Due to High Labor costs, Low Productivity
Ssangyong Motors went into red last year, which shows symbolicaly Korean automakers' situation.
In 2016, Ssangyong Motors’ inventory period dropped to 20 days, six days down from a year before. Its domestic sales, which were only 70,000 units in 2014, exceeded 100,000 units, and its exports also jumped more than 16% to 52,200 units year on year. Inventories also fell from 260 billion won (US$234 million) to 200 billion won (US$180 million) in the same period as its cars sold well. However, as exports to emerging markets such as Kazakhstan, which was a major export market of Ssangyong Motors slipped last year, inventories again swelled to 260 billion won. In order to decrease the accumulated inventories, sales and administrative and labor costs spiked, forcing the automaker to chalk up a deficit again.
Hyundai and Kia are in difficult situations, too. Their sales in China, their largest market, plummeted more than 40% due to China retaliation for South Korea’s deployment of the THAAD anti-missile system last year. Sluggish global market sales extended Hyundai's and Kia’s inventory periods from 30 days to 58 days in 2014 and from 46 days to 87 days, respectively. Hyundai Motor’s inventories also exceeded 11 trillion won (US$9.9 billion) and those of Kia Motors were close to 10 trillion won(US$ 9 billion).
Moreover, their sales slumps in the US market are rocking even production corporations in Korea. In the case of Hyundai Motor's plants in Korea, the inventory period increased from 18 days in 2014 to 28 days last year. At Kia Motors, its inventory period rose from 15 days to 24 days during the same period. This is because overseas production increased and sales decreased, but domestic production did not respond flexibly. In 2014, Hyundai's domestic production fell from 1.78 million units to 1.65 million units, down 220,000 units, and Kia’s from 1.71 million units to 1.25 million units, down 190,000 units. In the same period, Hyundai Motor suffered a decline of 230,000 units in exports and Kia Motors’s exports fell by 270,000 units. However, Hyundai and Kia failed to reduce production by as much as the declines in exports.
In the meantime, Korean automakers have been put into a vicious cycle of “a drop in sales, a maintenance of production volume, a rise in inventories, a spike in labor cost and sales and administrative expenses and finally a drop in profit margins.” Although sales and production decreased at the same time due to sluggish sales, wages rise due to annual negotiations with the labor unions. According to the Korea Automobile Manufacturers Association, in 2016, the proportion of labor costs to sales of five Korean automakers was 12.2% which towered over Japanese Toyota (7.8%) and Germany's Volkswagen (9.5%). On the other hand, productivity is the direct opposite. The production time for one car is 26.8 hours at Hyundai Motor's Korean plants in 2016. The time is longer than Hyundai's Czech factory (21 hours), Honda Canada in Alliston (22.7 hours) and Ford Factory in Cologne, Germany (16.7 hours).
Some experts say that when high cost problems of the Korean automobile industry deteriorate, the automobile industrial base can be collapsed. It is advisable to check the case of the Renault’s Valladolid Plant in Spain where labor and management agree to cut costs and boost productivity to world-class levels in the wake of a crisis. Lee Hwang-koo, a researcher at the Korea Institute for Industrial Economics and Trade, pointed out that Korean automakers will be forced to lose competition and go out of business without addressing high wages compared to selling prices and increasing future investment that small than that of competitors."