By John Burton
Cars and semiconductors are the two industrial stalwarts of the Korean economy. Both are now under threat.
Semiconductor exports could be hurt as the Sino-American trade war escalates since many of the chips are exported to China to be installed in electronic products that are then shipped to the U.S.
Korea's car industry may be even more vulnerable. This was highlighted when Hyundai Motor, the country's largest automaker, reported that operating profits in the third quarter plunged by 76 percent from a year ago to 289 billion won ($257 million), its lowest level since 2010.
This reflects the industry's heavy dependence on exports, especially those to North America and the Middle East, where demand is weakening. These two markets account for half of Korea's car sales overseas. Exports to Europe and emerging markets have not made up the difference. Domestic car production has already contracted this year as a result.
The news on the export front could have been worse if the Trump administration had abandoned the KORUS free trade agreement. In the end, the U.S. president decided to modify the pact, inflicting little damage on the Korean car industry.
Korean vehicles, except for trucks, will continue to enjoy generally free access to the U.S. markets, while restrictions were eased on the export of U.S. cars to Korea. However, the Korean public generally prefers European brands when it comes to foreign imports.
The only potential source of worry is that the Trump administration could still curtail Korean car imports by citing the issue of "national security," although there is no sign that it is contemplating doing so for the moment.
But another problem is looming in the U.S. market. Rising interest rates there could depress sales since so many car sales rely on credit. Growing auto loan delinquency rates are also affecting borrowing. Meanwhile, the burden of high student debt is likely to deter young buyers.
Korea car sales in Saudi Arabia, an important market in the Middle East, have also been affected by rising fuel prices and insurance costs when wages are being cut and unemployment is increasing. Sales of Korean cars have nosedived as a result.
Demand for imported cars in Turkey, another key market, is falling as high inflation is weakening the local currency and consumers face rising debt servicing costs.
But the real danger to the Korean car industry lies at home. Domestic sales are already in the doldrums due to high levels of household debt and a weak labor market.
Things could get worse, Fitch Solutions Macro Research estimates the domestic car sales could contract by nearly 5 percent in 2019 due to slow economic growth, higher interest rates and rising oil prices. High youth unemployment will also likely put a cap on potential car sales over the next decade, with a continual contraction in sales.
Korea had already lost its position as the world's fifth largest carmaker last year when it was overtaken by India. It may soon be surpassed as well by Mexico, which has become a favorite site for U.S. automakers.
The car industry's troubles will have a knock-on effect on other related industries, such as steel, electronics and parts and components suppliers.
This coincides with growing problems for the local steel industry. Steelmakers such as POSCO are already facing a quota on steel exports to the U.S. under the Trump administration's tough trade policy. Sector growth is likely to stagnate over the next decade as the steelmakers reduce their dependence on the U.S. market as well as confront falling demand at home.
Korean carmakers must innovate to regain global market share. They should focus on autonomous driving vehicles and eco-friendly ones such as electric cars. This is an area where the U.S. and Europe are far ahead of Korea. The problem for the local industry is that as profits fall it will have less money to invest in research and development.
The problems afflicting the car industry highlight the dangers of Korea's continued dependence on smokestack industries.
Korea should be devoting more resources to developing 21st century industries, such as healthcare and pharmaceuticals to deal with its rapidly aging population as well as artificial intelligence-based technologies.
Unfortunately, the government is taking a band-aid approach to the economic problems caused by the woes of the industrial sector
The administration's income-led growth policy will not save the economy from its deep-rooted structural weaknesses that are rooted in the country's dependence on traditional industries.
Instead, officials need to offer fundamental and comprehensive measures that will overhaul economic priorities so that Korea can regain its competitiveness.
John Burton (johnburtonft@yahoo.com), a former Korea correspondent for the Financial Times, is now a Washington, D.C.-based journalist and consultant.
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Semiconductor exports could be hurt as the Sino-American trade war escalates since many of the chips are exported to China to be installed in electronic products that are then shipped to the U.S.
Korea's car industry may be even more vulnerable. This was highlighted when Hyundai Motor, the country's largest automaker, reported that operating profits in the third quarter plunged by 76 percent from a year ago to 289 billion won ($257 million), its lowest level since 2010.
This reflects the industry's heavy dependence on exports, especially those to North America and the Middle East, where demand is weakening. These two markets account for half of Korea's car sales overseas. Exports to Europe and emerging markets have not made up the difference. Domestic car production has already contracted this year as a result.
The news on the export front could have been worse if the Trump administration had abandoned the KORUS free trade agreement. In the end, the U.S. president decided to modify the pact, inflicting little damage on the Korean car industry.
Korean vehicles, except for trucks, will continue to enjoy generally free access to the U.S. markets, while restrictions were eased on the export of U.S. cars to Korea. However, the Korean public generally prefers European brands when it comes to foreign imports.
The only potential source of worry is that the Trump administration could still curtail Korean car imports by citing the issue of "national security," although there is no sign that it is contemplating doing so for the moment.
But another problem is looming in the U.S. market. Rising interest rates there could depress sales since so many car sales rely on credit. Growing auto loan delinquency rates are also affecting borrowing. Meanwhile, the burden of high student debt is likely to deter young buyers.
Korea car sales in Saudi Arabia, an important market in the Middle East, have also been affected by rising fuel prices and insurance costs when wages are being cut and unemployment is increasing. Sales of Korean cars have nosedived as a result.
Demand for imported cars in Turkey, another key market, is falling as high inflation is weakening the local currency and consumers face rising debt servicing costs.
But the real danger to the Korean car industry lies at home. Domestic sales are already in the doldrums due to high levels of household debt and a weak labor market.
Things could get worse, Fitch Solutions Macro Research estimates the domestic car sales could contract by nearly 5 percent in 2019 due to slow economic growth, higher interest rates and rising oil prices. High youth unemployment will also likely put a cap on potential car sales over the next decade, with a continual contraction in sales.
Korea had already lost its position as the world's fifth largest carmaker last year when it was overtaken by India. It may soon be surpassed as well by Mexico, which has become a favorite site for U.S. automakers.
The car industry's troubles will have a knock-on effect on other related industries, such as steel, electronics and parts and components suppliers.
This coincides with growing problems for the local steel industry. Steelmakers such as POSCO are already facing a quota on steel exports to the U.S. under the Trump administration's tough trade policy. Sector growth is likely to stagnate over the next decade as the steelmakers reduce their dependence on the U.S. market as well as confront falling demand at home.
Korean carmakers must innovate to regain global market share. They should focus on autonomous driving vehicles and eco-friendly ones such as electric cars. This is an area where the U.S. and Europe are far ahead of Korea. The problem for the local industry is that as profits fall it will have less money to invest in research and development.
The problems afflicting the car industry highlight the dangers of Korea's continued dependence on smokestack industries.
Korea should be devoting more resources to developing 21st century industries, such as healthcare and pharmaceuticals to deal with its rapidly aging population as well as artificial intelligence-based technologies.
Unfortunately, the government is taking a band-aid approach to the economic problems caused by the woes of the industrial sector
The administration's income-led growth policy will not save the economy from its deep-rooted structural weaknesses that are rooted in the country's dependence on traditional industries.
Instead, officials need to offer fundamental and comprehensive measures that will overhaul economic priorities so that Korea can regain its competitiveness.
John Burton (johnburtonft@yahoo.com), a former Korea correspondent for the Financial Times, is now a Washington, D.C.-based journalist and consultant.
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