S. Korea Set to Flood U.S. With New Cars


South Korea's globally ambitious auto makers are poised to send a flood of low-cost automobiles into an already overcrowded world market, a prospect that is sending shock waves across the Pacific.

The apparent determination of the financially troubled Asian tiger to export its way out of its economic woes is symptomatic of broader trouble ahead in the global trading system, economists and diplomats warn.

For South Korea is not alone. From Japan to Thailand, the "Asian miracle" finds itself in varying stages of disrepair, and the easiest way back to health for these once-robust economies is to crank up their vaunted export machines while continuing to protect their weak players.

U.S. officials, noting a sudden falloff in Japan's economy and a dramatic August surge in its global trade surplus, promise to raise such concerns at this weekend's G-7 finance ministers' gathering in advance of an International Monetary Fund/World Bank meeting in Hong Kong.

"Tensions are going to arise because of these slowdowns, and we are going to have to be vigilant," said Sven Arndt, director of the Lowe Institute for Political Economy at Claremont McKenna College in Claremont.

Nowhere is the dilemma in sharper focus than South Korea, which plans to at least double its auto-building capacity to 7 million vehicles by 2000--even as its own economy weakens and the world already has the capacity to build 20 million more vehicles each year than it needs. In the meantime, South Korea is allegedly retaining barriers that have restricted foreign cars to less than 1% of the 1.6-million-vehicle domestic market.

A flood of Hyundai, Kia and Daewoo nameplates might be good news for U.S. consumers, because it should drive down prices for entry-level cars. But it means somebody else might lose sales, and thus jobs, while the world's auto makers are denied export sales to South Korea.

The South Korean scenario has U.S. auto makers fuming.

"It's a confirmation to many people of what they had always feared," said Steve Collins, director of international trade and economics for the Washington-based American Automobile Manufacturers Assn. "Everybody wants to be a Japan and be an export platform. And that's not going to make for a balanced global trading system."

Last week, the heads of America's Big Three auto makers wrote President Clinton and members of Congress detailing their unhappiness with South Korea's "irresponsible trade practices" and "irrational buildup of excess capacity."

U.S. auto makers, citing the paltry 3,900 vehicles they sold in South Korea last year, argued that the South Korean government has failed to implement a 1995 bilateral agreement designed to improve access for foreign cars by removing regulatory and tax barriers.

They urged the U.S. government to use its "Super 301" authority to include South Korea on a list of unfair trading countries to be published at the end of this month. That would set the stage for an investigation of the allegations and the possible imposition of penalties against South Korea.

In Seoul, where at least half a dozen giant chaebols, or conglomerates, have declared bankruptcy or sought fiscal relief this year, many view these actions as unnecessarily provocative. They say the Clinton administration should not be pushing so hard, particularly since the United States enjoys a $10-billion trade surplus with South Korea.

"For the U.S. to start to apply pressure to open up the market is ill-timed in the extreme, particularly given the broader political pressures on the South Korean peninsula and unstable economic regime in the north," said Jonathan Dutton, deputy head of research at SBC Warburg Dillon Read in Seoul.

But the U.S. is far from alone in its worries about South Korea's aggressive expansion in automobiles, an industry coveted for its payback in global prestige, high-paying jobs and cutting-edge technology.

Recently, the U.S., the European Community and Japan--a trio rarely on the same side of trade disputes--joined in filing a complaint with the World Trade Organization over an Indonesian national car project that gave South Korean auto maker Kia special access to that fast-growing Southeast Asian market.

Bill Pochiluk, a partner with Coopers & Lybrand Consulting, estimates that the world's car and truck makers will have excess production capacity of 21 million vehicles by 1998. They actually built just 50 million units last year, or roughly 75% of 1996 capacity.

"Frankly, the problem the South Koreans have had is they basically wanted to be the new Japan," he said. "This basically destabilizes the global automotive marketplace."

South Korea's plans to double its production capacity are particularly worrisome because they come at a time when two of the nation's four leading auto makers--Kia Motors Corp. and Ssangyong Motor--are struggling to stay afloat, the victims of overly aggressive expansion, mounting debt and a regional slowdown that has curbed bank loans and auto purchases from Tokyo to Bangkok to Seoul.

In spite of this turmoil, the giant Samsung conglomerate--which has never built a car before--has declared it intends to become one of the world's 10 largest auto makers. It plans to begin producing its first automobile, a small passenger car, next spring.

South Korea's automotive ambitions were hatched during the 1980s and early 1990s, when the nation's chaebols were enjoying record profits thanks to an export-oriented growth strategy supported by the government and cash-rich banks.

As relative newcomers to the automotive business, South Korea's auto makers--led by Daewoo Motor Co. and Hyundai Motor Co.--targeted the low end of the market in Eastern Europe, Southeast Asia and South America. A key part of their strategy, honed in the consumer electronics and semiconductor industries, was developing efficient production lines and creating a network of low-cost suppliers.

To build market share quickly, the South Korean companies entered markets where others dared not tread, including Daewoo's risky $2.2-billion investment in an ailing auto maker in Poland. As a result, South Korea holds the leading position in much of Eastern Europe and has become a major player in emerging markets such as Venezuela and Panama.

South Korea has been far less successful in penetrating the U.S. market. Its budget-priced imports, such as the Hyundai Accent and Kia Sephia sedan, have only carved out a tiny share of the market, in part because of continued poor quality ratings. This hasn't deterred Daewoo, which plans to begin exporting its lower-priced sedans to the U.S. next year.

Meanwhile, South Korea's auto makers have been hit hard by the recession at home, which slowed auto purchases at the same time the government cut back the low-cost financing that traditionally flowed from the banks to the large South Korean conglomerates.

South Korean economic specialists warn that pressure from abroad, particularly the United States, could backfire by giving ammunition to protectionist sentiments that are surfacing in South Korea. The issue could be particularly volatile given South Korea's upcoming presidential election.


Times researcher Chi Jung Nam in Seoul contributed to this report.


A Car Glut

South Korean vehicle production is expected to soar to 5 million in 2000, with capacity to make 7 million. South Korean car and truck production, in millions:

2000: 5.1 million

Note: 1997-2000 figures are forecasts

Source: AutoPacific Inc..

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