The Korean auto industry is in shock from the scheduled implementation of a new minimum wage system. If weekly holidays are included as working hours when calculating the minimum wage, the burden of wage increases on five South Korean automakers is estimated at 700 billion won (US$626.68 million) a year.
The Korea Automobile Manufacturers Association (KAMA) and the Korea Auto Industries Cooperation Association (KAICA) filed a petition with the government on Dec. 27, urging it to reconsider the revision of the enforcement ordinance to the Minimum Wage Act.
If the government’s revised enforcement ordinance comes into effect, five domestic automakers, including Hyundai Motor Co., Kia Motors Corp. and SsangYong Motor Co., will face a heavy burden of wage costs. The annual salary of an employee at an automaker who receive a monthly average of 5.69 million won (US$5,094), including 1.85 million won (US$1,656) of basic pay, 1.56 million won (US$1,399) of regular bonus and other performance-related pay, stands at 68.3 million won (US$61,146). When calculating the hourly wage for the figure based on the current minimum wage standard time which is 174 hours a week, it comes out to 8,908 won (US$7.97). It is 550 won (US$0.49) higher than the next year's minimum hourly wage of 8,350 won (US$7.48).
However, the minimum wage of the employee would fall to 7,655 won (US$6.85), which is in violation of the Minimum Wage Act, if the minimum wage standard time increases from 174 hours to 209 hours after the revised enforcement ordinance of the Minimum Wage Act takes effect. As a result, the company will have to raise the hourly wage by 695 won (US$0.62), or 7.8 percent, starting from next year. The KAMA believes that it will apply to nearly 9,000 employees at five domestic automakers alone.
This is not the end of the matter. When the company raises the hourly wage for employees who receives a minimum wage or lower, it has to raise the wage for other employees who receive higher wages than them. In this case, five South Korean auto producers will see their additional wage costs grow by 700 billion won (US$626.68 million) and 6 percent from 11.63 trillion won (US$10.41 billion) of last year’s total wage costs, according to the KAICA.
The average wage per employee at domestic automakers was 90.72 million won (US$81,218) as of the end of last year. However, the figure will increase to 96 million won (US$85,944) when the revised enforcement ordinance comes into effect. The figure is 130 million won (US$11,638) higher than 83.9 million won (US$75,112) of Japan’s Toyota Motor Corp. and 83.03 million won (US$74,333) of Germany’s Volkswagen Group.
If the revised enforcement ordinance is expanded to auto part manufacturers which are suffering from financial problems, the worst situation of shutting down plants due to the burden of wage costs can occur. Car part companies, which have a lower wage level, will face a higher burden of wage increases than automakers. The number of domestic car component producers far surpasses 10,000, including 200 big businesses and small and mid-size firms. This is because some say that the burden of additional wage costs on the auto industry are highly likely to exceed trillions.
The government recently announced plans to provide 3.5 trillion won (US$3.13 billion) worth of financial support to car part producers which are struggling with the stagnation of the auto industry. Car sales, which had been flat, have also shown signs of rally from the fourth quarter this year. In fact, the monthly average shipments of Hyundai Motor in October and November this year stood at 101,180 units, up 30.1 percent from 77,785 of the average until September. Kia Motors also showed a 23.4 percent increase over the same period.
However, some points out that the government’s support efforts will come to nothing when the revised enforcement ordinance for the Minimum Wage Act applies to the field. An official from an auto component producer said, “Even if we receive 10 billion won (US$8.95 million) of new funds, more than 10 percent will be used for wage costs.”