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Automobiles

By Carl Wright,2014-06-16 23:11
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Automobiles ...

Automobiles

    Over the past year there has been slow, but measurable progress in market access for imported automobiles. Nonetheless, the import market share of Korea‘s total automotive market is still only 1.28 %, and many long-term and

    significant barriers in the areas of consumer perception, taxation and tariffs, and standards remain to be resolved. In mutual recognition of the need to address and to resolve the many formidable market access barriers to imports of automobiles into Korea, the U.S. and Korean governments signed a Memorandum of Understanding in 1998. Implementation of the MOU through regular, government-to-government consultations over the past four years has led to the resolution of a number of standards issues and to some measurable improvement in what is, perhaps, the most complex, long-term issue

    negative consumer perceptions concerning imported vehicles.

    Progress in improving consumer perception is particularly difficult to quantify and painstakingly slow to realize. AMCHAM notes that in 2002, the Korean Government took some proactive measures to improve consumer perception by putting more imported cars on Korean roads. Specifically, the government facilitated the importation of 100 imported minivans for taxi services, and the National Police Agency procured 50 imported patrol cars for its fleet. AMCHAM requests that the Korean Government continue to take all pro-active measures possible to achieve a level of progress in consumer perception that can be demonstrated by true inroads in import market share, currently measured at only 1.28% of the total Korean market demand for

    passenger vehicles. Reduction or elimination of the current 8% duty on imported vehicles represents the single most important step that the Korean Government should take as soon as possible both to make imported vehicles more price competitive and to send a positive, encouraging message to Korean consumers to buy imported vehicles. During 2002, AMCHAM and KAMA jointly initiated regular meetings to discuss ways in which the two organizations may be able to cooperate to achieve progress in consumer perception, including future trade shows featuring both domestic and imported vehicles. AMCHAM believes that this new forum holds much promise as a means to supplement other government and industry efforts to improve consumer perception.

    AMCHAM notes that the Korean Government‘s strong efforts in 2002 resulted in the resolution of several major standards issues, including progress toward self-certification for passenger vehicle manufacturers, the re-definition of multi-purpose vehicles, and the acceptance of both U.S. and EU standards for side crash tests. Had this latter issue not been resolved favorably, many models of imported vehicles would have been effectively blocked from the market. Under the auspices of the highly effective standards experts working group, progress is being made on remaining standards issues, including new standards for brakes, fuel efficiency standards, the deterioration factor for gasoline evaporative and exhaust emissions, and diesel standards, among others. The resolution of all remaining standards barriers will be a significant step toward the Korean Government‘s full acceptance of internationally

    accepted standards and regulations. AMCHAM would like to thank the Korean Government for its continued cooperation in participating in these expert-level, joint industry/government meetings to grapple with and make progress on the many complex standards issues that continue to present market access barriers. At the same time, AMCHAM notes that new barriers in the form of standards continue to arise, making the business climate for imported automobiles unpredictable and fraught with potential hazards. As part of the MOU, the Korean government agreed to re-structure its system for taxation of motor vehicles, which is based on engine displacement size and inordinately places a high tax burden on cars with large engines, representing the vast majority of imported vehicles. In 2002, the Korean government temporarily reduced the Special Consumption Tax (SCT) on motor vehicles, the amount of which is based on engine displacement size. As a result, market demand for imported vehicles and total market demand increased in direct response to the temporary reduction in this tax, which significantly reduced the overall cost of a car purchase for consumers. The Ministry has lifted this reduction and, subject to approval by the National Assembly, plans to replace it, effective in 2004, with a two-tiered tax system, still based on engine displacement size. The AMCHAM strongly believes that additional, fundamental changes to the system of vehicle taxation are still needed in order to facilitate long-term demand for imported vehicles. Another example of the unpredictability of the Korean market environment arose this year when the Ministry of Finance and Economy began to consider the re-classification of an imported truck as a passenger vehicle in order to apply SCT, even though the Ministry of Construction and Transportation had classified the vehicle as a truck. As a result of bilateral consultations, the Korean Government made a decision to retain the classification of the vehicle as a truck, thus, keeping the market open for the vehicle and the price affordable for Korean commercial buyers. AMCHAM is pleased that this issue was resolved quickly and that the Korean Government has maintained consistency in its classifications for licensing and tax purposes. In regard to market access for U.S.-made motorcycles, the highway ban for motorcycles remains as a major impediment for any real market penetration for heavy, U.S.-made motorcycles, which are specifically designed for safe highway use. In the short-term, the Korean Government‘s acceptance of ECE

