The Roles of Export-led Policy in Developing Korean Automobile Industry

Transcription

1 Royal University of Phnom Penh And Royal University of Law and Economics Department of International Studies, RUPP Siem Pichnorak Department of Law, RULE Sok Vouchneng The Roles of Export-led Policy in Developing Korean Automobile Industry 2013

2 i Contents Abstract... ii Acknowledgements... iii List of Acronyms... iv Chapter 1: Introduction Brief History Significance of Research Study Research Methodology... 6 Chapter 2: Literature Review... 7 Chapter 3: Analysis and Discussion Export-led Policies and Implementation a. Tax Incentives: b. Financial Incentives: c. Establishment of Free Trade Zones and Other Supporting Organization: Policies Significances Chapter 4: Conclusion Research Finding Limitation and Recommendation Appendices Bibliography

3 ii Abstract South Korean automobile industry has presented an interesting case study as it has transformed itself from cheap low quality producer to a high-end global competitor in the world market. In 2010, South Korea has become the fifth largest car exporter in the world. The success story of South Korean automobile industry cannot be separated from the roles of the government, which had embarked for an ambitious plan and determination to develop this particular industry since 1960s. In this connection, this research paper is missioned to investigate relevant exportled policies which were utilized to spearhead this industry, forcing three major local producers such Hyundai, Kia, and Daewoo to export in the first place and compete in the global market. The argument of this paper is that export-led policy was the main factor that help push up the performance and lead to drastic improvement in technology and productivity of Korean automobile producers. To shed light for further discussion, the first chapter will briefly describe the historical development of the industry in South Korea along with the significances of research study and methodology used in the investigation. Next, chapter 2 will review the existing literatures, while chapter 3 will analyze and discuss in-depth the export-led policy implementation and its significance in the development process of the industry. Last but not least, the final chapter will sum up the discussion with research findings and suggest recommendations for future study in response to limitations of this paper.

4 iii Acknowledgements This research study on the topic of The Roles Export-led Policy in Developing Korean Automobile Industry would not have been possible without active supports, professionalism, advices, commitments, encouragements and consultation from professors, seniors, family and peer friends who have always been providing us with valuable assistances. First, we would like to express our deep and sincere appreciation to Professor Eunyoung Kim, who has always given us supports and ideas as well as feedbacks in developing this research topic despite her tough schedule. More than that, we are also thankful to the understanding and constructive feedbacks she has periodically given us to update and correct our research plan and process along the way. Second, we would also like to express our heartfelt thanks and faithful gratitude to Professor Seyoung Park, who has devoted time, efforts and resources giving us lectures and helped us with the process of our research study. Without her advices, suggestions, and efforts, our research would have derailed. Last but not least, we would also like to express our thankfulness and gratefulness to our family, seniors and peer friends, who have encouraged, advised and assisted us in completing our research paper. Without their constructive criticism and supports, we are sure that this paper would not be completed successfully.

5 iv List of Acronyms EIF: Export Insurance Fund FDI: Foreign Direct Investment FTZ: Free Trade Zone HMC: Hyundai Motor Company HCI: Heavy and Chemical Industry KAMA: Korean Automobile Manufacturer Association KCGF: Korea Credit Guarantee Fund KEIC: Korea Export Insurance Corporation KIET: Korea Institute for Industrial Economics and Trade KITA: Korea International Trade Association KOTRA: Korea Trade Promotion Corporation KTIC: Korean Trade Insurance Corporation NIC: Newly Industrialized Country R&D: Research and Development

6 1 Chapter 1: Introduction Started from a humble government-led industry, South Korean (from now on Korean) automobile industry has achieved such a miracle by quickly becoming a leading global competitor amongst producers from relative more advanced economies. Korean auto makers have moved fast and far as it became the fifth largest in terms of production and sixth largest in terms of export volume in 2010 despite economic downturn in Korea has produced diversified types of vehicles, and three main producers that dominate Korea auto export include Hyundai, Kia and Daewoo, later joint by Ssangyoung and Samsung Renault. The performance and success of Korea automakers cannot be realized without an active contribution and intervention of the government, particularly in terms of policy. The paper will generally analyze the intervention of Korean government in boosting up the auto industry and specifically exportled policy which allows the industry to grow so fast and gain the competitive edge of today Brief History Korean automobile is a catching up industry which started roughly 48 years ago under the initiatives of the government in order to strengthen strategic HCI (Heavy and Chemical Industry). The government has the dominant roles in structuring the industry and shaping its future. The industry has gone through many drastic changes due to internal and external factors. However, the historical development can be classified into 3 phases the1960s to 1970s, from , and from 1990 to the present. From the outset of Korean War until 1960s, Korea was one of the world poorest nations with per capital GDP of only ten percent of that of the United States. However, the situation

