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Korean Automobile Industry at a Critical Juncture
Whirlwind of Ordinary Wage
Korean Automobile Industry at a Critical Juncture
  • By Jung Min-hee
  • August 8, 2017, 02:00
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The result of the first trial regarding the ordinary wage of Kia Motors workers is predicted to have a significant impact on the Korean automobile industry as a whole.
The result of the first trial regarding the ordinary wage of Kia Motors workers is predicted to have a significant impact on the Korean automobile industry as a whole.

 

The result of the first trial regarding the ordinary wage of Kia Motors workers, which has continued for almost six years, is predicted to have a significant impact on the automobile industry of South Korea as a whole. The business community is expressing concerns about the possibility of an additional cost of up to 52 trillion won (US$46 billion).

The litigation started in 2011 as 27,459 Kia Motors union members claimed that their bonus should be regarded as an ordinary wage. At that time, they charged an amount of 686.9 billion won (US$618 million). In 2014, 13 members filed a representative suit, too. The result of the representative suit is applied to each employee of the automaker. According to industry insiders, the employers of the company have to pay approximately three trillion won (US$2.7 billion) if the union members win the case. Depending on the result of the litigation, the amount can reach five trillion won.

If the union members win the case, each of Kia Motors employees can be given up to 100 million won (US$900,000). Their annual salaries increase, by more than 10 million won (US$90,000) per employee as the case may be, once their bonus is included in their ordinary wage. Then, the employers have to pay 300 billion won (US$270 million) to 400 billion won (US$360 million) each year in additional labor cost, not to mention the five trillion won (US$4.5 billion) or so that depends on the result of the litigation.

The result of the lawsuit is likely to lay a burden on every subsidiary of the Hyundai Motor Group. It is Hyundai Motor Company that is likely to take the biggest hit. The two automakers’ slump cannot but lead to a crisis affecting each of the subsidiaries as they are currently in a vertically integrated structure. This implies the entire automobile industry can be affected.

Hyundai Motor Company’s and Kia Motors’ business conditions are worse than ever this year. In the first quarter, the group’s sales in China halved amid the diplomatic tensions between South Korea and China that resulted from THAAD deployment in the former. Besides, its global sales showed a decline of 9% and Kia Motors’ operating profit fell 44% year on year to a seven-year low of 787 billion won during the same period. Kia Motors’ operating profit-to-sales ratio dropped from 7.5% to 3% between 2012 and that period.

The result of the litigation is expected to affect similar lawsuits that are underway at hundreds of South Korean companies. This is because the litigation between the Kia Motors employers and employees is the largest in size among them. If the court rules in favor of the latter, union members at the multiple large corporations including Hyundai Motor Company are likely to file additional suits. Then, employers may have to bear an additional cost of 50 trillion won (US$45 billion). According to the Korea Employers Federation, the cost amounts to 38.55 trillion won (US$34.6 billion) and corporations’ burden increases by 8.86 trillion won (US$7.9 billion) a year once bonuses for 2013 are included in ordinary wages.

Under the circumstances, employers are asking the court to apply the principle of good faith in a comprehensive way. It is a legal principle that can limit their claim for an ordinary wage expanded in scope and it can be applied when acceptance of the claim is predicted to lead to significant management difficulties. In October 2015, the court ruled that GM Korea did not have to pay additional allowances to workers with its current net loss at 869 billion won (US$782 million) and ruled the same with regard to Seoul Express with its workers charging a wage exceeding 100% of the company’s current net profit for the previous year.