Falling Prices of Imported Cars a Threat to Korean Automakers

○ No More Bloated Prices

Recently, imported car dealers have released new models with upgraded options at lower prices.

Prices of best-selling imported cars have fallen overall to a level comparable to prices in the U.S., all within a year since imported car dealers began fierce price competition in March 2007.

In Korea, a 34.2 percent tax is imposed on foreign vehicles with engines larger than 2,000cc and a 26.5 percent tax for imported vehicles with engines smaller than 2,000cc. An 8 percent tariff is included in the tax rate. On the other hand, the U.S. imposes a mere 2.5 percent tariff on imported cars. Also, it exempts domestically manufactured vehicles from taxes (the automobile registration tax, set between 5 to 9 percent and imposed by each state government, is not included).

Excluding tax, the Volvo S80 3.2 sells for 44.56 million won in Korea, just 90,000 won higher than in the U.S., where it sells for 44.47 million won.

Korean consumers buying the Cadillac CTS 3.6 Premium have to pay 320,000 won more than their counterparts in the U.S. Similarly, Koreans purchasing the Honda Accord 3.5 sedan and the Chrysler Sebring need to pay 250,000 won and 260,000 won more, respectively, than Americans. Given the price gap between the U.S. and Korea for the BMW 528i and the Audi A6 3.2Q has narrowed to the 3-4 percent level, imported car dealers in Korea have little room to cut prices further.

Nevertheless, dealerships importing large luxury cars seem to have more room to cut prices. Even though Mercedes-Benz Korea announced a price cut on Mar. 9 for its S500L AMG, it is still 34.8 percent more expensive than the same model sold in the U.S. Also, Koreans buying the BMW 750Li and Lexus LS406L pay 49.8 percent and 42.6 percent more, respectively, than their counterparts in America.

○ Japanese Cars a Threat to Vehicles Made in Korea

With prices of imported cars gradually falling to a level comparable to the price of Korean cars in the same class, sales of imported cars, especially Japanese cars, have sharply risen.

In January, market share of imported cars exceeded 6 percent for the first time as 5,304 units of imported cars were sold. In February, the number of imported cars sold reached 4,572, accounting for 5.6 percent of Korea’s car market.

Six out of ten best-selling imported cars in Korea were manufactured in Japan. Honda’s vehicles took first and second places.

Sales of Japanese cars are expected to surge drastically since Japan’s three automakers, Toyota, Nissan and Mitsubishi, were scheduled to sell their cars in Korea beginning next year.

Sales of imported cars with engines smaller than 2,000cc have also increased sharply thanks to their price competitiveness. In 2007, sales of cars with engines smaller than 2,000cc accounted for 24.2 percent of Korea’s imported car market. As of late February, their market share in this category has increased to 30.3 percent. This means Korean consumers who decide to buy medium-sized passenger cars manufactured by local carmakers can buy imported cars if they spend slightly more.

Executives of Hyundai Motor Company are known to order managers to set up countermeasures to stay ahead of Japanese carmakers’ aggressive moves.

The nation’s largest carmaker publicly expressed a determination to guard against Japanese carmakers’ attempts to increase their share of the Korean car market this month, including a message in its promotional ad for the Grandeur sedan, saying, “Do you think Japanese cars are quiet? Have you ever compared?”

An executive of Hyundai said, “We cannot reach break-even point in the U.S. market. Certainly, we have generated profits in the Korean market and invested the money into R&D and into opening up global markets. If we fail to generate significant profits in the local market, which has been a cashcow for us, we can face a real challenge.”

mobidic@donga.com