Background

On the eve of this year’s Paris Auto Salon, French industrial renewal minister Arnaud Montebourg accused Hyundai and Kia of ‘dumping’ cars in Europe and said he would boycott their stands at the show. A month earlier he had asked the European Union to monitor Korean car sales throughout its member states with a view to scrapping the free trade agreement that had been in force for only a year.

It was a tactic startlingly reminiscent of the attitude the French took towards Japanese manufacturers in the 1970s and 1980s, particularly after they started to establish assembly facilities in the UK. But this time the French were not only fearful of what might happen: the cat was already out of the bag.

At the time of the Paris show, car sales in France were down 12.4% for the year and PSA Peugeot-Citroën had announced plans to close its Aulnay-sour-Bois plant north of Paris, with the loss of 8,000 jobs.

Meanwhile, Hyundai sales in France were up 24.6% and Kia’s by 37.5%. What Montebourg had failed to take into account is that 70% of Hyundai’s sales were of cars manufactured at its Nosovice factory in the Czech Republic. For Kia, 60% came from the Zilina plant in Slovakia. Both countries are member states of the EU.

That’s today, and shows how far the country has come in just four decades.

In the 1960s – just as the fledgling car industry was getting going – GDP per capita wasn’t much better than that in poorer countries elsewhere in Asia and parts of Africa. But by 2004, South Korea had joined the trillion-dollar club and today is among the world's 20 largest economies.

The Asian financial crisis of 1997-98 forced the country to adopt economic reforms which included greater openness to foreign investment and imports and a period of steady growth – averaging around 4% a year between 2003 and 2007 – followed.

Growth fell to just 0.3% in 2009 after the 2008 global crisis but the country recovered quickly, showing growth by the third quarter of 2009, largely export led and much of that from the car industry. Growth last year was 3.6%. Exports apart from cars include semiconductors, wireless telecommunications equipment, computers, steel, ships and petrochemicals with China its biggest trading partner, accounting for 24.4% of exports and 16.5% of imports. That’s not necessarily all good news since exports compromise half of GDP, a proportion that worries some observers.

Other problems include a rapidly ageing population and a workforce that is notoriously inflexible – strikes over wage deals and working conditions hit both Hyundai and Kia factories earlier this year.

The car industry

Hyundai and Kia are two of the five auto makers which make up the Korean Automobile Manufacturers’ Association, along with General Motors Korea, Renault Samsung and Ssangyong. The Korean auto industry family tree has some particularly tangled branches, many of which have threatened to wither and die more than once in their relatively short life-spans.

Kia grew out of Kyeongseong Precision Industry in 1962, and is the oldest of the country’s current auto manufacturers. Yet within 25 years it was in such dire financial trouble that it is blamed for dragging South Korea into the Asian financial crisis. Today it is an extremely successful and profitable part of the Hyundai Motor Group.

SsangYong started life as the Ha Dong-hwan Automobile Industry Company, also in 1962. In 1998 it was in such a parlous state that it was taken over by Daewoo, which is now GM Korea, but the partnership lasted barely two years as SsangYong continued hemorrhaging cash. It has since had an unhappy relationship with China’s SAIC and is now part of the Indian Mahindra & Mahindra Group.

Hyundai began as a civil engineering company in 1947, but the automobile division – which is now distinctly separate from the heavy industry, construction, electronics and department store companies which bear the Hyundai name – did not come along until 1967. Yet by 1975 Hyundai had become the first Korean manufacturer to develop its own car, the Pony, and in 1982 was the first to start exporting vehicles, to South America. It is now South Korea’s premier auto-maker and operates the single largest vehicle production plant in the world, at Ulsan.

GM has had a presence in South Korea since 1972, when it operated a joint venture with Sinjin Automobiles. At various times it has been known as Saehan Automobiles and GM Daewoo, after taking over Daewoo Motors in 2002. It has five manufacturing facilities in Korea building cars under GM badges, plus a headquarters and design and technical centres at Incheon. It is also responsible for developing the small-car platforms shared by GM divisions around the world.