7 2 changed when General Park Chung Hee took power in 1960 and initiated first five year development plan in 1962, which also marked the birth of Korean automobile industry. In 1962, Automobile Industry Promotion Policy and The Automobile Industry Protection Act were adopted accordingly to promote the growth and protect this infant industry. At the time, there was no foreign automaker except joint ventures in Korean market. The development plans mainly focused on the creation of domestic automobile industry which could make use of local contents to the maximum level. As a result, government banned import of complete car but encouraged acquisition of foreign automobile parts. However, back at that time Korean auto makers were in their infant stage. Production technology and productivity were low and highly dependent on imported components. In this stage, Korean auto makers imported semi and fully knocked down kits from Japan as well as the United States to assemble cars and sale in Korean market. In order to improve the capability of the industry, the government in 1966 put forward a plan to encourage domestic innovation and production of automobile through subsiding auto part producers and promoting joint venture investment from major foreign producers to acquire technology. The first Korean auto maker started in 1955 when Choi Mu Seong a Korean businessman and his 3 brothers namely Choi Hae Seong and Choi Soon Seong converted a US army jeep into the first Korean car which was called Sibal. In 1960, Sin Jin Publica was launched by Sin Jin under the technical licensing agreement with Toyota. In the same year, three companies were formed. Kyeong Seong Precision Industry was first formed in 1964 and the name was changed to Kia Industry and began assembling car with Mazda assistance. The second one was Ha Dong Hwan Automobile Industry Co. that was firstly named SsangYong Motor Company; and the last one was Saenara Automobile that joint with Nissan Motor Co. In 1965, Asia Motors Company

8 3 was founded, and not until 1968 that Hyundai Motor Company founded under the cooperation with Ford Motor Company. In 1973, Sohari Plant was opened by Kia in Gwang Myeong, South Korea. Later in 1975, Hyundai Pony was built as the first Korean made car. General Motor Korea Saehan Motors was established in 1976 under the joint venture agreement between General Motors and Sin Jin after Toyota withdrew in Besides, General Motor Korea s annual capacity rose to 50,000 passenger car, 7,000 trucks and 3,000 buses. By 1979, the total production rose to 204,447 units. Nearly one hundred million dollar worth automobiles were exported to about 67 countries such as Middle East, Central and South America, Western Europe and Africa in For instance, from 1976 to 1982, Hyundai exported Pony to South American countries such as Colombia, Venezuela, and Ecuador, and made the first the history of first Korean developed car. Even though it seems to be small in number, the successive export growth shows the promising development of Korean automobile industry. In 1982, Daewoo Motor, the combination of Daewoo Group and Sae Han Motors, was established. In the same year, Automobile Industry Rationalization Policy was enacted in response to solve the 1979 energy crisis and local recession. However, the main purpose of passing this act was to have Hyundai and Daewoo merged in order to manufacture passenger car, while Kia and Asia were supposed to produce small sized trucks. Yet, this did not go smooth as expected because GM, the fifty percent shareholder of Daewoo wanted to assemble a world car, whereas Hyundai insisted continuing to build Korean car. The disagreement led to the abolition of the act in Korean auto industry has moved to another turning point when import restriction of automobile was relaxed. In 1986, SsangYong Motor Company replaced Dong-A Motor Co. that

