Is the US Loss in the Auto Sector Korea`s Gain?

The biggest factor that rattled Korean stocks Monday was the U.S. government’s rejection of additional financial aid to General Motors and the resignation of the auto giant’s chairman Rick Wagoner.

The news triggered speculation that GM could go bankrupt, causing Asian stock markets to plunge and throwing cold water on the recent rebounds in the Korean financial market.

The Korea Composite Stock Price Index, or KOSPI, bounced back to the 1,200 level yesterday. Hyundai Motor and Kia Motors had dragged down stock prices Monday, but Hyundai shares rose 4.72 percent and Kia’s 5.96 percent.

Nothing changed for GM, however. Instead, the fall on Wall Street added bad news.

One expert said, “The worst news on the global market turned into good news on the Korean stock market in a day.” Though investors initially sold stocks due to panic over the possibility of bankruptcy, they began to focus on the positive impact of GM’s bankruptcy on the Korean market.

○ Opportunity for Korean automakers

The most likely scenarios for American automakers are saving competitive units after filing for bankruptcy or downsizing through aggressive restructuring. Whatever the result, they will find it difficult to regain their previous dominance of the global auto market. If they file for bankruptcy, at least two to three years are expected to be needed to bring everything back to normal.

Based on these assumptions, securities firms said Korean automakers could raise their share of the global market as U.S. automakers stumble.”

“It’s not easy to buy a car from a company that’s likely to go bankrupt,” Korea Investment & Securities researcher Seo Seong-moon said. “Eventually foreign companies in Asia and Europe could see higher opportunities; among them, Korean automakers, which are benefiting from the weak won and are strong in small cars, can stand on higher ground.”

Bloomberg said Monday, “In the worst U.S. car market in 28 years, Hyundai Motor is on a roll.” Indeed, the combined market share of Hyundai and Kia began to soar at the end of last year and rose to 7.6 percent in February.

Given that the combined U.S. market share of the Big Three - GM, Chrysler and Ford – is around 45 percent, Korean automakers have room to expand their territory.

Others warn that GM’s bankruptcy could provoke U.S. protectionism for the American auto industry, hurting Korean auto parts suppliers, which are expanding to overseas markets. In the case of GM Daewoo, the likelihood that its parent company GM will go belly up could lead Korea Development Bank to suspend financial assistance to the Korean unit.

If GM cuts its overseas dealer network, exports of GM Daewoo, which accounts for 90 percent of sales, could get largely affected.

○ Short-term financial shock

Though restructuring of the U.S. auto industry might be good news for the U.S. economy over the mid to long term, it could send shockwaves throughout the global financial market and economy over the short term.

Given the importance of the auto industry in the U.S. economy, the restructuring could have a tremendously negative impact on the real economy including employment and consumption. This explains why Barack Obama mentioned the rescue plan for automakers first in his presidential campaign, saying, “The auto industry is the backbone of the U.S. manufacturing industry.”

The Big Three employ more than 200,000 workers and up to 2,000 suppliers around the world trade with GM.

Deutsche Bank said, “A bankruptcy by an automaker would put an estimated one million people out of work, pushing the U.S. unemployment rate up to 11.5 percent.”

GM’s bankruptcy could cause a vicious cycle of rising unemployment and the collapse of suppliers, followed by increased bad debts among financial institutions. This would lead to dampened investor confidence for a short period.

Daeshin Securities research director Gu Hee-jin said, “Though not as severe as Lehman Brothers’ bankruptcy, financial turmoil is likely to last three to six months with increased fears over bankruptcies.”

Others see this as a possible opportunity to tackle another uncertainty that has been dragging the feet of the global economy. Since the market has known of the shock for a while, the effect of the shock might prove limited.

Samsung Securities said in a report, “Though GM might go bankrupt, the bankruptcy will not trigger a large-scale chain reaction like Enron in 2001 because there is already a market, and the U.S. government plans to buffer shocks.”

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