Korea’s automobile export reached a record monthly high last month, while domestic sales dropped nearly 10% compared to the previous month. In today’s show we will look at this disparity between automobile export and local sales with Professor Kim Pil-soo of the Department of Automotive Engineering at Daelim University College. First, he tells us about the run-up to the monthly export record.

The industry usually looks at the month-on-month changes to determine how many more or fewer cars were sold. Compared to the same month last year, the sales volume increased more than 18% and in terms of monetary amount, 35%. That means Korean cars were sold at higher prices, indicating added value. Car markets around the globe have been struggling, especially the European market. Despite the difficulties, Korean carmakers were able to post better records than their overseas competitors, because Koreans were able to build solid markets in India, China, Russia, the Middle East, and Latin America - the regions outside of the traditional strongholds like the United States and Europe. Also helping car sales are the substantial quality improvements of Korean cars. Korean brands now rival top industry competitors, thanks to high price competitiveness and more effective marketing strategies.

The Ministry of Knowledge Economy announced that last month’s export of automobiles increased 18%, or by 305,257 cars, compared to the same month last year. In monetary terms, the average car price also rose 8.3% to 14,300 dollars, bringing in nearly five billion dollars in export, a 35% boost compared to the same period in 2011, and hitting monthly highs in both the number and amount of car export. Despite the shrinking consumption worldwide and soaring oil prices, Korean automakers were able to set records in export. Such a surge can be attributed to the boost in average car prices driven by better quality, more new car models, and increased demand in compact cars and SUVs, Korea’s flagship vehicle exports. Another factor contributing to Korea’s record car export is a set of free trade agreements that went into effect to facilitate automobile exports.

The effects of free trade are already manifested in Europe. When speaking of automobile exports, we tend to think only of selling finished cars, but just as important is the export of automotive parts. Most automotive parts companies are small businesses, which tend to see more dramatic benefits from increased exports. Since automotive parts are tariff-free items, their exports were bound to thrive. This is how a free trade agreement is supposed to work. The effectiveness of an FTA has been proven in numbers, especially by the automotive industry.

The automobile industry is the poster child for free trade accords. Immediately after the Korea-EU FTA went into effect on July 1st, 2011, the formerly 10% tariff on Korean-made cars were lowered to 7%, allowing roughly 451 million dollars of Korean cars to be sold in Europe in July alone. Last year, small automotive parts companies in Korea saw their exports grow nearly 19%. Then last month the Korea-U.S. FTA went into effect, immediately lifting tariffs on automotive parts and gradually removing tariffs on passenger cars over the next four years. When Korean cars become completely tariff-free in 2016, the Korean automakers will likely see a bigger boost in their exports. However, Korea’s domestic automobile market is showing a different picture from the bustling exports.

The Korean domestic market has shrunken due to high oil prices. Since Korea depends on foreign oil, the country cannot be free from the effects of oil price fluctuations. Also, in bad economic times, people tend to choose smaller cars, which was a factor in driving up the sales of imported cars. Last year, small import models sold totaled 105 thousand, slightly over 8% of the total sales. This year, there are more compact car models available in the market and Korean car importers foresee the sales of as many as 150 thousand foreign cars this year. Moreover, there are not as many new local models as last year. Some 70 new models, domestic and foreign brands combined, were introduced in 2011, but this year only two models from local carmakers are totally new ones. Perhaps this is why local demands for new cars have dropped.

A March sales record shows roughly 120 thousand locally made automobiles were sold, an 8% or more decrease from the same month last year. Meanwhile, the importers of foreign automobile brands already sold more than 100 thousand cars by last month, outperforming last year’s record-setting 100 thousand imported car sales in Korea. The reasons for the differing pictures between local and imported automobiles can be found in the wide selection of imported compact cars and the newly enacted free trade agreements. Also, Korean consumers tend to be swayed by eye-catching new models, which drove the recent surge of car imports. The influx of foreign automobile brands can be a threat to the local car industry, but in the long run it could trigger quality improvement and price wars and cause a positive change in the Korean automobile industry.

An increase in import cars is not all bad, because local brands can enhance their product quality, price competitiveness, and market strategies to compete better with their foreign counterparts and cater more to local consumers. But Korea has to deal with many obstacles along the way. First, tighter environmental regulations mean Korea has to step on its development of eco-friendly cars. Korea has caught up with its rivals in automotive technology for conventional cars, but not quite so much in the area of hybrid or alternative fuel-driven cars. This is why Korea needs to develop source technologies and environment-friendly models, as well as set new pricing policies and improve quality. One small mistake could make even big industry names tumble. Korean automobile giants should be cautious and thorough in their industry analyses and decision-making processes to take the industry to the next level.

In the global automobile market, the Big Three in America – GM, Ford, and Chrysler – have made an impressive comeback, as did Japanese carmakers, now recovered from the recent setbacks. Chinese companies are poised to join the industry’s top names as they have been seeing an annual increase in export of 50% for the past few years. The only way for the Korean automakers to solve the current dilemma is to boost their competitiveness and embrace change.