Samsung Motors had the misfortune to be formed in 1994, only three years before the Asian financial crisis. That meant that by the time it launched its first car, the Nissan-based SM5, in 1998, market conditions were anything but favourable. Samsung immediately began negotiating a buy-out with Renault which came to fruition in 2000. The French company now owns 80.1% of Samsung, which continues to make Nissan and Renault-based products in Bulsan, while its research and development and design facilities are in the capital, Seoul.

Even now, Samsung gives the lie to the idea that the whole of the Korean auto industry is booming. Its sphere of operations is limited to just a few Asian markets to protect Renault and its Alliance partners, Nissan and Dacia, in their strongholds. Samsung sales in 2011 were down by 27% on the previous year to just over 118,000, and are down by a further 41% this year.

Meanwhile Samsung is obliged by Renault to continue investing in electric vehicles which buyers have shown little appetite for. Renault has tried to reduce Samsung’s production costs by sourcing as many components as possible locally, and has announced plans to build a Nissan 4×4 at Busan in 2014, which will also help to overcome the difficulties Nissan is facing from an over-valued yen. In the meantime, however, Renault has initiated a voluntary jobs reduction plan which could see 80% of Samsung’s 5,700 staff leave. The only section which will be unaffected is the research and development department.

SsangYong has a much larger global market to attack than Samsung, but is still easily the smallest of the five Korean auto manufacturers. Worldwide sales are averaging 9,000 to 10,000 a month in 2012, with around 60% going for export. In Korea, SsangYong is benefiting from the government’s Car Allowance Rebate Programme introduced in July – similar to the scrappage or ‘cash for clunkers’ schemes used to bolster sales in other parts of the world following the 2008 global banking collapse. Domestic sales are up 34.5% year-on-year. However, overseas it is suffering from the problems in the Eurozone, just like everybody else, with sales down by 6% on 2011.

The fortunes of GM Korea are inextricably linked to those of GM globally. As South Korea’s third-largest auto manufacturer, it builds a quarter of all the Chevrolets sold worldwide, including the Spark, Aveo, Cruze, Orlando, Captiva and Camaro as well as the stand-alone Alpheon, which is also sold as the Buick LaCrosse. It also provides CKD kits for assembly in several countries.

GM produces around 1.8 million cars a year in Korea, only about 125,000 of which are for the domestic market. So it is particularly vulnerable to downturns in overseas sales such as those being experienced in Europe, where Opel is suffering from chronic over-capacity. GM simply has to downsize, and rumours keep surfacing that it will shift production from Korea to Europe and China to make more productive use of its global facilities.

When people talk about the Korean auto industry miracle, then, what they really mean is the spectacular success in recent years of Hyundai and Kia. This comes down to strategic decisions made in the first half of the last decade, when the momentum which had carried the group to fifth in the table of the world’s largest auto-makers was starting to fizzle out as a result of dowdy products with no discernible identity.

The group decided to invest heavily in a range of compact and sub-compact models using shared platforms, and did not waiver when the banking collapse came along in 2008. It also decided to build cars in and for the markets where they were to be sold wherever possible.

Hyundai opened its Californian design and technical centre in 2002, its plant in Alabama in 2005, began work on its second Chinese production facility in 2006, opened its Czech factory in 2008 and one in Russian in 2011. It is now close to completing its Brazilian production site. In the same time-frame Kia has built two production plants in China and is currently working on a third, as well as the one in Slovakia and one in Georgia.

Hyundai and Kia both benefited hugely from the scrappage schemes in various countries between 2009 and 2011. Neither has looked back since, setting sales and revenue records for the past two years. In the first half of 2012 they were up again: Kia’s sales of 1.348 million were 12% ahead of the corresponding period for 2011; Hyundai’s were up 11.5% in the same period at almost 2.183 million.

All is not necessarily sweetness and light: domestic sales are slightly down, both companies’ commercial vehicle divisions are struggling and their plants are mostly working at capacity, making continued growth difficult to achieve.