Potential Threat
Korean automakers are feeling nervous, as the Korean government is planning to declare the conclusion of the Korea-China FTA at the APEC meeting held in Beijing next month.
What they are worried about is the import of BMW, Mercedes Benz, and Toyota vehicles being manufactured in China. Once the high-quality yet inexpensive cars are imported into Korea, there could be a fundamental change in market dynamics. This is why many industry experts are calling for the government to make a prudent decision on the tariff cut before the conclusion of the free trade deal. At present, Korea imposes an 8 percent tariff on finished vehicles. After signing the FTA, the tariff is eliminated over a few years.
As far as the auto industry is concerned, the Korea-China FTA is said to carry more risks than benefits. “In view of the transport and labor costs, global car makers are highly likely to import their vehicles to Korea from China after the signing of the FTA,” said a national policy research institute. According to shipping industry experts, the cost of transportation between Korea and China is approximately 40 percent cheaper than that between Korea and Europe.
BMW is currently manufacturing its 2 Series and 5 Series in China. Mercedes Benz is manufacturing the C Class, E Class, and GLK in China, and Volkswagen is making the Tiguan, very popular with Korean customers, there. Most of the European and Japanese cars currently available in Korea are manufactured in their headquarters. In this context, the Korea-China FTA is a great boon for their efforts of labor cost reductions. “The average labor cost in China is just around one-tenth of that in Korea, and those manufactured in China are estimated to be at least 10 percent cheaper than the vehicles manufactured in Europe,” said an industry source. Meanwhile, most of the Korean cars produced in China are sold in the Chinese market.
In the meantime, these foreign car makers’ official stance is that the Korea-China FTA has nothing to do with import of cars manufactured in China. “We are now having a hard time meeting the local demand in China, and China and Korea are separate markets,” a BMW spokesperson explained.
The Chinese car market is indeed growing at an explosive pace these days. A total of 21.98 million cars were sold in the market in 2013 alone, and the size more than doubled in five years. Global leading automakers are competing more and more fiercely there. According to HI Investment & Securities, GM is going to increase its local production volume from three million to five million a year via building four more plants by 2015. Volkswagen, Toyota, Ford, and Nissan are planning to increase theirs by 0.6 million to 1.2 million each, too. The companies are saying that their cars manufactured in China will be supplied to the Chinese market. However, the opposite possibility cannot be ruled out, either.
After the KORUS FTA took effect two years ago, the tariff on vehicles manufactured in the U.S. was halved to 4 percent. The percentage is 2.5 percent for now, and will become 0 percent in January 2016. The amount of imports of such cars increased from 13,669 to 28,361 between 2011 and 2012, and then to 31,654 last year. BMW, Nissan, and Toyota are currently bringing their X Series, Altima, QS60, Camry, and Sienna from the United States. The same can happen with the Korea-China FTA. In fact, not a few buses manufactured in China are already being imported into Korea.