9 4 took over Geo Haw Co., the successor of Sin Jin Automobile, in In 1980s, Hyundai first exported the Korean made Pony model to the US and receive a successful response. On the contrary, it was notorious for low quality. In 1989, Sonata, a medium sized sedan was assembled to export to the United States. It is noteworthy that the success of Korean export was because the demand of cheap car at the low end market while Japan was on Self-Restraint period. In 1990, Hyundai s export to the United States was exceeding one million. Elantra, Accent, and Avante were Hyundai products that won Australia Best Car in 1993, Canadian Best Buy in 1995, and Asia-Pacific Rally in 1995 respectively. In 1993, Hyundai Elantra was nominated as the Best Car of 1993 in Australia. In 1995, Accent won Best Buy Award. However, because of the bad reputation of Excel poor quality, franchises were cancelled by car dealer in the United States. To clear off the bad image, Hyundai invested heavily in quality, design, manufacturing and R&D. Asia Motor merged with KIA Motors Company in In 2000, facing with financial issue, Samsung that starting selling cars in 1998 sold its seventy percent share to Renault and the company was renamed to Renault Samsung Motors. Korean automobile industry received great attention by North America due to the purchase of Daewoo Motor by General Motors Corporation in 2002 and the completion of one billion dollar assembly plant of Hyundai in Alabaman in As the result, Hyundai is the sixth Asia automaker to build a United States factory, the third foreign maker to pick Alabama, and the sixth automaker that is situated in the Southeastern United States since In 2009, there is another factory in West Point Significance of Research Study Concerning our topic of The Roles Export-led Policy in Developing South Korean Automobile Industry, this small research study will explore and analyze the significance of

10 5 government intervention in shaping the future of Korean auto industry, especially the roles of export-led policy. First of all, the paper will summarize the development history of automobile industry in South Korea from the early 1960s. As evidenced, Korean automobile industry has been playing an important role in pushing Korean economic growth, particularly in the epoch which Korean competitive edge has changed from cheap labour to technology and capitalintensive. Starting from one of world s poorest war-torn economy, South Korea has managed to become an advanced country in such a short period. The booming industries, let alone auto industry have contributed a lot to the development of the nation. In this case, this is a good lesson learned for other developing countries that seek to industrialize and achieve such rapid growth. This can be a good experience and implication for our country, Cambodia to learn from Korea s lessons. In this relation, it is very interesting to explore the stages of automobile industry development in South Korea by focusing on the implementation of export-led policy. Secondly, this research paper will contribute to the understanding of the roles government intervention and export-led policy played in boosting up the automobile industry in Korea. On the one hand, this paper will highlight various government interventions and exportled policy which stimulated the development of the industry. On the other, the paper will analyze the relation between export-led policy and development as well as the prospect of Korean auto industry. Therefore, this paper will prove that export-led policy which led by government was an effective tool in developing the automobile industry. Last but not least, by understanding and analyzing both significances and weaknesses of government intervention as well as export-led policies in developing the automobile industry and current status of the industry, the paper will present some suggestions and future prospects in which Korean automakers will be facing.

11 Research Methodology The targets of this research are to understand the phase of Korean auto industry development, export-led policy initiated under government intervention, and relation between export-led policy and the growth of industry. Therefore, it is important to analyze the industry development from both policy and economic perspectives. For this small research paper, the research process will mainly base on qualitative analysis and observations as well as secondary data. Previous scholastic journal articles, statistics data and policy documentations will be utilized to analyze the significant relation between export-led policy and auto industry growth. The secondary data will be collected from both economic and policy journals which outline the significances of three aspects: government intervention, export promotion and automobile industry analysis. It is also interesting to gather the information related to auto industry in other NICs which embarked for automobile industry development at the same time but failed so that we can compare and jump to the conclusion that Korea is a role model and an outstanding one.

