Shrinking Production: Korea on Verge of Being Overtaken by Mexico in Automobile Production

It is likely to be not long till Korea’s car production will be overtaken by that of Mexico. This is because Korea outweighed Mexico in car production only five years ago, but the gap has narrowed down to the 100,000 level.

While chronic labor-management conflicts lead to strikes which hamper production every year, there is a possibility that production facilities will move to overseas countries if wages rise due to normal wage risk. The decline in finished car production brings about the life-and-death issue of parts suppliers, fueling concerns that the Korean automobile industry’s ecosystem which accounts for more than 13% of Korean manufacturing may collapse.

In the first half of 2012, Mexico produced 1.48 million cars in 2012. The annual output rose 35% annually to 199 million units, nearly 2 million units this year. 199 million units are the largest volume since 2012.

On the other hand, Korea’s car production shrank nearly 10 percent to 2.16 million units this year from 2.38 million units in 2012. This year’s figure is the lowest since 2012 in the opposite direction to Mexico.

As a result, the production gap between Korea and Mexico sharply narrowed from 900,000 units in 2012 to 170,000 units this year. Thus, Korea, the sixth largest car producer in the world, can be overtaken by Mexico at 7th place before long.

Notwithstanding, the labor unions of Hyundai Motor and Kia Motors union have staged strikes this year. Eight partial strikes hit Hyundai Motors, hindering production of a total of 39,000 units this month alone. Kia Motors failed to produce 3,500 cars due to two strikes. The union which had negotiated collective bargaining over the past five months temporarily halted negotiations on August 29th.

There is a constant possibility that workers of GM Korea will go on a strike because it is difficult for the automaker to normally negotiate with the labor union until the new president officially takes office on October 1.

Strikes have temporary impacts. But some people warn that in the mid- to long-term, the aftermaths of normal wages may directly deal a big blow to production. Earlier the Korea Automobile Industry Association announced that if Kia loses in the normal wage lawsuit on August 31, it will incur about three trillion won in labor cost, fatally damaging the automaker’s competitiveness and finally force the company to consider moving its production bases abroad. 

Political circles also expressed the same concern. “If automobile companies transfer their production bases overseas due to wage pressures, it will be a great disaster for the Korean manufacturing industry and the Korean economy as well as for the Korean automobile industry,” said chairman Chang Byung-wan (lawmaker of the People’s Party) in a general meeting of the Industry, Trade and Energy Small and Medium-Sized Venture Business Committee.

Continuing rumors about GM Korea’s withdrawal from Korea cut across the normal wage issue. GM Korea added bonuses to normal wages, its labor cost ballooned by 130 billion won in 2014 alone. Normal wages pushed up GM Korea’s labor cost by close to 500 billion won for three years and GM Korea posted 520 billion won in operating loss last year.

The Korean auto industry’s competitiveness is being significantly undermined by a sharp drop in sales in major overseas markets. In particular, Hyundai Motor’s Chinese subsidiary turned to a deficit of upwards of 210 billion won in the first half of last year from an operating profit of 670 billion won in the first half of last year due to sluggish sales stemming from China’s retaliations over Korea’s deployment of the THAAD System. Eventually, Hyundai Motor’s inability to pay money to local Chinese auto parts suppliers brought a halt to the operation of four Hyundai Motor plants in China.

Kia Motors ‘Chinese plant is still in operation, but its sales decline is worse than Hyundai’s, making partners suffer more than ever. Kia Motors’ Chinese subsidiary also posted an operating loss of nearly 220 billion won in the first half of this year.

 

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