Fight to fend off the Korean challenge in stagnant market

Date: 11/01/1996

By Tim Jones

WHEN European vehicle registration figures for most of 1995 were released at the end of last year, they made for uncomfortable reading in the boardrooms of PSA Peugeot Citroën, Ford and Fiat.

While European demand for new cars seemed to be stagnating, with sales up a mere 1&percent; from 1994, and even the resilient Japanese finding the going tough, with a 0.7&percent; dip in registrations, sales by South Korean firms were up 71&percent;.

In November, sales by the likes of Daewoo, Hyundai and Kia were 120&percent; higher than in the previous year.

While Korea's market share remains low, at 1.5&percent; of all new registrations last year, the trend is very much upwards.

In the first nine months of 1995, Korean car exports soared 63&percent; to 775,000 vehicles and they are expected to hit one million this year, allowing Seoul to assume the role of the world's fifth largest auto exporter.

In the EU, Korea's market share has risen from 0.9&percent; in 1994 to 1.5&percent; last year, with the best gains in Belgium, Spain, the Netherlands and Greece. Total sales for cars and small trucks had reached 167,031 by the end of November.

Twelve months ago, the weakness of the won against the yen led some industry observers to believe the Korean manufacturers were seeking to assume the mantle of the Japanese as the main low-priced, high-quality alternative to European cars.

Both Japanese and Korean companies are aggressively pursuing strategies designed to produce more abroad and tailor their products to local markets, mostly in the Asia-Pacific region but also in Europe.

Since the first half of 1995, western Europe has become the principal export market of South Korean manufacturers, accounting for 25&percent; of foreign sales. Daewoo Motor Co., in particular, has engaged in a hard sell in Europe, having only been a presence in the Union since the beginning of the decade.

At the end of 1994, it began a campaign to sell small cars at 30&percent; below Japanese and US prices, offering to allow an exchange within 30 days of sale. At the same time, it unveiled a line of hatchbacks to rival Nissan, Fiat and Ford.

It now aims to boost sales revenue to 4.4 billion ecu in 1996, up from 3.7 billion ecu, and release six new models by 1998. Moreover, 64&percent; of its 530,000 vehicles made in 1996 will be earmarked for export.

Unlike the established European manufacturers, Daewoo had no traditional sales outlets. Instead, it opted for direct marketing, so reducing costs and opening motor supermarkets employing sales staff on salaries rather than commission to keep overheads down.

Already operating a production plant in the UK, Daewoo bought an assembly plant in Romania with a capacity of 200,000 vehicles a year, and recently beat General Motors in a bidding race for a Polish state-owned plant. It plans to invest 840 million ecu in the FSO factory in Warsaw and aims to produce 220,000 cars and 300,000 engines and gearboxes there annually.

But while South Korean sales are surging towards 200,000 units and 2&percent; of the European market, European car sales in Korea last year totalled less than 3,000.

“We are far from having reciprocity with Korea,” says Camille Blum, of the European Association of Automobile Manufacturers (ACEA). “But it is clear that these things take time and the efforts of the Commission are too recent to yield immediate results.”

Yet there have been some. At a meeting in Seoul at the end of November, Trade Commissioner Sir Leon Brittan put the European manufacturers' case and won a handful of concessions on testing - one of the two main obstacles to European car imports.

Since Korea's tariffs are below those in the EU, formal impediments are not the problem. What Korea has is an antiquated and over-complex regime of standards and testing that tends to shut out foreign cars.

The Koreans have now agreed to abolish their 20,000-kilometre durability test, their steep-hill climb test and acceleration and maximum speed tests, since these serve little purpose for safety requirements.

What European producers want most of all, however, is the instilling of a culture in Korea which makes it acceptable for people to buy foreign cars. To this end, the Koreans agreed that tax audits would not be carried out solely on the basis of ownership of a foreign car.

As this was going on, things were looking up slightly. In 1993, European producers sold just 496 cars in Korea, whereas the Americans sold 1,466. In the first seven months of 1995, European car sales rose to 2,426 units, compared with 1,554 US cars.

But, in reality, the penetration of Korean and some Japanese manufacturers into the European market is the worst of all worlds for the indigenous industry: a flat market with an increased presence by Asian producers.

In the past, the EU has reacted to this kind of threat from Japan with quotas. Before the advent of the single European market in 1993, five member states had restrictions on Japanese imports.

To prepare for the single market and cushion European car-makers from the sudden effects of harsh competition, the Commission agreed a voluntary export restraint accord with Japan in 1991 to run until the end of the century.

Under the accord, Japan promised to monitor exports to the five member states, allowing them to be only gradually increased during the following nine years. Every year, talks are held to adjust the import quota to the forecast level of demand in the EU.

As the agreement approaches its demise, it seems to be becoming less and less relevant. In 1994, sales reached 815,911 vehicles compared with a quota of 993,000 and, while the quota for last year was revised downwards from 1.105 million to 1.071 million cars and light trucks, the strength of the yen and weak demand meant the ceiling was not reached.

European companies are becoming more and more satisfied with their penetration of the Japanese market, particularly since the yen began its upward drift two years ago. However, their main concern now is to ensure that the opening-up of the Japanese market will not be dominated by US car-makers.

This threat increased after Washington was persuaded not to slap 4.5 billion ecu of sanctions on Tokyo, thanks to a deal under which Japan agreed to reduce the number of inspectors for maintenance checks, deregulate car parts and servicing, and help US manufacturers win access to Japanese dealerships.

Both sides agreed to let the EU have monitoring status to ensure European companies did not suffer discrimination, but final conclusions will be hard to reach before the end of the year.

In the meantime, a mid-year review of the deal in 1996 could race ahead of events if the US feels Japan is not carrying out its side of the bargain.