12 7 Chapter 2: Literature Review Industrial evolution and economic development in South Korea are the result of effective by the government policies and regulations under statist model. In this sense, many scholars have agreed that government intervention and outward looking policy played dominant roles in the miracle success of Korean automobile industry (GreenAndrew, 1992; MukherjeeAvinandan & SastryTrilochan, Automotive Industry in Emerging Economies: A Comparison of South Korea, Brazil, China, 1996; LeeDaechang, 1997; HuangYasheng, 2002; KimLinsu, 1997). This is mainly the hypothesis of this research. This paper will seek to analyze the government intervention, specifically export-led policies effectiveness in developing automobile industry in South Korea. From the early stage of industrialization, the government of Korea provided seed capital and incentives to develop the strategic industries. Series of policies and interventions were and are being implemented to catch up the advanced countries and to stay competitive in the market. The growth process of Korean automobile industry clearly shows the role played by the developmental state. Green (1992) maintained that South Korean government was the main force behind the successful story of automobile industry; and the evidences could be found in its actions. The roles of the state in developing automobile industrial sector are very clear through the intervention of state in protecting and forcing those automakers through carrots and stick method. Many scholars have related the effectiveness of government intervention to the relationship between government and Chaebols, statist model. Green (1992) has also pointed out that the key source of power government has on industrial giants is its ability to cause liquidity and force them into bankruptcy as necessary. The relationship between government and chaebol is parental or family affair in which government is the father and Chaebols are children.

13 8 Chaebols are supposed to cooperate and take order so that government goal can be realized and firms continue to grow. Huang (2002), in his comparative studies over the coordination failure of automobile industry policy in China and South Korea, suggested that the policy adopted and implemented by Korean government at the time was so effective that the automobile industry could develop into a mature stage; while the same model was a failure in China. In this sense, the institutionalization of policy in South Korea was effective provided that the type of government which differentiated it from other NICs. In addition, the government, with an ambitious plan, had a strong commitment and clear vision to elevate its automobile car makers to become a world class player by investing in R&D as well as acquiring product development capacities so that industry can develop fast (MukherjeeAvinandan & SastryTrilochan, Automotive Industry in Emerging Economies: A Comparison of South Korea, Brazil, China, 1996). In the same vein, Korean government is equipped with a strong power to restructure the industry environment to adapt to its economic goals. In particular, government also put forward the Big-Push policy, which forced the car maker from phase I to Phase III, meaning that the firms needed to jump from assemblers to new product developer (SuhJoonghae, 2004). More importantly, grown under government-led plans such as Long-Term Automobile Production Plan, Korean carmakers are now achieving global competitiveness in international market. During this stage, the government efforts should also be emphasized. The government supported schemes along with intensive learning and leveraging process from linkage with the advanced competitors were the main components which allowed Korean manufacturers to

14 9 transform from contract assemblers to technologically independent manufacturers (RitterLarissa, 2010). Besides, Kim (1997, 1998) and many other scholars came to conclusion that incentive regimes and preferential conditions generated by government policies such as income tax reimbursement, subsidies, loan, access to foreign reserve and many others played a crucial role in accelerate the export and overall the production capacity of the manufacturers. Export-led policy is part of government efforts to push auto industry development. Many scholars have identified the correlation between export promotion policy and export growth. Government provided tax and financial incentives and export-promoting organizations to selected industries which commanded export potentials. Government put forward industrial policy because it wanted auto makers to achieve economies of scale by exporting to international markets and international competitiveness which in turn improve the productivity and capacity of the industry (GreenAndrew, 1992) (MahJai, October 2010). Above all, these previous research studies have made the postulation crystal clear that government policies and interventions, particularly government efforts to push automobile export helped develop and leverage Korean automobile producers to become a global player. Various studies have proved that Korean government was an effective implementing agent which successfully adopted and enforced the designed policies. However, these previous literatures seem to capture dominantly the general aspects of policy and government roles. Also, the analyses were relatively outdated which left the future prospect of the manufacturers unclear. Therefore, this paper is seeking out to elaborate the significance of government interventions from export-led policy implementation perspectives. That is, the paper will analyze the government interventions, mainly export-led policy which led to the improvement of production and competitive capability.

