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Will Ordinary Wage Issue Accelerate Exodus of Automakers from Korea?
Ordinary Wage Timebomb
Will Ordinary Wage Issue Accelerate Exodus of Automakers from Korea?
  • By matthew
  • December 19, 2013, 12:28
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The Supreme Court ruled on December 18 2013 that the regular bonus is included in the ordinary wage, which is expected to have great repercussions in the auto industry.
The Supreme Court ruled on December 18 2013 that the regular bonus is included in the ordinary wage, which is expected to have great repercussions in the auto industry.

 

The Supreme Court ruled that a regular bonus is considered to be ordinary wages, but money for employee welfare such as vacation bonuses are not, because these are not considered as money paid for labor. The court added that overtime and severance pay cannot be claimed later when an employee and his or her company agree with each other to exclude the regular bonus from the ordinary wage.

On December 18, the Supreme Court referred to two cases between KB Autotech and its 296 employees back to the Daejeon High Court. The appeals for retirement allowances and wage payments were filed by the latter against the auto parts manufacturer. The plaintiffs won the original trial. 

The ruling implies that the local automobile industry cannot avoid a hit with regards to the ordinary wage issue. In particular, GM Korea and KB Autotech are likely to go through at least some losses in the near future, as they have lawsuits raised by labor unions and employees that are about to be handled in the Supreme Court. 

Under the circumstances, the possibility of production cut by foreign automakers in Korea is rising. Their potential exodus is likely to be accelerated down the road, given the current situation in which the manufacturing facilities in Korea have been characterized by high cost for years. For example, after the labor union of GM Korea won its first and second trials on ordinary wages, the company had to remit 814 billion won (US$769 million) of contingent labor costs in advance, which resulted in 340.3 billion won (US$321 million) in operating losses last year in spite of the record sales.
 
GM Korea is estimating that it will have an additional burden of 1.2 trillion won (US$1.1 billion) for the past three years, due to the Supreme Court ruling that the regular bonus be included in the ordinary wage. The amount is estimated to be over 300 billion won (US$283 million) in the first year, given that 16,000 employees are working for it now. In order to mitigate the burden, the company has to prove that it is a factor causing significant difficulties in business. 

GM recently decided to shut down its Chevrolet business in Europe, causing the export volume of GM Korea to be cut by 180,000 units a year. Further production cuts may follow if the labor cost burden is added to the situation. In fact, GM Chairman and CEO Dan Akerson said back in May, during his meeting with President Park Geun-hye, that he can invest in Korea only after the ordinary wage issue is properly dealt with. The automaker is planning to build four more plants in China by 2015, with a combined annual capacity of 500,000 cars, to take the place of GM Korea’s manufacturing facilities from 2016, when GM Korea’s exports to Europe have stopped.

Renault Samsung Motors is facing a similar challenge, that is, ordinary wage lawsuits of its own. “The wage level is much higher in Korea than in other countries,” said Renault Group Vice Chairman Jerome Stoll during his recent visit to Korea, adding, “Then, we have no option but to assign more cars to more competitive plants out of Korea.”

The story is not that different for Ssangyong Motors, whose largest shareholder is the Mahindra Group of India. Although the company has no ordinary wage lawsuits going on, the shareholder is likely to feel greater burdens with time, because overtime pay can be increased.