Why are Japanese car dealers closing en masse in Korea?

Official Korean dealers of Japanese auto brands, who are struggling amid an all-time low share in the Korean market, are withdrawing from the business en masse.

This is because Korean consumers are shunning Japanese cars, which have seen their competiveness deteriorate vis-à-vis European brands, which have made great strides due to a bilateral free trade agreement.

Dongyang Engineering & Construction Corp. has liquidated D&T Toyota and is reportedly considering closing D&T Motors, which the company has been running since the early years after the establishment of Toyota Korea in 2000. D&T’s business license to supply the high-end brand Lexus will expire in December, but whether the company will have its supply license renewed remains uncertain. If D&T terminates the licensing deal, Dongyang will sever its 12-year tie with Toyota.

Insiders among auto importers and distributors consider the withdrawal of Dongyang, which has been the biggest partner in Toyota’s advance into the Korean market, from import vehicle distribution as showing the lackluster performance of Japanese cars in the Korean market.

In line with its headquarters’ long-term plan to enter the Korean market, Toyota has staged a low-margin strategy and continuously expanded its after-sales service network here.

In the process, Korean dealers have seen their profitability drastically deteriorate. D&T Toyota saw net losses increase nearly 4.75-fold from 1.38 billion won (1.21 million U.S. dollars) in 2010 to 6.54 billion won (5.77 million dollars) last year. The net profit of D&T Motors, which supplies Lexus vehicles, fell 64 percent from 2.4 billion won (2.12 million dollars) in 2010 to 876.54 million won (773,000 dollars) last year.

○ Korean dealers leave Honda, Nissan en masse

The situation is no different with importers and distributors of other Japanese auto brands. SS Motors, which has sold Nissan Korea’s high-end brand Infiniti, will return its sales license for its branches in Seoul’s Gangnam and Songpa districts on Oct. 1. Earlier, Bando Motors and Hanmi Motors also gave up their sales licenses for Nissan as well.

Korean dealers of Japanese cars are shutting down their businesses due to a significant drop in the market share of Japanese brands in Korea. The market share of Japanese auto brands in Korea had hit 35.5 percent in 2008 but plummeted to 18 percent last year, when Japanese automakers suffered their worst crisis in history due to production disruptions in the aftermath of the massive earthquake in Japan.

Their market share in Korea was just 17.9 percent between January and July this year despite complete recovery of their production.

A source in Korea`s imported auto business community said, “A drop in price competitiveness due to the yen`s appreciation, aggressive marketing by European auto brands, and Korean automakers’ efforts to protect their domestic market have combined to hamper Japanese car brands in Korea.”

gene@donga.com