Report from Bloomberg talks about shifting tariff regulations have upended the traditional automotive pecking order in Korea. Lee Tack Young says Hyundai’s luxury vehicles are oversized, overpriced gas guzzlers. So he opted for a more modest alternative: a BMW 528i.
Foreign brands have seen their share of South Korea’s market for premium vehicles surge to 41 percent from 28 percent in the past two years, according to Korean industry groups, as lower tariffs make their cars cheaper and local buyers abandon a decades-long preference for domestic brands.
“I was looking for a quality car that wasn’t too big,” said Lee, president of Cosmetic Engineering, a packaging-machinery maker near Seoul. The 65-year-old’s last seven cars were all Korean, starting with a Hyundai Excel in the 1980s.
This time, he chose his 71 million won ($64,000) BMW over an 85 million won K9 from Hyundai affiliate Kia Motors Corp. (000270) “Unless Hyundai and Kia change and offer me more variety and better quality, I don’t see any reason to go back,” Lee said.
The shift has made South Korea a growth market for Bayerische Motoren Werke AG, Daimler AG – Mercedes-Benz, and Volkswagen AG – Audi. Their gains are coming at the expense of Seoul-based Hyundai and Kia, which count on sales of luxury vehicles in their home market for much of their earnings.
“It’s definitely something Hyundai and Kia are worried about, and they should be worried,” said Lee Sang Hyun, an auto analyst at NH Investment & Securities Co. “This trend will undoubtedly have an adverse effect on Hyundai’s profits.”
Duties on European imports have fallen to 3.2 percent from 8 percent since a trade pact was implemented in 2011, and next year they will be eliminated for most cars. A U.S. deal has halved tariffs for passenger vehicles to 4 percent and will eliminate them by 2016.
“Sure, it’s every boy’s dream to have a German car, but that wasn’t the most important reason,” said Park Jun Bum, 28, who traded his Kia Forte sedan for an Audi A4 a few weeks back. “Audi offered better design, engine, safety — better quality overall.”
Sticker prices for the Hyundai Equus — the company’s most luxurious model — range from 68 million won to 151 million won. BMW’s 5-series runs 61 million won to 113 million won, though the Equus is closer in size to the BMW 7-series, which starts at 124 million won.
Hyundai’s profit fell 15 percent last quarter, squeezed by Japanese competitors boosted by the weakening yen. This year, Hyundai says its sales will likely rise at the slowest pace since 2007.
To fight back, Hyundai this month cut the price of mid-sized sedans by as much as 1.5 million won. The automaker is developing diesel engines, which have become popular in the imported brands. And it’s remodeling some dealerships and service centers to better compete with the upscale digs offered by the Germans.