    regulations for pass-by noise would remove market access barriers for several U.S. models. Moreover, the absence of motorcycle owner titles in Korea is also an impediment to long-term market penetration. AMCHAM strongly believes that the progress to date under the framework of the 1998 Automotive MOU has proven beneficial to Korean consumers and, in the long term, will benefit the Korean economy and Korean manufacturers. Therefore, AMCHAM encourages the continued implementation of this very important government-to-government agreement and cooperation among all industry, consumer and government stakeholdersU.S., European, and

    Korean--in Korea‘s automotive market to take all necessary steps to remove

    remaining barriers to the Korean market as soon as possible and to foster a competitive environment which not only benefits Korean consumers by

offering high quality vehicles for overall value but also challenges Korean and

    foreign automotive manufacturers to achieve the highest possible quality and

    technological innovations.

(All figures below need to be updated.)

    1. IN 2002, THE AUTOMOTIVE TRADE IMBALANCE WIDENED WITH

    KOREAN IMPORTS TO THE U.S. REACHING A RECORD

    570,976(YTD Nov) VEHICLES, WHILE IMPORTS FROM THE U.S.

    TO KOREA AMOUNTED TO ONLY 1,373(YTD Nov) VEHICLES,

    AND TOTAL IMPORTS, 7,077(YTD Nov) VEHICLES.

    In 2002, the imbalance of trade in automobiles continued to widen. By the

    end of the year, while sales of Korean-made automobiles in the U.S. import

    market reached a record of 570,976(YTD Nov) vehicles, the number of foreign automobiles sold in Korea reached only 7,077(YTD Nov) units,

    representing only 0.71% of the Korean market demand for passenger vehicles

    in 2002. Although the number of foreign vehicles sold in the Korean market in

    2002 nearly doubled from a total of only 4,414 units sold in 2000, import

    market share in units actually only increased from 0.41% in 2000 to 0.71 % in 2001(YTD Nov). While the share of U.S. nameplates represented only

    1,373 units (through 11/01) or only 0.13% of the market, Korean exports to the U.S. in 2001(YTD Nov) exceeded 570,976 units!

    Korean Imports/Exports of Automobiles

    1,500,000

    1,000,000

    500,000

    0

    2000 export2000 Export (J-

    407,964450,681USA

    638,032458,409Europe

    1,045,996909,090Total

    Imports to Korea amounted to 7,077(YTD Nov) vehicles, only 0.71% of

    the total market demand.

    Import Markets Compared

    30

    20

    %

    10

    0

    Import Market size

    0.3Korea

    5Japan

    30USA

    25EU

2. THE KOREAN GOVERNMENT’S CRITICAL ROLE IN INFLUENCING

    CONSUMER PERCEPTION

    In 2002, there continued to be gradual, but steady improvement in Koreans‘

    perceptions of imported vehicles. AMCHAM notes that Koreans‘ attitudes

    toward the value of foreign investment and two-way trade have evolved

    positively under the leadership of President Kim Dao Jung. Much of the

    improvement in consumer perception of imported vehicles can be attributed to

    President Kim‘s occasional public statements, which encourage Koreans to

    purchase imported cars and the tax authority‘s statements that audits will not be conducted on the basis of foreign car ownership. However, consumers‘

    fears of tax audits will take many years to overcome. Moreover, the media

    occasionally publishes negative reports and editorials that discourage

    consumers from purchasing luxury goods, including imported cars, in an effort

    to revive policies of previous administrations. Korean Automotive

    Manufacturers‘ Association (KAMA), as well, occasionally still makes negative

    statements about importers in the press and in trade publications. Although

    over the past year these types of statements and articles are far fewer in

    number than before, they, nonetheless, serve to reinforce lingering negative

    consumer perceptions.

