A Tariff Bomb of 2 Tril. Won

The US car market accounted for 15 percent of the total sales of Hyundai Motor as of last year.
Hyundai Motor and Kia Motors would be hit by a tariff bomb of 2 trillion won if the US decides to imporse a 25 percent tariff on imported vehicles.

Hyundai Motor Co. and its smaller affiliate Kia Motors Corp. would each face up to 2 trillion won (US$1.78 billion) of extra burden when the United States decides to impose a 25 percent tariff on imported cars, a local brokerage said on July 26.

HI Investment & Securities Co. predicted that Hyundai Motor would have to pay 1.44 trillion won (US$1.27 billion) more in tariffs and Kia Motors 2.1 trillion won (US$1.85 billion). The estimates were based on the manufacturer's suggested retail prices (MSRP) of the models sold in the US market and a won-dollar exchange rate of 1,135 won.

Korea Investment & Securities Co. also said that Hyundai Motor and Kia Motors would face 2.24 trillion won (US$2 billion) and 2.45 trillion won (US$2.18 billion) of losses, respectively, when the US levies a 25 percent tariff. When the tariff rate decreases to 10 percent, Hyundai Motor will have to shoulder 1.09 trillion won (US$973.67 million) of extra burden and Kia Motors 1.09 trillion won (US$969.21 million).

The US accounted for 15 percent of the total sales of Hyundai Motor as of last year, almost the same as the domestic market, which accounts for 16 percent. For Kia Motors, the US accounted for 20 percent of the total sales last year, almost similar to the 19 percent taken up by the domestic market. Hyundai Motor and Kia Motors posted 4.57 trillion won (US$4.08 billion) and 660 billion won (US$589.02 million) in operating profits, respectively, last year. When the two companies are slapped with tariffs of up to 2 trillion won (US$1.78 billion), Hyundai Motor will see its operating profits halve and Kia Motors will turn to losses.

The problem is that such a tariff bomb focuses on sport utility vehicles that are popular in the US market. The Hyundai Tucson sold 114,700 units in the US last year. It has a price tag of US$22,550 (25.6 million won). With a 25 percent tariff, Hyundai will face US$646.8 million (734 billion won) of burden. The Kia Soul sold 115,700 units and the Sportage sold 72,800 units last year. The competitiveness of the two models will also rapidly drop.

This is why the two companies are forecast to increase production in the US in order to avoid duties. The ratio of Hyundai Motor cars produced in the US to its US sales decreased from 65 percent in 2015 to 47 percent this year, while that of Kia Motors fell from 41 percent to 31 percent. When the US puts more pressure on the two companies, they are expected to move their production lines for the Tucson and even the Kia Soul to the US.

In this case, however, political problems will occur in South Korea. The decision can cause strong resistance from the labor union and fuel public anger in the Gwangju region where the Soul and the Sportage are produced. The Gwangju City released a report at the National Assembly on July 16 claiming that 600 companies would go belly up, killing 32,000 jobs, when Kia Motors decreases output by 50 percent due to the US tariff imposition.

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