Bloomberg News

Detroit’s ‘Bulky’ Image Means Modest Gains After U.S.-Korea FTA

November 29, 2011

Nov. 29 (Bloomberg) -- When Back Seung Chul bought a new car in Seoul, he didn’t even look at imported models from General Motors Co., Chrysler Group LLC and Ford Motor Co.

Detroit’s Big Three don’t offer the combination of functionality and style that Korean automakers such as Hyundai Motor Co. provide, said Back, a 25-year-old engineer who lives in the capital’s southern suburbs near Hyundai headquarters.

“American cars don’t come with the practical features we need, like fuel-efficiency and a handy network of service centers,” Back said in an interview. “Foreign cars used to be like Angelina Jolie or Miranda Kerr while Korean cars were unattractive and not worth paying attention to, but all that’s changed.”

Back’s decision -- he bought a Sportage R sports utility vehicle from Hyundai affiliate Kia Motors Corp. -- suggests that a new U.S.-Korea trade deal won’t mean a leap in sales in the Asian country for U.S. automakers, which accounted for just 1.1 percent of the market last year. The agreement, likely to take effect Jan. 1 after it was signed by President Lee Myung Bak in Seoul today, calls for the phasing out of South Korea tariffs on U.S. vehicles.

“It is highly unlikely American cars will do well in the Korean auto market,” said Kang Sang Min, a Hanwha Securities Co. analyst in Seoul. “Local automakers like Hyundai and Kia can make good cars and offer quick, convenient service.”

Consumers in the nation of 49 million people packed into an Indiana-sized space favor cars that are roomy on the inside yet look sleek and small on the outside, Kang said. American vehicles are seen as “bulky and rugged” gas-guzzlers, while Korea’s are “sensitive and delicate,” he said.

Kia’s Sportage

“My car is sleek like a dolphin,” Back said. “It looks great, performs well and has a nice price tag.”

The Sportage R he purchased sells for about 22 million won ($19,500) in Seoul and gets 15.6 kilometers per liter (36.7 miles per gallon), according to Kia’s website. Competing U.S. models in South Korea are GM’s Captiva, priced at 25 million won, with fuel economy of 13.9 kilometers per liter, and Chrysler’s Compass, which costs 35 million won and gets 10 kilometers per liter, according to mileage figures on the automakers’ websites.

Fuel efficiency is important to consumers in South Korea, where gasoline prices have increased 10 percent this year and are double those in the U.S., according to data from state-run Korea National Oil Corp. and AAA, the biggest U.S. motoring organization.

Dealership Advantage

Kia has 723 dealerships and service centers around the country while Hyundai, the nation’s biggest automaker, has 843, according to data provided by the companies. GM, the biggest U.S. seller of cars in South Korea after acquiring most of the Daewoo Group’s automotive assets in 2001, has 289 dealerships and service centers. Ford has 15 dealerships and 23 service centers and Chrysler has 21 dealerships and 21 service centers, spokespeople for the companies said.

“Korean consumers are very sensitive to how well the companies provide after-sales service,” said Kim Ki Chan, a marketing professor at the Catholic University of Korea and former president of the Korea Academy of Motor Industry.

“There is a perception that U.S. cars are expensive, unreliable, and that after-sales maintenance is poor.”

The bankruptcies of GM and Chrysler in 2009 and $30.1 billion in losses at Ford from 2006 through 2008 added to this perception, increasing the need for the U.S. automakers to prove to customers that they are reliable, Kim said.

Trade Deal

All this doesn’t augur well for U.S. automakers seeking to make inroads on the trade deal, the biggest for the U.S. since the North American Free Trade Agreement took effect in 1994. President Barack Obama signed the agreement, along with pacts with Colombia and Panama, on Oct. 21.

South Korean producers accounted for 92 percent of the 1.2 million new vehicles registered in the nation last year, compared with the U.S.’s 1.1 percent -- or 13,044 vehicles -- according to data cited by the U.S. International Trade Commission. That’s more than 22 years after Ford became the first U.S. automaker to export cars to Korea.

Most of the U.S. vehicles sold in the nation are made there, mostly by GM’s unit, the former Daewoo.

Even after the 54 percent increase in shipments of American cars and auto parts to Korea projected by the U.S. trade commission, the total value of the exports would be just $194 million.

GM’s Malibu

Korean automakers, by contrast, exported about 562,000 vehicles to the U.S. last year, according to data cited in a March report by the trade commission. Hyundai and Kia also have U.S. plants that produce some of the vehicles that have helped make them among the fastest-growing automakers there, with a combined 9 percent market share this year through October.

Officials at the South Korean units of GM, Ford and Chrysler declined to comment on their strategies for taking advantage of the free-trade pact.

GM has chosen the Chevrolet Malibu to compete with Hyundai’s Sonata, the top selling car in Korea, and Kia’s K5.

The mid-size sedan, the centerpiece of GM’s television advertising campaign in Korea, is priced at 21.8 million won and has fuel economy of 12.4 kilometers per liter. That compares with the Sonata, selling for 20.2 million won with fuel economy of 13 kilometers per liter, and the K5, at 21.5 million and 13 kilometers per liter, according to data on the companies’ websites.

European Rivals

European carmakers outdo their U.S. rivals in South Korea, accounting for 65 percent of foreign-made vehicles sold there in 2010, followed by Japanese companies with a 26 percent share of exports, according to data from the importers association. The U.S. ranked third at 8.2 percent.

While European car sales surged almost 28 percent in the two months after South Korea’s free trade agreement with the EU came into effect on July 1, compared with the same period a year earlier, gains of this magnitude are unlikely for U.S. automakers, said Hanwha’s Kang.

Koreans view European brands including Audi and BMW as status symbols that reflect individual success while American vehicles lack cachet, he said.

“I can think of only a few models that might benefit, and they are the big American muscle cars or the premium models for each company,” said Kang.

Elliot Cha, a 31-year-old banker from Seoul who owns a 535d sedan by Bayerische Motoren Werke AG, said he’s never bought an American car because they “lack the excitement” of European models.

“They don’t look great and they don’t feel great,” said Cha, who has previously owned Porches, Audis, and Hyundais.

--With assistance from Eric Martin in Washington, Alan Ohnsman in Los Angeles and Shinhye Kang in Seoul. Editors: Brett Miller, Joe Winski

To contact the reporter on this story: Rose Kim in Seoul at rkim76@bloomberg.net

To contact the editor responsible for this story: Brett Miller at bmiller30@bloomberg.net


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