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back to index backASIAtalk May,  2007

Big beneficiaries of Korea Free Trade Agreement might just be Japanese makers in U.S.

Provided it gets past Congress despite vows from the Michigan delegation and other senior Democrats to block it, the new U.S.-Korea Free Trade Agreement might just be better for Japanese automakers with factories in the United States than it is for the Detroit makers it’s supposed to benefit, according to Japanese and Korean analytic reports.

Nikkei Sangyo, the Seoul daily JoongAng Ilbo and others said the South Korean auto industry is already biting its nails about the prospect that the pact will give the Japanese auto industry a way around the trade barriers Seoul maintains against their products.

Japanese cars pose a greater threat than those of the U.S. Big Three,” Nikkei Sangyo said one anonymous South Korean auto industry official told it. We have to do something about this.”

Reduction of the current 2.5% U.S. tariff on South Korean passenger cars with engines of 3 liters or less won’t mean much in the grand scheme of things—an insignificant $150 a vehicle.

Progressive removal of the 25% duty on trucks will make a larger difference, but the South Koreans don’t currently make a whole lot of pickups, and the lower tariff won’t be fully effective for a decade.

Hyundai said late last week, however, that it will start thinking about a foray into the pickup market.

Removal of Korean Tariff

But removal of the 8% Korean tariff on U.S.-made vehicles will lower prices significantly, and so will Seoul’s agreement to reduce from five to three the number of tax classifications into which it divides passenger vehicles.

The South Koreans profess few worries about competition from the Detroit makers. Big Three vehicles are not especially popular in South Korea,” according to Nikkei Sangyo, and as a result, they’re unlikely to score significant sales gains.

In point of fact, the one Detroit company that sells significant numbers of subcompacts in Korea, GM, happens to make them there. GM Daewoo CEO Michael Grimaldi, using an artful and completely opaque term, told reporters last week that his company looks forward to resolution” of the agreement.

The Big Worry

The South Korean makers’ big worry, the papers said, are Toyota, Honda and Nissan, whose cars are highly fuel efficient, and are regarded as the gold standard for quality. Lexus is already the top seller in South Korea’s minuscule (under 4,000 a month) import market, and Honda and Nissan vehicles are also in the top ten.

All three makers currently pay the tariff and factor it into the Korean prices of vehicles they import from Japan. But it’s high enough to have all three of them—not to mention a number of gray market importers—analyzing the costs of shipping from the U.S., and supplying U.S. buyers in turn, with vehicles made in Japan.

Complex Equation

It’s a complex cost equation, an anonymous Honda executive told Nikkei Sangyo, but one worth thinking about. JoongAng said auto analyst Stephen Ahn, of Woori Investment in Seoul said that even with shipping costs factored in, removal of the 8% tariff will put U.S.-built Japanese vehicles in a better competitive position.

That has made Hyundai, which already is getting hurt by the steady rise of the Korean won against the dollar, worry considerably.

Unlike the Japanese, who make big profits in the U.S., Hyundai relies a lot on its 70% share (together with Kia) of the 1.2 million-a-year domestic market.

The lack of significant competition gives it an operating margin in Korea of 7-8%, vs. just 1-3% in the U.S., JoongAng said.

Lobby Hard

The fact that a major Japanese penetration could hurt the Koreans considerably, caused them to lobby hard to get the FTA to define U.S. cars as those with Detroit nameplates—but that didn’t happen.

To view a sample copy of the Japan Automotive Digest, click here.

Source: The Japan Automotive DigestGAI

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