15 10 Chapter 3: Analysis and Discussion Started in 1960s, South Korea was a late entrant in the global automobile market, yet it managed to achieve enviable outcome and progress compared to other NICs which embarked for auto industry at the same time or relatively earlier. Back in the early stage, Korean automobile industry was fragmented and undeveloped, established under the knock-down kits imported from Japan and the United States. Among Newly Industrialized Countries such as Mexico, Brazil, Argentina, India and China which embarked for automobile industry development as a strategic pillar in relative same period, Korean automobile industry was the outstanding one. Therefore, it is relevant to compare South Korea to those Newly Industrialized Countries because of government role in boosting up the industry. While government intervention proved successful in South Korean case, the same model implemented in those above mentioned NICs revealed ineffectiveness. It is said that Korean endeavor to develop its industry was at the right time with right policy. Therefore, the following section will outline the export-led policy and the implementation Export-led Policies and Implementation By 1962, export promotion policies was introduced to replace import substitution policy that was implemented by the early of 1960s, which was considered as the starting point of Korean economic recovery after years of Korean War and division of Korean peninsula (Charles Harvie, Hyun Hoon Lee). Responding to advancing export, in 1962 export-led policy was announced to provide new force for the industry and to transform Korean carmakers from cheap car assemblers to global players. The export-led policy is comprised of three main parts, namely tax incentives, financial incentives, establishment of free trade zones and the supporting organizations (Mah, October 2010).

16 Tax Incentives Tax incentives policy mainly consists of two main schemes which were tax incentive in general and duty drawback schemes. For tax incentive, export firms were provided with tax deduction according to the 1961 Tax Exemption and Reduction Control Law. To illustrate, in 1964, government imposed 50 percent reduction of profit tax of export firms and endorse export finance schemes at a low interest rate. Moreover, tax benefits such as 80 percent of profit tax reduction were given to export firms to support other R&D activities and FDI inflows. Since 2005, foreign visitor investment FDI areas are exempted from profit and income tax for first ten year of establishment, and 50 percent tax of new R&D expenditure can be claimed as tax deduction. On the other hand, duty drawback schemes were used to reduce cost of producing exported products. Basing on 1997 Special Act for Duty Drawback in Korea, the imported raw materials that were used to produce export products within two years from import were qualified for duty drawback. The drawback rate was defined as the amount of duty drawback divided by exported value. Obviously, the ratio of duty drawback increased from 0.3 percent in 1975 to 2.6 percent in 1990, and the rate further increased from 17 percent to 27 percent between 1990 and Financial Incentives Financial incentives included policy loan, export finances and export insurances. Policy loan played a role as facilitator to provide the preferential interest rates. During the 1970s, preferential interest rate of total bank rose from less than 40 percent in 1975 to over 55 percent in 1976 and 1977, and this preferential interest rate reached 70 percent in However, the

17 12 financial incentives encountered changes in 1980s when government liberalized interest rates to give managerial autonomy and privatize of commercial banks. In addition, export finances gave exporters huge amount of interest rate subsides with the supports from Export-Import Bank and commercial banks. Interest rate for export finance was 3 percent during 1998 to 1999, which was much lower than that of market rate ranging from 8.5 to 20 percent in Besides, SME s debt related to export withdrawn from commercial banks is protected by KCGF under guaranteeing the repayment that was up to ten billion won, reaching 4.2 trillion won and 4.6 trillion won in 2006 and 2007 respectively. Last but not least, export insurances helped exporters increase exports by protecting them against the losses through the 1969 Export Insurance Act. Later, EIF (Export Insurance Funds) were established to support the implementation of Export Insurance Act. EIF accumulated 1.5 trillion won in From 1968 to 1972, the value of export supported by export insurance was 1 percent, and remained stable around 3 percent during 1980s. KEIC was established in 1992 to support export incentives Establishment of Free Trade Zones and Other Supporting Organizations FTZs, exclusive areas outside the national customs boundary that is exempted from customs requirements, have been governed by the Law on Free Trade Zones. In FTZs, streamlined import procedures, exemption from import tariffs and tax relief including value added tax/corporate tax are applied. Also, foreign cargos are allowed to enter and leave the zones freely, yet to enter FTZS industries shall have more than 50 percent of total sale amount of export, and invest more than 50 million won. Until now, FIZs are situated in many places. The Masan Free Trade Zone (FTZ) was formed in 1970 under the name of first Korean foreign

