
–
–
–
–
–
–
–
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
Domestic Sale
–
–
–
–
–
–
–
–
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
Export
9,136
26,337
31,486
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
16
2011
2012
4,657,694
4,561,766
1,474,637
1,410,857
3,151,708
3,170,634
Source: KAMA
From another aspect, by pushing auto makers to export and compete in foreign markets,
where the competition environment was very fierce, those firms willing or not had to improve
quality, technology as well as production capacity in order to capture the market share. Since the
domestic market was highly restricted, the competition 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 R&D efforts conducted by Korean firms to improve production and gain
competitive edge. To indicate, 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
17
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 payment they
had to pay to foreign companies. 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 carmakers 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 policy
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.
18
Chapter 4: Conclusion
In a broad aspect, Korea Inc. dictated the development of the country based on statist
model and outward-looking policy. 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
a conclusion that Korean government intervention was very effective back then in shaping the
development of the country and especially the development and prospect of Korean auto industry.
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 relationship between Chaebols and the government is known to a parental one in
which state both persuaded and force firms to realize the goals it had put forth. The government
took strong hold over banking sector so that it could allocate resources to whichever industry in
favor. 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 policy which helped the
development of Korean auto industry, and the significance of such outward policy can be
summarized into two. First, export allowed firms to reach economies of scale which they cannot
realize by capturing the 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.
19
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 face to face 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 words, 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 policy 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 Korea. From broad
perspectives, we can conclude that the development of auto industry in Korea has gone through
three major stages.
First, from 1962 to early 1970s, the government embarked the initiatives for HCI (Heavy
and Chemical Industry) in which automobile industry is the main pillar in the development of
Korea. In this stage, Korean automakers relied greatly from foreign technology, license and
reverse engineering of foreign technology. Many analysts have agreed that Korea had skipped
from phase 1 to phase 3 in terms of car production during its catching-up process. Though the
involvement of foreign firms was 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.
20
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 policy played great roles in shaping and
restructuring the industry because the mid 1980 saw the rationalization of banking sector and
trade liberalization. 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 are being established abroad. At the meantime, various
R&D efforts are to achieve competitive edge in innovative technology to compete or supersede
other mature producers.
With regard to the importance of export-led policy, two significances were found. On the
one hand, export-led policy 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, 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
21
determined by market mechanisms. Notwithstanding this new landscape, Korean auto industry
prospect is very promising as the continuous growth continues to be seen.
Despite 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 a
mature and competitive global player. In terms 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
makers still compete in the lower end of the market where 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
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
policy 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
22
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 policy. 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 policy. In this sense, many
international factors which are out of Korean government control are also important in shaping
the future of auto industry development.
23
Appendices
Table 1: Global production by country
Table 2: Production by makers
Table3: Key Elements of Government Policy
24
Table 4: Worldwide automobile production ranking, 1992 and 1995
(Unit: thousand)
Table 5: South Korea: international cooperation of the leading auto producers
25
Table 6: Production, Domestic sales, Exports and Imports, 2004-2011
Table 7: Export by makers
Table 8: Export by regions
26
Table 9: HMC and Kia Motors: royalty payments and sales, 1992-1995
27
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