South Korea Autos Report Q1 2013

Data throughout 2012 showed that sales of South Korea's five domestic brands were subdued, therebydragging down production. Despite healthy overseas demand, we forecasted that total sales would dropover 8% in 2012, with 1.35mn units shifted. This prompted BMI to revise sales and production forecastsfor 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 theforecast for 9.5% growth in exports would not be enough to prevent a contraction in output. Things havenot changed greatly in Q412.

This quarter we are maintaining our 2012 vehicle sales forecasts of 1.35mn units. BMI forecasts 2013vehicle sales to grow at a lackluster 3.4% and come in at 1.39mn units due to the high level of consumerdebt and poor economic sentiment which will crimp private consumption. Consumer confidence is notexpected to improve going into next year and our country risk team forecasts 2013 GDP growth of just3.0%. 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 autoproduction 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), vehiclesales 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 dueto Hyundai, the biggest automaker in the country, resolving its labour dispute in September (see ouronline 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 onvehicle 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 thestrong vehicle sales numbers for September.

Another possible reason for the m-o-m surge in sales is the package of stimulus measures recentlyintroduced by the Korean government to bolster consumption. These pose some upside risks to our yearendforecast. The Korean government has introduced tax breaks to increase consumption of durables aspart of its broader measures to boost the flagging economy. Automakers have taken advantage of thesestimulus 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 andcould help full-year vehicle sales to come in higher than our forecasts. That being said, the high levels ofconsumer debt, as well as poor economic sentiment in the country, are major obstacles to any measures toboost private consumption in the near-term.

However, we expect passenger car production to maintain some momentum, largely based on our viewthat passenger car exports will be stronger than the commercial vehicle segment. In 2012, we expect caroutput 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 weakmarket, while a strong presence in the US, where car sales are up 14.9% in the first four months, is alsosupporting the two national brands.

Domestic news isn't great, however. In November, for instance, US-based automobile company GeneralMotors confirmed that it will not produce its next-generation Chevrolet Cruze in South Korea, reportsAutomotive World. The company may reportedly shift assembly to Europe in order to help increaseefficiency 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 simmeringonce 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 InAuto 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 inJuly, compared with 36,209 units exported in June. Hyundai's profit fell to KRY2.17tn (US$2bn) in theJuly to September quarter, reports the BBC, compared with 2.5trn won in the previous three months, asstrikes cut production by almost 82,000 vehicles. However, profit was up 13% on the same period in 2011and 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 inan industry hit by the ongoing slowdown in Europe. However, investors are showing concerns about itsreluctance to increase capacity.

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

The Chevrolet Spark EV will reportedly be produced at a facility in Changwon and be sold domesticallyand exported to selected markets abroad. GM is also collaborating with eco-friendly equipment supplierKC Cottrell, to utilise green technology in its Korean facility, including plans to outfit its factory roofwith a solar panel installation. The GM Korea Design Centre is planning to expand in 2013 and takeadvantage of high-energy efficiency and recycled materials.