18 13 exclusive individual complex to appeal more FDI inflows. It is so beneficial for export activities mainly due to its favorable location. In addition to establishment of free trade zones, there is a focus on exchange rate. The exchange rate system was in 1980 changed to the managed flexible system that was basically determined by market forces in foreign exchange markets. Exchange rate was devalued from time to time. Korean Won exchange rate shifted from 255 won/usd in 1964 to 484won/ USD in Lastly, many supporting organizations were established. KITA and KOTRA were built to assist firms overcome the export barriers such as motivational, informational and operational issues. KOTRA, established in 1962, plays a role as national trade promotion organization by facilitating export led economic growth through trade promotions including oversea market survey and business matchmaking. With the expanding mandate of KOTRA, It was renamed as Korea Trade Investment Promotion Agency in 1995 in order to mainly promote cross border investments and to support technical and industrial cooperation projects. Until 2009, there have been 100 Korea Trade Center in 73 countries around the world. In addition, KAMA (Korean Automobile Manufacturers Association) was created in 1974 to facilitate and support auto industry Policy Significances The industrialization and rapid economic growth in Korea has been explained as the outcome of outward looking policy which forced Korean firms to be more competitive particularly in international markets. In the same way, the growth and export expansion of auto industry in Korea could happen thank to various government interventions and policy resources, especially export-led policy. As mentioned earlier in this paper, Korean automakers have

19 14 transformed from the cheap unqualified producers, utilizing borrowed technology from abroad, to a global competitor with self-technology and high production capacity. Korea first exported six cars to Ecuador in exchange for bananas in 1976 (GreenAndrew, 1992). However, ten years later the industry has changed when Hyundai successfully exported Excel to North America, particularly United States in In this sense, it is arguable that export-led policy helped boost Korean auto industry in two aspects, economies of scale and productivity and improvement. In the early stage Korean auto industry suffered greatly from diseconomies of scale due to small domestic demands and fraction in size. Economies of scale are gravely indispensable and sensitive for automobile industry since the shortage of demands would lead to the waste of production capacity and sustainability of producers. Economies of scale refers to the cost advantages the firms obtain by reducing the cost and increase the outputs. In the motor vehicle industry, the minimum economies of scale are affixed at 250,000 units per year (HuangYasheng, 2002). Though the production increased rapidly from 9,069 cars in 1974 to 112,324 cars in 1979, the industry was still in the struggling stage because the domestic market is too small to absorb the outputs, and as KIET report indicated, the industry can only survive if the production was expanded large enough to capture economies of scale (GreenAndrew, 1992). Thus, the only survival strategy, as one Korean newspaper pointed out the last resort for survival, was to force auto makers to export to foreign markets, especially the big market such as United States. Figure 1 indicates the increase in production and export which helped Korean automakers achieve economies of scale. Korea exported less than 35% of its automobile production in 1985, but from 2004 until 2012 Korea has exported from 50% to 70% of auto outputs. It is already clear that the export volume is much greater than domestic sale volume, and the figure implies that the exportled policy, which pushed Korea to export its automobile since 1970s, helped the industry itself to

20 15 develop in the sense that export allowed those automakers to reach economies of scale in order to survive and grow. Figure 1: Total production, domestic sale and export volume between 1977 and 2012 Year Total Production Domestic Sale Export , , , , , , , , , , , , , , , , , ,083, , , ,129, , , ,321, , , ,497,758 1,104, , ,730,161 1,268, , ,049,968 1,435, , ,311,609 1,555, , ,526, , , ,818,000 1,513,000 1,305, ,954, ,000 1,362, ,843,000 1,273,300 1,510, ,115,000 1,430,000 1,676, ,946,000 1,451,000 1,501, ,147,584 1,622,268 1,622, ,177,870 1,318,312 1,814, ,469,464 1,093,652 2,379, ,699,350 1,142,562 2,586, ,840,102 1,164,254 2,648, ,086,308 1,219,335 2,847, ,826,682 1,154,483 2,683, ,512,926 1,394,000 2,148, ,271,741 1,465,426 2,772,107

