S. Korean carmakers have succeeded in their game plan

  • Business
  • Saturday, 26 Jul 2014

WHEN local national car companies seek grants from the Government, the common justification is that South Korean car manufacturers, who are now among the top-five largest players in the world, also get assistance from the Government.

This is right in a certain sense because the South Korean automotive players and the Government continue to work together, particularly in research and development initiatives.

But that is not telling the whole story.

Although the likes of the Hyundai-Kia Automotive Group obtains funds, the amount invested by the companies themselves is much higher.

For instance, in 2010, the automotive players together with the South Korean Government started a green car initiative.

According to the Malaysia Automotive Institute, the South Korean Government plans to plough in 40 billion Korean won (about US$39mil or RM124mil) over the next five years to help the local automotive and related industries to develop lithium-ion batteries for plug-in hybrid cars.

This works out to eight billion won per annum.

What is interesting is that the Hyundai-Kia Automobile Group plans to invest one trillion won (US$1.1bil) and will hire 4,500 people for this project. The amount of investments put in by the private sector is much more than what the Government puts in.

The amount committed by Hyundai-Kia is not the only money coming from the private sector for this project.

Additional investments to produce energy-efficient vehicles are also forked out by South Korean battery manufacturers such as Samsung SDI, LG Chem and SK Energy.

Put together, the investments poured by the private sector considerably overwhelms the portion forked out by the Government.

The differences are significant in the automotive industries of Malaysia and South Korea – from the profitability of the companies to how much it has grown and the impact it has made on the world stage.

South Koreans are no longer extensively burdened under the weight of carrying the aspirations of local car manufacturers.

According to a dealer, the South Korean Government imposes a flat tax rate of 7% on all passenger cars and there are no other tariffs. This gives South Koreans the option of owning an imported model at a cost that is slightly higher than what is produced locally.

Even this home-ground advantage is coming under pressure of late due to the strengthening of the won against the US dollar that has caused South Korean marques to see reduced sales in their domestic market.

Nevertheless, Hyundai, together with its affiliate Kia Motors, is the world’s fifth-largest automotive company today, with combined sales expected to reach 7.86 million units by the end of the year.

The fact that the South Korean automotive players are on the global stage justifies the Government’s investments and protection of the automotive industry since the early 1970s. It reduced gradually in the 1990s and came to a screeching halt during the 1998 Asian economic crisis.

There is no denying that the automotive industry of South Korea has made its mark on the world stage.

The operating profit of Hyundai is a talking point among executives in the automotive industry, especially in Europe where Volkswagen reigns supreme.

For all the engineering supremacy that the Germans possess, they realise that they have to keep costs low at the assembly lines.

Earlier this week, Volkswagen’s chief executive Martin Winterkorn was reported to have told his top executives that they have to achieve five billion euros in savings by 2017 to counter the high development costs, falling productivity and falling sales in emerging markets such as China, where the German manufacturer has done well.

According to the Financial Times, Volkswagen aims to achieve a 6% operating margin at its core passenger car brand compared with the 2.9% margin it achieved last year – if the highly profitable China operations are excluded.

As a whole, Volkswagen’s operating margin last year was 5.9% compared with its nearest competitor Toyota, whose auto division achieved 8.9%. Volkswagen and Toyota, which are approaching 10 million in sales annually, are racing to be the world’s largest carmaker by 2018.

But as the giants race to dominate the automotive sector that is determined by the manufacturer that has the volume to achieve production with economies of scale, Hyundai has nudged them as the automotive player with an even better operating margin.

Last year, Hyundai achieved an operating margin of 9.5%, which surpasses the performance of the Germans and the Japanese.

Even South Korean car manufacturers have made progress in the entry-level car market segment in Europe, which is dominated by General Motors (GM).

According to a report in 2008, GM marques had 10.8% of the market for low-budget car owners, while Dacia, a Romanian manufacturer owned by Renault, Hyundai and Kia, had 4.9%.

Today, Dacia, Hyundai and Kia together have an estimated 9.1% against GM’s 7.9%.

In a nutshell, the South Korean automotive industry has matured and stamped its authority on the world stage. Along the way, it has taken painful measures. The Government allowed GM to take over Daewoo Motors in 2001, and Hyundai took over Kia in 1998.

For Malaysia, Proton Holdings Bhd, the national car manufacturer, has not seen daylight since the financial crisis in 1998. According to the latest sales figures, Proton sold 63,040 units between January and June this year, giving it an 18.9% market share of the total vehicle sales. Prior to 1998, its share was more than 40%.

To be fair, there are some positives from the existence of Proton. For instance, we have produced some competitive auto parts manufacturers who have diversified their customer base beyond Proton and spread their wings outside Malaysia. APM Automotive Holdings Bhd is just one of many such companies.

But beyond component manufacturers, what is the future of the national car companies? This includes Perusahaan Otomobil Kedua Sdn Bhd, or Perodua, which is strong at home but weak in exports.

In 1996, the late Tan Sri Yahya Ahmad, who used to own Proton through DRB-Hicom Bhd until his sudden death due to a helicopter crash in 1997, announced that the national car company would no longer require Government protection by the year 2000.

They had a plan to make the quantum leap, and the acquisition of the United Kingdom’s Lotus Group International Ltd followed to provide them with the technology.

But so far, we have not seen this leap onto the world stage. There are still no signs of our national car assembly plants hitting the economies of scale like what the South Koreans have managed to do.

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