SECTION [B] : VARIOUS GOVERNMENT POLICIES /cont'd

(iii) Encouraging Foreign Capital Formation
The Korean government encouraged foreign motor companies, particularly from Japan and the US, to participate in Korea's capital markets by providing various incentives to induce capital formation through national financial markets. In this manner, foreign capital provided the necessary source of capital for Korean automakers to make investments, which required large capital outlays. Correspondingly, limits were imposed on foreign ownership to ensure that control of assets was not lost to foreign interests. This arrangement allowed Korean automakers to gain technological know-how from foreign expertise, yet maintain control over their own operations since foreign equity participation in auto-making companies was minimal.

(iv) Other government efforts
Since the government handpicked the automobile industry to be a key driver of economic growth, a host of incentives were provided to encourage participation in the automobile industry. Such incentives included access to cheap credit in the form of low interest rate loans and tax subsidies, which effectively reduced manufacturers' cost of production.

Furthermore, national labour movements were oppressed to ensure that wages remained under control and automobile manufacturers could operate without much disruption to their operations in the form of strikes.

Also, when Korean automakers first began exporting, the government permitted the practice of dual pricing, whereby prices of vehicles in local and foreign markets were non-identical. This enabled automakers to penetrate highly competitive markets that were more developed such as the US by achieving unnaturally low prices in foreign markets since they were able to recover the lost revenue from the highly protected domestic market. In a nutshell, the Korean government made the practice of dumping legal. Of course, this led to strong opposition from foreign firms and sparked heated political debates. Nevertheless, through this practice, Korean cars were able to penetrate foreign markets and this may not have been possible if the government had not allowed the practice of dumping.

(v) The Automobile Industry Protection Act
For the purpose of developing the Korean automobile industry, the government held that it was necessary to completely shield the domestic market from foreign competitors that were more established. Hence, under this act, the government banned imports of complete vehicles and correspondingly, duty-free status was granted to parts that were imported to be used in the assembly of new vehicles. When this act was enacted, the Korean automotive firms' activities were confined to assembling major motor vehicle parts such as engines, transmissions, axles, bodies, electrical parts through the semi knock-down method. Since there was lack of local knowledge at this point in time, expertise was acquired through foreign licenses and joint-ventures. Through such efforts, Koreans began to acquire the required expertise.

(vi) The 3-Year Automobile Localisation Plan
This plan was announced in 1965, where there was barely any local content in vehicles assembled and the government targeted to achieve 90% local content by 1967. Therefore, the main objective here was to encourage assemblers to increase the local content of components utilised in assembly and increase the linkages and multiplier effect of the automobile industry on the Korean economy. To do so, the Korean government made it mandatory for Hyundai, a new market entrant at that time to achieve at least 21% local content.

Through this, local content was increased from nearly zero to 21%, and the Korean auto industry progressed from the assembly of semi-knockdown models to the assembly of complete knockdown models, whereby Hyundai assembled the Ford Cortina.

(vii) Systemisation Promotion Act
In 1975, the government implemented the Systemisation Promotion Act to facilitate development of small-medium enterprises in the automobile industry. The enterprises in question here were mainly those producing auto parts. By this time, the automobile industry had progressed from merely assembling complete knockdown units to mass production with a significant amount of local content, whereby the average amount of local content was approximately 85%. As production increased, Korean manufacturers realised that there was need to improve efficiency. Hence, they looked to the successful Japanese auto industry for improvement on production techniques, particularly the lean production method that was responsible for much of Toyota's success.

There is evidence that this Act has impacted the current auto industry structure because as of 2005, small-medium enterprises manufacturing auto parts constituted 809 of the total 878 firms (92.1% of the total industry).

(viii) Rationalisation Plan
In 1981, the government announced a rationalisation plan, whereby it limited the number of players in the industry to 4 producers, ie Hyundai, Daewoo, Kia and Asia. However, as there was a lack of a demand in the domestic, as well as international markets, manufacturers did not possess economies of scale, a vital element for ensuring competitiveness in this industry. Therefore, to limit competition, Hyundai became the only conglomerate that was allowed to manufacture commercial vehicles.

As a result of the low demand for motor vehicles, the parts industry also suffered from the lack of demand. Hence, the government offered protection to its domestic parts industry by giving Korea Auto Industries Cooperative Association (KAICA) the power to veto the imports of parts that were locally available. Also, foreign parts producers were coerced into transferring their technology to Korean parts producers, as they would lose their business completely otherwise.