    AMCHAM notes the very positive results of the Korean government‘s efforts to work directly with the U.S. industry to identify and create opportunities for

    sales to government entities and fleet sales to private sector transportation

    companies as part of the Korean government‘s commitment under the 1998

    Automotive MOU to work actively to improve Korean consumers‘ perceptions.

    As a result, in 2002, the Korean government facilitated the import of 100

    minivans for airport taxi services, and the National Police Agency imported 50

    vehicles for its fleet with plans for an additional 50 vehicles. AMCHAM

    encourages the Korean government to continue to work to find additional

opportunities as well as to take other proactive steps to bolster positive

    consumer perception of imported vehicles. Although these steps help, they

    alone are not enough to tackle the very complex, persistent consumer

    perception issue.

    Presently, purchases of imported vehicles are still concentrated among the

    top one percent of wage earners who purchase ―marquee‖ brands. These

    consumers often feel confined to driving their imported cars on weekends and

    for private use only for private use for fear of societal disapproval. In 2000,

    foreign importers and manufacturers of foreign-made vehicles conducted a

    survey of Korean consumer perceptions regarding the purchase of foreign-

    made vehicles. The results of this survey were quite revealing as to why

    foreign car sales do so poorly in Korea. Although research indicates that

    consumers prefer imported vehicles, social stigma is still the number one

    reason why Korean consumers do not purchase foreign cars. This social

    stigma attached to imported vehicle ownership is captured in what Koreans

    term ―other people‘s eyes‖, and is but one barrier to consideration. (The

    factors that drive consumers to make a choice counter to their preferences

    are referred to as barriers to consideration‖.)

    Barriers to consideration that are often raised in other markets, such as price,

    quality and after sales service, are not even raised in Korea. Korean

    consumers‘ barriers to consideration stem from a variety of sources, including

    a basic lack of understanding as to the benefits of globalization, fears of

    appearing unpatriotic, ongoing fears of possible tax audits, criticism from

    friends and family for excessive consumption, as well as criticism from

    employers. Because of the strong influence of traditional Confucian

    hierarchical social norms, imported vehicles are not even allowed on many

    Korean companies' premises. Even some multinationals firms operating in Korea have non-import car policies in deference to Korea‘s strong anti-import

    sentiments. Many, if not all, of these barriers to consideration have been

    created and reinforced by previous Korean government administrations.

    U.S. manufacturers recognize that it is their responsibility to market and sell

    vehicles that Korean consumers want. In this respect, they have spent

    tremendous amounts of money on adapting vehicles to the Korean market, on

    implementing nation-wide service programs to ensure after sales-service, and

    on marketing, advertising, and sales programs. Overall, U.S. manufacturers

    invest more per vehicle on marketing in Korea than in any other market in the

    world. U.S. manufacturers have participated in both the 2000 Import Motor

    Show and the 2001 Posen Motor Show, both of which drew large audiences

    of interested Korean consumers. Plans are underway to participate in a joint

    motor show in Inch eon with KAMA in 2003. Despite these efforts, the import

    market share in Korea in 2002 was still only 1.28 %, a figure that simply does

    not reflect the manufacturers‘ efforts and investments in marketing. While

    AMCHAM appreciates the Korean Government‘s recent efforts to help

    improve consumer perceptions in the market, more efforts are needed to

    hasten the process and make real, measurable progress. For example, the

    Korean Government has not yet taken full advantage of publicizing nationwide

    the study entitled, ―The Effect of Imports on the Korean Motor Vehicle

Industry‖, published in January 2002, by the Korea Institute for International

    Economic Policy (KIEP). AMCHAM believes that the Korean Government should take proactive steps to publicize consistently and throughout Korea the KIEP study as well as Kayla‘s report on the role and impact of imports in

    Korea, an effort that would help considerably to improve consumer perception. AMCHAM would like to underscore its belief that the single most important action the Korean government should take as soon as possible to improve perception is the elimination or reduction to 2.5% of the current 8% tariff on imported vehicles. No other action will have the positive, multiple, and immediate effect of reducing the price disadvantage for foreign vehicles in comparison to domestic vehicles, while also sending an unequivocally positive message to all Koreans to buy imported cars.

