Market Newsletter : If It’s Fancy, Don’t Market It in Seoul : Or anywhere else in the country for that matter, because South Koreans are taking a dim view of conspicuous consumption. Is the government behind this shift in attitude?
Now is not the time to think about selling anything foreign and fancy in South Korea. A mood of intolerance toward conspicuous consumption has grown since the beginning of the year, and there are no signs of it lifting soon.
At stake is a burgeoning domestic market in an economy that continues to post phenomenal growth despite several years of political upheaval, labor strife and now, the specter of higher oil prices.
The forest of high-rise apartments south of Seoul’s Han River, inhabited by people with a distinct resemblance to American yuppies, attests to the new affluence. By all accounts, South Korea, population 42 million, has a middle class that is here to stay. Spending by urban dwellers in the first quarter of the year was 21.4% higher than the same period in 1989.
But bureaucratic concern about the nation’s recent dip into a current accounts deficit has combined with rising moral indignation over the persistent gap between poor and rich to cast a chill on the spending spree. . . .
Imported goods, symbolic of extravagance, were the first target of public scorn. Unconfirmed stories abound of government officials threatening tax audits for people who continue to indulge in these forbidden fruits.
Consider the case of Ford, which thought it had a good thing going last October when it signed a deal with Kia Motors Corp. to distribute its Mercury Sable model in South Korea. Sales boomed in the fourth quarter of last year to nearly 500 cars, and continued to grow to more than 300 units a month in March of this year.
“We all thought this was peaches and cream,” said Allen Patrick, vice president for Ford International Business Development and head of Ford’s operations in Seoul. “Everybody was happy.”
Then an “anti-consumption” campaign got off the ground, Patrick said, and the Sable was one of its victims. Monthly sales were cut nearly in half in April. Kia showrooms across the country sold only 88 Fords in July.
“There have been insinuations in the media that the government would audit the taxes of people who bought luxury items or imported cars,” Patrick said. “Unfortunately there’s no smoking gun. It’s all hearsay. . . . “
The government denies any meddling in the market.
“This problem is entirely confined to the private sector, which has launched an austerity campaign in response to the frivolous and extravagant life styles of the upper class,” a Ministry of Trade and Industry report declared in July. “The government has in no way encouraged or instigated this movement.”
Yet one Western diplomat cited a typical example of apparent “moral suasion.” A government official got hold of a list of 200 South Koreans who had placed orders for a European luxury car, he said. One by one, the customers were contacted by telephone and told their tax filings would be investigated if they went through with the purchase, said the diplomat, who asked not to be identified. All the orders were canceled.
A South Korean importing European designer brands complained of being forced by “government pressure” to close two of four shops because they were “too noticeable.” Sales are flat at the remaining outlets.
“My business has been greatly hurt by social pressure,” said the importer, who spoke on the condition of anonymity.
“Luxury goods may be seen as part of an import invasion, but in dollar terms their share is negligible. They’re not hurting the economy, and if Koreans don’t buy the goods here they’ll get them in Hong Kong or wherever. That means money goes out of the country.”
Indeed, the Trade Ministry noted that luxury goods constitute less than 3% of South Korea’s total imports, the vast majority of which are raw materials and machinery that feed the country’s export industries. . . .
Overall, trade and current accounts balances look bad this year. Imports were up 11.5% from January through June, while exports remained flat, leading to a trade deficit for the half-year of $2.8 billion--following four straight years of trade surpluses. Auto exports were down by 37.5% during the first five months of the year, partly because labor disputes had put a dent in production.
Recently released figures for July suggest a rebound. The current account moved back into surplus--$524.9 million for the month--after six consecutive months of deficit. The trade balance was in the black, too, with a $518-million surplus, according to the Bank of Korea.
But there have been few signs that the mood of austerity will lift its constraints on consumers.
“At this particular moment you have to be extremely careful about selling in Korea,” said Ford’s Patrick. “The whole aura has damaged confidence that a quality product will succeed on its own merits in this market.”
For example, the government changed regulations on tagging for imported clothing, noted an official with the French Embassy in Seoul. Now stores must mark the garment’s landed price and its retail price, showing consumers the markup. No such rule applies to clothing made in South Korea.
“It’s a very efficient way to discourage consumption of imported fashion brands,” the French official said. “The government is very definitely blocking the import of luxury goods, but we’ve decided it’s not worth taking steps because the amount is peanuts compared to total trade. . . . “
Reports of the campaign against conspicuous consumption have raised alarm in Washington where there is concern that South Korea may be backtracking on a commitment to liberalize its markets through steps such as reducing tariffs and abolishing quotas.
Whether it is government sponsored or not, the anti-consumption campaign has “served no purpose other than to increase the anti-foreign bias of an already difficult-to-crack market,” the American Chamber of Commerce in Korea observed in a pamphlet it published last month.
“When all is said and done, Korea’s trade ‘liberalization’ has had a minimal effect on trade because the Korean rules of the game are designed to keep imports out of the Korean market,” the Chamber of Commerce said. “The primary accomplishment of ‘liberalization’ in Korea has merely been to bring into play a vast array of other non-tariff trade barriers which affect both the supply and demand of imported consumer goods.”
Sables in South Korea: Boom and Bust
The demographics in South Korea--with its new yuppie class--looked good to Ford Motors, which proceeded to sign a distribution deal with Kia Motors Corp. to distribute Mercury Sables. Sales boomed in the fourth quarter last year to about 500 cars. But a nationwide anti-consumption drive turned the boom to bust. In July, Ford sold only 88 cars in South Korea. The government has denied any meddling to create this climate of non-consumption.
EXPORTS TO SOUTH KOREA OF U.S.-MADE MERCURY SABLE, 1990
Number of vehicles
Mar.: 303
June: 59
Source: Ford International Business Development Inc., Seoul
