South Korea Autos Report Q1 2013

Data throughout 2012 showed that sales of South Korea's five domestic brands were subdued, thereby dragging down production. Despite healthy overseas demand, we forecasted that total sales would drop over 8% in 2012, with 1.35mn units shifted. This prompted BMI to revise sales and production forecasts for the year downward in our last quarterly report. On the upside, our export projections improved,
although we stated that demand in Europe would remain the biggest threat to our outlook, and that the forecast for 9.5% growth in exports would not be enough to prevent a contraction in output. Things have not changed greatly in Q412.

This quarter we are maintaining our 2012 vehicle sales forecasts of 1.35mn units. BMI forecasts 2013 vehicle sales to grow at a lackluster 3.4% and come in at 1.39mn units due to the high level of consumer debt and poor economic sentiment which will crimp private consumption. Consumer confidence is not expected to improve going into next year and our country risk team forecasts 2013 GDP growth of just 3.0%. Hence, we are not bullish on growth for 2013 vehicle sales.

According to a report released by South Korea's Ministry of Knowledge Economy, the country's auto production saw a drop of around 4.3% in October 2012 as a result of weak demand, reports NZ Week.

The report showed automobile production by South Korea-based automobile companies,
including Hyundai Motor, Kia Motors, GM Korea, Renault Samsung Motors and Ssangyong Motor,
reached 396,677 vehicles in October 2012, which represents a fall of 4.3% y-o-y.

According to latest statistics from the Korean Automobile Manufacturers Association (KAMA), vehicle sales in September 2012 came in at 116,484 units, a decline of 6.8% y-o-y. Month-on-month sales,
however, saw a surge of 35.5%. We believe that one of the reasons for the m-o-m surge in sales was due to Hyundai, the biggest automaker in the country, resolving its labour dispute in September (see our online service, September 04 'Labour Agreement Vital To Hyundai's Targets'). During the dispute,
Hyundai factory workers staged strikes which resulted in a cut in production. This had an impact on vehicle sales for August. However, once an agreement between the unions and management was reached,
Hyundai announced its aim of recovering lost production through overnight shifts. This contributed to the strong vehicle sales numbers for September.

Another possible reason for the m-o-m surge in sales is the package of stimulus measures recently introduced by the Korean government to bolster consumption. These pose some upside risks to our yearend forecast. The Korean government has introduced tax breaks to increase consumption of durables as part of its broader measures to boost the flagging economy. Automakers have taken advantage of these stimulus measures to offer discounts on their models and lure more buyers into their showrooms.

We believe these measures could provide some supportive pressures for households and businesses and could help full-year vehicle sales to come in higher than our forecasts. That being said, the high levels of consumer debt, as well as poor economic sentiment in the country, are major obstacles to any measures to boost private consumption in the near-term.

However, we expect passenger car production to maintain some momentum, largely based on our view that passenger car exports will be stronger than the commercial vehicle segment. In 2012, we expect car output to rise 2% y-o-y, while exports will be 8% higher. This has so far been backed by company results,
which show major brands Hyundai and Kia posting double-digit growth in Europe, despite the weak market, while a strong presence in the US, where car sales are up 14.9% in the first four months, is also supporting the two national brands.

Domestic news isn't great, however. In November, for instance, US-based automobile company General Motors confirmed that it will not produce its next-generation Chevrolet Cruze in South Korea, reports Automotive World. The company may reportedly shift assembly to Europe in order to help increase efficiency at its loss-making unit in the region.

In September 2012, French carmaker Renault's South Korean unit announded it plans to cut around 15
%of its workforce to cut costs.

We also remain slightly concerned that labour tension, which has been improving, may start simmering once again, which will impact domestic production. Hyundai's auto exports to the US dropped 25
%month-on-month (m-o-m) in July 2012, owing to strike action at its South Korean plants, reported In Auto News. The company posted a production loss of 60,511 cars in July, worth around KRW1.26trn
(US$1.1bn) as a result of partial strikes in July and August. The company's exports fell to 27,101 units in July, compared with 36,209 units exported in June. Hyundai's profit fell to KRY2.17tn (US$2bn) in the July to September quarter, reports the BBC, compared with 2.5trn won in the previous three months, as strikes cut production by almost 82,000 vehicles. However, profit was up 13% on the same period in 2011 and is expected to rise with an end to the dispute. It did post a 13% rise in its Q312 net profit, to US$2bn,
despite labour strikes in the country, reports Reuters, and the company has outperformed leading rivals in an industry hit by the ongoing slowdown in Europe. However, investors are showing concerns about its reluctance to increase capacity.

On the upside, however, BMI believes that South Korea, along with Japan will continue to be the leaders in high-tech auto production, such as battery powered vehicles. We see GM's decision to base the production of its Spark EV in South Korea as evidence of this. GM Korea plans to begin manufacturing its first all-electric vehicle (EV) from 2013.

The Chevrolet Spark EV will reportedly be produced at a facility in Changwon and be sold domestically and exported to selected markets abroad. GM is also collaborating with eco-friendly equipment supplier KC Cottrell, to utilise green technology in its Korean facility, including plans to outfit its factory roof with a solar panel installation. The GM Korea Design Centre is planning to expand in 2013 and take advantage of high-energy efficiency and recycled materials. SHOW LESS READ MORE >

Executive Summary 5

SWOT Analysis 8

South Korea Autos Industry SWOT 8

South Korea Political SWOT 9

South Korea Economic SWOT 10

South Korea Business Environment SWOT 11

Global Overview 12

UK Boosts Europe, But Favourites Still Outperform 12
Table: Passenger Car Sales 8M12 12

Incentive Boom For Japan, US Powers On 13

Industry Risk/Reward Ratings 17
Table: Business Environment Ratings - Autos Industry Asia Pacific 20

Regional Overview 21

Japanese Autos: Outlining The Bear Case Alternatives 21

Macroeconomic Forecast Scenario 27
Table: South Korea - Economic Activity, 2011-2016 30

Industry Forecast Scenario 31

Sales And Production 31
Table: South Korea Automotives Sales, 2010-2017 31
Table: South Korea Automotives Production, 2010-2017 32

Trade 37
Table: Trade, 2010-2017 37

Competitive Landscape 40

Market Overview 40

Industry Developments 40

Company Developments 42

Renault To Decrease European Reliance 49

Company Briefs 50

Company Monitor 54

Mercedes Takes Knocked-Down Route To Asia 54

Company Profiles 56

Hyundai Motor 56

Kia Motors 60

Ssangyong Motor 63

Renault Samsung Motors 65

Demographic Data 67
Table: South Korea's Population By Age Group, 1990-2020 ('000) 68
Table: South Korea's Population By Age Group, 1990-2020 (% of total) 69
Table: South Korea's Key Population Ratios, 1990-2020 70
Table: South Korea's Rural And Urban Population, 1990-2020 70

BMI Methodology 71

How We Generate Our Industry Forecasts 71

Sources 72

Company Monitor
Mercedes Takes Knocked-Down Route To Asia
Company Profiles
Hyundai Motor
Kia Motors
Ssangyong Motor
Renault Samsung Motors