    AMCHAM firmly believes that the leadership of all nations should work together to ensure that consumers have accurate perceptions regarding the participation and role of foreign manufactured automobiles in their markets. In reality, the successful manufacture of vehicles is a global business. Two significant developments in 2002 vividly illustrate this point. Hyundai announced its plans to gain a strong foothold in the U.S. market through an evergreen plant in Alabama, and GM bought Daewoo Motors, making a major investment in and commitment to the Korean market. Both firms plan to buy auto parts from the markets in which they have invested. Moreover, most manufactured vehicles contain significant volumes of imported parts and components as manufacturers continually seek the best price and quality for components. U.S. manufactured vehicles contain U.S., European, Japanese, Korean and other nations' parts and components. U.S. manufacturers also purchase over U.S. $500 million worth of Korean components from Korea per annum. Korean manufacturers also outsource the production of many parts and components to foreign companies, and, in fact, many Korean vehicles are built under foreign license agreements. The automobile industry is clearly international, and no nation can afford to attempt to protect its domestic manufacturers. Hyundai‘s luxury model, the Equips, is an interesting case in point. The Equips is competitive with imports in terms of price, engine displacement and size. In bringing the Equips to market, Hyundai has entered into licensing and technology sharing agreements with its Japanese partners. This demonstrates the global nature of the industry as well as the demand for high-end products in Korea. Equips sales (13,810 units YTD Oct) in 2002 registered 5.7 times larger than the total number of U.S. vehicle nameplates in Korea.

Recommendations:

    AMCHAM believes there are many actions, including the specific actions listed below that should be taken to open the market further for imported vehicles. Among those actions are the following:

    ? Eliminate entirely or, at minimum, reduce the tariff on imported

    vehicles to 2.5% to send a clear message of encouragement to

    Korean consumers to buy imported vehicles.

    ? Promote and distribute to the fullest extent possible the results of

    the KIEP study and the KAIDA study on the role and impact of

    imports in the Korean economy.

    ? Continue to issue regular public statements supporting the concept

    of the neutrality of imports and their positive role in Korea's

    economy.

    ? Revise the product classification for automobiles from ―consumer or

    luxury goods‖ to ―durable goods‖ for the purpose of the ROKG ‗s

    periodic announcements on import trends.

    ? Promote actively the concept of consumer choice, focusing on

    quality, safety, price and reliability.

    ? Continue to publicize the benefits to the Korean economy of a

    healthy foreign automotive presence in Korea, citing the benefits to

    domestic manufacturers, consumers and the economy in general.

    ? Continue to publicize information that will assure consumers that

    the purchase of a foreign automobile will not trigger tax audits.

    ? Encourage the National Tax Office and other ROKG agencies to

    allow imported vehicles to compete with domestic vehicles for

    official use.

    ? Support other KAIDA initiatives to educate consumers about the

    globalization of the automotive industry as well as educate

    government employees.

    ? Ensure that imported vehicles are not subject to punitive taxes or

    import clearance procedures.

    ? Encourage KAMA to work closely with AMCHAM and KAIDA to

    improve consumer perception, including positive media coverage

    and collaboration with KAIDA in order to have a successful joint

    motor show in the future.

    ? Restructure the import tax system on vehicles so consumers are

    not paying high tariff rates on freight and insurance in addition to the

    ex-factory price of the vehicle.

3. KOREAN STANDARDS CONTINUE TO POSE MARKET ACCESS

    BARRIERS FOR IMPORTED VEHICLES.

    Over the past year, much progress has been made in resolving standards

    issues that have posed major threats to market access for imported vehicles.

    Notably, the Ministry of Construction and Transportation (MOCT) eliminated a

    serious threat to market access for U.S.-made vehicles by permitting the

    application of FMVSS (U.S.) as well as EU standards for side-crash tests.

    MOCT is working with the industry to resolve similar, new issues that have

arisen for standards for brakes and steering. An additional new issue is the

    Ministry of Environment‘s plans to introduce an Onboard Diagnosis (OBD) II

    standard for on-board measurement of emissions, effective in 2004. The

    Korean standard presents a market access barrier for some models of both

    diesel and gasoline vehicles. Other long-standing standards issues which

    continue to be addressed in the standards experts working group include the

    requirement for both front and rear tow hooks on passenger vehicles,

    restrictions on frequencies for remote keyless entry devices, steering systems,

    tinted glass, bumper standards, self-certification, etc.

