By Cho Jin-seo

Shares of small auto parts firms will be the first to reap the benefits of the Korea-EU free trade pact, analysts think.

More than 9,000 made-in-Korea items are exempted from tariffs beginning last Friday under the free-trade agreement (FTA), and some 2,000 items are subject to gradual phase-out of tariffs over the next two to 10 years. Though the impact on the broader economies of the two sides remains unclear, at least some industry sectors are surely welcoming the FTA, analysts say.

In terms of the effect on stock prices, small firms with large exposure to Europe deserve investors’ attention.

“It is not Samsung, not LG, not Hyundai nor Kia. They are the smaller firms with lesser known names that will see the largest changes in their stock prices,” said Kim Yeon-woo, an analyst at Hanyang Securities.

Though Samsung and LG sell many products in Europe, the impact of the FTA would be limited because they produce a wide range of products for a variety of regions across the world, he says.

Auto industry upbeat

Hyundai and Kia each now get about 5 percent of their sales in Europe. It will take some time for them to increase the number — the 10 percent tariff on passenger cars is being phased out over the next five years.

On the other hand, the tariffs on car parts were eliminated all at once as of July 1, so parts makers are trying to take this opportunity to expand their customer base of automakers manufacturing in Europe, such as GM, says Kim.



A prime example is Hyundai Mobis, the largest auto parts maker in Korea. It has been heavily depending on its affiliates Hyundai Motor and Kia Motors, with only around 10 percent of its sales linked to Europe. But the FTA will allow it to decrease its dependency on the two firms and brand it as a global parts supplier, Kim says. The earthquake in Japan also helped to raise its price competence against Japanese firms.

Suh Sung-moon, an analyst at Korea Investment & Securities, another brokerage, add tire makers to the list of FTA beneficiaries. They paid between 2.5 to 4.5 percent in tariffs until June, but these will be eliminated over the next five years. Europe is the second largest market after the U.S. for Hankook Tire and Nexen.

Mando, another major car parts supplier in Korea, has had limited sales in Europe. But they have secured orders from several European carmakers and shipments will begin in 2012, Suh says.

A survey from a state trade agency supports this rosy prediction. According to KOTRA, 11 out of 17 auto companies and major buyers surveyed in Europe said that they plan to increase use of parts coming from Korea after the FTA.

The report indicated that Bosch of Germany and Mekonomen of Sweden are planning to buy 5 to 10 percent more Korean parts once the FTA kicks in. Mercedes Benz was also one of the firms that was positive about using more Korean goods, it said.
On the other hands, Peugeot of France and Fiat of Italy were more hesitant. They said that price is not the only factor and they have no immediate plans to buy more parts from Korea.

Among big Korean firms, Samsung SDI, a sister firm of Samsung Electronics, is expecting a boost in its sales of lithium-ion batteries for electric vehicles. The firm has set up the joint venture SB Limotive. It recently announced that it will double its cell production capacity at its Ulsan plant, and that it will build a factory in Europe after 2013.

But there are concerns that small firms may not take the full advantage of the FTA because of their lack of international experience and legal expertise.

To get tariff exemption, firms need to prove that the goods they sell are made in Korea. This is a complex matter. Sometimes it is hard to determine the point of origin of manufactured goods when the origin or raw materials is different from the location of manufacturing.
According to Rep. Park Joo-sun of the Democratic Party, only 8 percent of small firms had secured the certificates by the end of April. Big firms were better prepared but still only 30 percent had attained the status of “approved exporter.”

About 77 percent of small firms do not even know the existence of such a system, he said in a press release, adding this lack of information is not unique to the Korea-EU FTA. In the case of a similar trade arrangement with India, which took effect in 2010, only 16.4 percent of applicable items actually benefit from the tariff exemption in terms of value, he said, citing data from the customs office.

Farming, food downbeat

The FTA is expected to inflict direct damage to the farming and dairy industry shares. Some 610 items including coffee and wine are exempted from customs duties from now on.

Firms that sell pork and other diary beef, pork, chicken and dairy have the most worries. The Korea International Trade Association estimates that they will have a combined annual loss of more than 160 billion won every year because of increasing import from Europe.

Pork is the main concern. Korea’s farm houses cannot match European pig farmers in their know-how of breeding so the price gap between local and imported pork belly is often more than double. Already about 30 percent of pork imports come from 10 EU nations such as France, Belgium and the Netherlands.

It is a warning for stock market-listed pork producers such as Farmsco and Easybio. But their short-term outlook is not so negative, says Shim Won-seop of IBK Investment & Strategy. He says that local consumers have a high preference for pork produced in Korea over the inexpensive pork from Europe. And the tariff on pork belly, Koreans’ favorite part, is to fall from the current 25 percent to zero over the next 10 years, so both Farmsco and Easybio have some time to prepare.

Furthermore, this year’s disastrous foot-and-mouth disease killed about one third of pigs in Korea. As a result, the average number of pigs culled every day had fallen by half in May compared to a year ago. Livestock needs at least three years to recover from this kind of supply shock, Shim said.

Until then, the two companies will continue to enjoy a sellers’ market.

In the first quarter of this year they already achieved 70 percent of the profit of the entire 2010. The earnings surprise is to continue for some time, Shim said, which will be more than enough to assure investors in those two firms that the FTA won’t be a grave concern if they are looking for a short-term return.