SECTION [C]: AFTER 1988

As shown in table 1 of Part 1, government efforts pertaining to the development of the automobile industry were no longer as explicit although protectionist policies continued to be maintained. The likely reason behind this was perhaps the fact that Korean automobiles were beginning to gain a stable footage in both domestic and export markets. As the preceding sections have already briefly discussed the developments that took place in the auto industry up till this day, the main objective of this section is to highlight the manner in which notable internal, as well as external developments, affected the industry.

(i) Increase in Exports of Korean Vehicles, Deteriorating Image in Developed Markets
Figure 1 below shows the increase in Korean vehicles exported from 1987 onwards.

Figure 1 : Exports of Korean Passenger Cars

Although by 1995, the number of Korean vehicles exported had exceeded 1 million units, it was argued that this tremendous surge in exports was attributable more to external developments that happened to be in favour of the Korean auto industry. First, due to the Plaza Accord the Yen had appreciated significantly, leading to an almost immediate rise in the prices of Japanese cars. Since the smaller Japanese cars were competitors to Korean cars (although general perception towards Japanese cars was far more favourable), Korean cars gained competitiveness overnight with the appreciation of the Yen.

Secondly, it was argued that the surge in exports was due to market entry into the less developed markets as vehicle exports to these countries only constituted less than 10% of total vehicle exports in 1990 and that by 1995, this figure had risen to more than 50%. The fact that its success in developed countries such as the US had begun to fade by 1995 also contributed to the rising proportion of vehicles exported to the less developed ones. A comparison of figures 1 and 2 illustrates this point. This is because, while figure 1 shows the increasing popularity of Korean cars in the global market, figure 2, in stark contrast, shows the drastic decline in the popularity of Korean cars in the American market. While the number of Korean cars sold in the US was 419,099 units in 1988, sales had fallen drastically to 173,214 units by 1993.

Figure 2 : Sales of Korean Cars in US

The decreasing popularity of Korean cars in developed markets was mainly because quality problems associated with Korean cars had become increasingly evident. According to the Initial Quality Survey conducted by J.D. Power, Korean cars had the highest average rate of defects per 100 units among all brands sold in the US in 1994 and 1995. The better performing Korean manufacturer produced cars that had almost double the amount of defects compared with that of its worst performing Japanese competitor. Moreover, a consumer report released in 1996 held that collision security of Korean cars was much less uncertain than that of its Japanese competitors, and issued a list of Korean cars on the list of used cars, which consumers should not purchase.

(ii) The Asian Financial Crisis and Reform Efforts
With the decline in the exports of Korean vehicles to the developed markets, the Korean automobile industry became increasingly reliant on developing markets to sustain its growth rate. This trend became a platform for disaster when the Great Asian Crisis hit in 1997. As a result, incomes declined dramatically in the export markets, leading to a plunge in demand for Korean cars. Also, while the domestic market provided substantial demand for automobiles, this situation changed as national income declined in line with the deterioration of the Korean economy. In the first half of 1998, domestic sales had fallen by more than 50%. Correspondingly, vehicle manufacturers that were already in vulnerable positions faced financial difficulties. In addition, the economic structure in Korea that relied heavily on chaebols exacerbated the problems. Hence, the Korean economic policies, as well as companies, underwent massive restructuring in order to stay afloat.

(iii) Policy reforms
It is important to comprehend the change in government stance pertaining to the chaebols after the crisis since the structure of the automobile industry is based on the chaebols. Prior to the crisis, the government condoned cross-subsidising between subsidiaries of the chaebols, political-business collaboration, and provided excessive protection to domestic industries by limiting foreign competition and maintaining ownership over operations. Inevitably, these practices gave rise to widespread cronyism and the overly protected domestic industries became lame duck industries that were inefficient and overly dependent on protection.

Consequently, the Korean government bit the bullet and bore with the bitter taste of reforms that initially led to a massive deterioration in the Korean standards of living. Nominal GDP fell by 3.5% from 497 trillion Won in 1997 to 480 trillion Won in 1998. Unemployment that had been progressively falling for the 30 years preceding the Great Asian Crisis until it fell below 3% had surged to 7.5% by Sep 1998 as a result of labour reforms. Moreover, Koreans who were extremely proud of lifetime employment practices, which contributed to full employment, saw this "legacy" come to an end. There was new found dynamism in the previously stable (a euphemism for inflexible) labour market.

One of the most notable differences in the post-crisis policies is the deregulation of the local market. While foreign investments were previously highly regulated with the objective of maintaining government control over businesses, foreign investments are now welcomed in most sectors of the economy. This meant that the Korean economy, which was previously highly protected, has now been opened up, leaving inefficient domestic firms little choice but to either increase efficiency or to shut down. Although it was argued that the domestic Korean automobile market remains protected, reflected in the minimal number of foreign cars, the fact that it had allowed foreign firms to take over Daewoo and Samsung demonstrates a significant change in stance.

Such a stance has far-reaching implications on the competitiveness of an economy as a whole because firms that were previously allowed to slacken as and when they like it, now need to constantly be on their toes. While government bailout used to be a readily available option, companies were now left on their own in a "do or die" situation, whether they were allowed to go bankrupt or be taken over by foreign interests.