Notwithstanding the impressive progress that has been achieved through the

    standards experts working group, it is troublesome that new standards issues

    continue to emerge, making the business climate for the importation of

    vehicles highly unpredictable. Just as AMCHAM urges the Korean

    Government to resolve standards issues that represent market access

    barriers for imported vehicles, it also urges full, equitable enforcement of

    existing standards and regulations for both Korean-made and imported

    vehicles to ensure a level playing field for all manufacturers competing in the

    Korean market.

    In addition, the Korean Government should continue to take all possible

    measures to reduce documentary requirements for the importation of vehicles

    and to make further progress in homologation. These steps will result in

    improved competitiveness in the market and reduced prices for consumers,

    the ultimate winners of deregulation. The objective should be to permit

    importers to roll the vehicle out of the factory, put the vehicle on a ship and roll

    it into a showroom just as Korean manufacturers are able to do in the U.S.

    One major step toward this goal is the planned implementation of a system for

    self-certification. AMCHAM urges the Korean government to take all steps

    necessary in a timely manner to implement self-certification in a

    comprehensive manner that takes into account the concerns and needs of

    manufacturers of imported vehicles.

Recommendations:

    ? Allow foreign manufacturers to comply with either FMVSS (U.S) or

    EEC (EU) standards, as needed, for steering, tinted glass, tail pipes,

    and all other safety as well as emission regulations.

    ? Implement diesel emissions regulations, which are in harmony with

    globally- recognized standards, such as FMVSS and EU, along with

    globally accepted diesel fuel quality standards.

    ? Continue to simplify and to reduce the documentary requirements

    needed to import vehicles in order to reduce time and expense for

    importers and, ultimately, prices for consumers.

    ? Ensure that Korean standards are enforced equitably for both

    imported and domestically manufactured vehicles.

    ? Accept either the US or the EEC OBD II standard and resolve the

    pending issue of DF on gasoline and diesel.

    ? Take measures in a timely manner to harmonize with international

    standards per the WTO harmonization acts. 4. ENGINE DISPLACEMENT TAX STRUCTURE IS MAJOR

    DISINCENTIVE NOT ONLY TO PURCHASE IMPORTED VEHICLES,

    BUT ALSO IS AN IMPEDIMENT TO PURCHASES OF ALL MOTOR

    VEHICLES.

    Of the 23 OECD countries surveyed, only Korea imposes multiple taxes

    based on engine displacement. Although a few countries still use engine

    displacement as a basis, only Korea has five separate taxes based on

    displacement. Korea‘s progressive vehicle tax structure based on engine

    displacement does not reflect the reality of the present-day Korean economy

    and the great technological advances in fuel efficiency and pollution control of

    the global automotive industry. Perhaps originally designed to discourage

    excessive fuel consumption, excessive pollution, and excessive consumption

    of so-called luxury goods, this outdated tax structure no longer addresses

    these objectives. In early 1999, the Korean Government took actions to

    reduce the tax based upon engine displacement. In late 2001 and for many

    months in 2002, the Korean Government reduced overall the amount of SCT

    charged, thus, reducing the price of vehicles and stimulating overall consumer

    demand. Although this reduction was terminated in August 2002, the Korean

    Government announced that it intends to reduce the percentage of Special

    Consumption Tax on vehicles and reduce the engine displacement categories

    on which it is based from three to two, effective in 2004. Although AMCHAM

    appreciates this effort, the fact remains that the engine displacement tax

    structure places foreign manufactured vehicles, all of which are 2000 cc or

    larger, at a distinct disadvantage vis-à-vis taxes on vehicles that comprise the

    majority of the Korean market. The following table illustrates this disadvantage

    on comparable vehicles:

Price Disadvantage: Korean vs. Foreign 2.0L Four Door Sedans

     Korea US UK

    Domestic $14,065 $18,008

    $25,042

    Foreign $17,636 $19,170

    $28,946

    Tax & Tariff Disadvantage 20% 6%

    13%

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