The operating margin of Kia Motors Corp. stood at 2.1 percent last year. The figure was less than half of its major competitors in the United States and Japan. To make matters worse, the recent changes in the implementation of the Minimum Wage Act requires the company to increase the wages of 1,900 employees who earn below the minimum wage as well as raise the wages of its entire employees who are paid under a salary step system.
The estimated additional burden due to the change in the minimum wage regulations amounts to hundreds of billions of won a year. If its cars sell well, the additional burden would not cause a big problem. Yet the Korean auto industry is in crisis, making it difficult for Kia Motors to shoulder such a burden. This is why the company is appealing to the labor union to end the minimum wage issue through bonuses paid in monthly installment, regardless of the outcome of an upcoming legal battle related to the ordinary wage.
Hyundai Motor Co. is also trapped in the minimum wage controversy. The company is seeking to provide bonuses in monthly installment but the labor union insists that bonuses be included in the ordinary wage. As Hyundai Motor is also suffering from a poor performance just like Kia Motors and is on the verge of becoming a law-breaking firm, the management and labor union can no longer remain apart on the issue. Therefore Hyundai Motor is highly likely to come up with measures that would encourage the labor union to make a major decision on the minimum wage issue like Kia Motors.
Kia Motors’ proposal to include bonuses in the ordinary wage on condition that the labor union refrains from taking the ordinary wage issue to court is what the labor union has wanted. It decided to accommodate the union’s demand because it cannot afford to be caught up in the minimum wage issue.
The average annual salary of Hyundai Motor and Kia Motors is a little over 90 million won (US$79,964). The ratio of labor costs to sales of five domestic automakers reaches 12.3 percent, which is over two times higher than 5.85 percent of Toyota. When a company sees its sales fall short of its expectations, it increases marketing expenses and sales subsidies, which eat into its operating profits. If operating margin falls, it cannot invest enough money in research and development (R&D) to improve the quality of its products. Hyundai and Kia cannot afford to bear the extra burden of hundreds of billions of won stemming from the minimum wage regulations when they do not earn much money.
Kia Motors has not enough time either. If the company does not raise the wages for its employees, it can face a series of complaints and legal actions in the second half of this year when the grace period for the implementation of the revised enforcement ordinance to the Minimum Wage Act ends. As time goes by, the labor union’s bargaining power will increase. The labor union does not have to actively negotiate with the management unless the management comes up with an attractive proposition since the wages will go up even when it stands still.
The chance of Kia Motors winning the ordinary wage suit is also not guaranteed even if it drags out the litigation. The company has the ruling for the second trial of the suit coming up this month. Kia Motors' labor union filed a wage lawsuit in 2014 and the court decided in favor of the plaintiff in 2017. The Seoul Central District Court partially upheld the demand by workers by ruling that bonuses and lunch allowances paid to workers at Kia Motors should be seen as part of the ordinary wage.
Under the revised enforcement decree to the Minimum Wages Act, statutory paid weekly holidays are included in the work hours used for determining the minimum wage. Production employees actually work 40 hours per week, which is eight hours per day and five days a week (174 hours per month). But the work hours used for determining the minimum wage include the paid weekly holidays (56 hours per month). This has the effect of reducing the extra burden of companies stemming from the change in minimum wage regulations.
An official from the auto industry said, “At Kia Motors, Saturdays and Sundays are regarded as paid holidays under an agreement between the management and the labor union. The company’s burden has marginally decreased because the working hours used as the denominator when calculating ordinary hourly wages have increased.”
The ball is in labor union’s court now. If the labor union refuses bonuses in monthly installment from the management’s proposal and only insist on the ordinary wage conversion, the management cannot help but to show anxiety. An official from the auto industry said, “The labor union would think that it can just fight back to the ropesif there are not any satisfactory suggestions. However, we can still look on the bright side of how the negotiation turns out because the current labor leaders can highlight their ability to union members by addressing ordinary wage problems within the term of office if the negotiation goes well.”
In addition, all eyes are on whether Kia Motors’ change of stance will affect other automakers. The Korea Automobile Manufacturers Association (KAMA) said that five domestic automakers are expected to bear the cost of 700 billion won (US$621.95 million) due to the shortfall of minimum wages. So, GM Korea Co., Ssangyong Motor Co. and Renault Samsung Motors Co are also paying close attention to Hyundai Motor Group’s discussion over the minimum wages.