Also, in Oct 1998, a US-Korea Memorandum of Understanding (MOU) was issued pertaining to market access for foreign vehicles. With this, the Korean government pledged to reduce entry barriers for foreign vehicles in Korea through the reduction of tariff rate imposed on American vehicles, institute a self-certification system by 2002 that would allow US manufacturers to certify their own products in line with US headlamp standards and secure a financing system that would ease financing of US vehicle purchases. This agreement supposedly fostered competition and encouraged the operation of market principles, simultaneously promoting a healthier, more transparent Korean economy.

However, it is crucial to note that this MOU and a similar one that was signed in 1995 were more of a lip service, as the Korean automobile market remained relatively shielded from foreign competition through loopholes in the agreements. Table 2 below compares the total registration of vehicles with the amount of imported vehicles after the signing of the MOU.

Table 2: Registration of vehicles and Imports

As Table 2 above illustrates, the percentage of imported cars in the Korean market remained extremely low even after the second MOU was signed. In a US Senate meeting, it was held that in 2000, only 0.12%* of the vehicles sold in the Korean market were American, while Hyundai-Kia maintained a 75% monopoly of the Korean market. [*Note: This figure is not reconcilable with the 0.09% of imported cars in the domestic market as the figures were derived from different sources.]

Hence, with the change in the government's stance, coupled with weakening domestic demand, the already debt burdened automobile manufacturers had little choice but to undergo drastic overhauls to survive. Enhancing the quality of vehicles manufactured became a necessity rather than a choice, as manufacturers desperately needed export-led expansion to be able to reap the benefits of economies of scale. The following section analyses the various measures that Hyundai, a major Korean automobile manufacturer, undertook to survive, and as a result, became a major player, in the global arena and threatened other more established competitors.

(iv) Hyundai's reform efforts
When the Great Asian Crisis hit Korea in 1997, Hyundai was swamped in financial difficulties. It was caught in a situation whereby its debt-equity ratio was 5 times and it made a net loss of 28.8 bln Won in 1997. By the 1st half of 1998, losses had reached 1.2 bln Won (US$864,000) on sales of 4.2 tln Won (US$3 bln). Also, due to a sharp decline in domestic demand, it was only operating at 40% of its total capacity of 1.25 million cars per annum.

To mitigate the problem of excess capacity, Hyundai initially planned to retrench 1,500 workers as part of its massive restructuring program. However, there was widespread opposition, leading to strikes that forced 4 of Hyundai's factories to close, and affecting the production of 6,300 sub-compact vehicles, four-wheel drives, and trucks, worth 56 bln Won (US$41.7m). There were also violent demonstrations, where 5,000 workers and their families barricaded themselves in Hyundai's main car plants in Ulsan, using new cars and trucks that they booby trapped with tanks of fuel and welding gases. When the 15,000 police surrounded them in an attempt to end the occupation, the workers threatened to explode the booby traps. Hyundai lost 100,000 vehicles during this occupation. To calm opposition, Hyundai compromised by agreeing to reduce the job losses to 277, while 1,261 workers were sent on 18 months of unpaid leave and given 6 months of education and training. This scenario demonstrates the power of Korean unions despite reforms in labour laws that supposedly enable corporations to fire and hire at ease. More importantly, it illustrates Hyundai's and the Koreans' determination to make unpopular decisions, and not adhere to "social obligations" to remain competitive.

Additionally, to solve its liquidity problem, Hyundai agreed to spin off two of its most profitable subisdiaries, Hyundai Heavy Industries and Hyundai Motors, into separate units in exchange for Hyundai Engineering's (the group's parent company) loans to be rolled over and the upgrading of its credit rating by local agencies. This restructuring effort was seen to be beneficial to both subsidiaries as they would no longer have to bear the debt burden of unprofitable/loss-making sister companies.

In addition, the acquisition of Kia enables Hyundai to reap synergistic benefits through the consolidation of operations and prevent wastage of resources arising from duplication of activities. A study performed by the Korean Institute for Industrial Economics and Trade held that benefits could be reaped through (i) consolidating platforms, (ii) restructuring parts suppliers, and (iii) employment adjustment. However, the extent to which such suggestions were put into practice is unknown.

Other measures included creditors purchasing a 6.1% stake in Hyundai Motors from its founder for US$200 mln and Hyundai selling off its real estate and securities to raise US$1.36 bln.

With regards to reforms undertaken from a marketing perspective, Hyundai implemented a comprehensive warranty scheme in 2000 to rectify the general perception that Hyundai cars were swamped with reliability problems. This scheme included 10-year/100,000 miles coverage on the engine and transmission and a 5-year unlimited roadside assistance program with a 24-hour, toll-free, call-for-help number. Due to the quality problems faced initially, pundits predicted that Hyundai's warranty costs would skyrocket as well. On the contrary, warranty cost has declined by 50% since 1998, indicating notable improvements in the quality of Korean vehicles. While in 1995 Korean cars suffered an average of between 200 and 280 problems per 100 cars, Hyundai's quality has improved so drastically that by 2002, Hyundai was only suffering 11 problems per 100 vehicles. With this, Hyundai was put in the no. 2 spot, alongside Honda.