21 ,657,694 1,474,637 3,151, ,561,766 1,410,857 3,170,634 Source: KAMA From another aspect, by pushing auto makers to export and compete in foreign markets, where the competition environment was very fierce, those firms willing or not had to improve quality, technology as well as production capacity in order to capture the market share. Since the domestic market was highly restricted, the competition seemed to be neglected; yet, the preservation of domestic market allowed those firms to produce and improve their products before exporting by using on trials and errors method. The domestic market is also the backdoor, for the government allowed dual pricing strategy in which domestic consumers paid higher than the foreign consumers. Experienced from severe competition abroad, Korean automakers, especially Hyundai which took the first step, pulled resources into R&D efforts. Technology and innovation is known to be deathly important for auto makers if they wish to compete or to at least survive. The initial stage of Korean auto industry R&D was mainly to adopt and develop foreign technology to achieve the maximum local content. The later stage R&D effort was to achieve the design specification and engine technology specifically to meet the US emission standard and to catch up the technology it lagged as well as to produce car by utilizing indigenous technology. In particular, HMC became the first Korean automaker that could produce engines and transmission independently. It is clear that the market competition in foreign market, along with government supports, stimulated R&D efforts conducted by Korean firms to improve production and gain competitive edge. To indicate, private auto industry expenditure on R&D increased remarkably from roughly 26% in 1975 to 75% in 1985 and remained very high until now. HMC increased its R&D significantly in 1990s; for example, in 1995 invested $625 million in R&D budget, equal

22 17 to 5.2% of its sale revenue. In recent years, Hyundai and Kia together spent $3 million on R&D annually, equivalent to 5% of total sale revenue, to achieve more fuel efficient engine technology (OnhsmanAlam, 2009) (OkaneTony, 2012). Various R&D efforts did not only help Korean automakers produce the qualified outputs but also helped them save the royalty payment they had to pay to foreign companies. As appendix table 9 illustrated, the royalty payments paid by Hyundai and Kia decreased significantly during 1990s. The competition is the answer to the question of live or death. Since the domestic market of Korea is highly restricted from foreign car producers, the competition was less likely. On contrary, the competition in foreign markets such as in North America and Europe where many mature and advanced carmakers had already dominated the market is another story. To compete in such a catch-up process, Korean automakers were left no choice but to improve and develop by putting more efforts on R&D and innovation. In short, it is very obvious that export-led policy had forced Korean automaker to shift from low technology producers to a global competitor by prompting firms to increase their efforts in R&D and improvement.

23 18 Chapter 4: Conclusion In a broad aspect, Korea Inc. dictated the development of the country based on statist model and outward-looking policy. In the same way, Korean auto industry has developed under the initiatives and protective wing of the government. Many scholars and observers have come to a conclusion that Korean government intervention was very effective back then in shaping the development of the country and especially the development and prospect of Korean auto industry. The government played roles as the initiator and supporter. In the aspect of Export-led policies, government has provided firms with tax incentive, financial support and establishment of various organizations to facilitate exports and further growth. The relationship between Chaebols and the government is known to a parental one in which state both persuaded and force firms to realize the goals it had put forth. The government took strong hold over banking sector so that it could allocate resources to whichever industry in favor. In the efforts to boost up export, government from the early stage provided R&D supports which in turn allow Korean automakers conduct reverse engineering and finally produce vehicles based on indigenous technology. Korea auto industry entered the new age when it successfully exported the first made in Korea car to the United States. Thanked to the export promotion policy which helped the development of Korean auto industry, and the significance of such outward policy can be summarized into two. First, export allowed firms to reach economies of scale which they cannot realize by capturing the domestic market alone. Second, the experience from severe competition abroad gave automakers lesson and force them to improve productivity and innovative technology to survive and compete internationally.

24 19 Headed by the big three Hyundai, Kia, Daewoo and later joint by Ssangyoung and Samsung Renault in 1990s, Korean auto industry has grown very fast, and Korean cars are now conquering the world markets face to face with other major world-class producers. Despite economic downturn in 2008, Korea auto industry continues to grow and in 2012 Korea exported 3,200,000 vehicles, amounting to $718 billion. In other words, despite many shortcomings and problems Korean automakers are facing today, the prospect of Korean auto industry is very promising Research Findings Responding to the research hypothesis which is the significance of government Exportled policy on Korean automobile industry, the paper has outlaid various actions taken by the government in order to industrialize as well as to develop the auto industry in Korea. From broad perspectives, we can conclude that the development of auto industry in Korea has gone through three major stages. First, from 1962 to early 1970s, the government embarked the initiatives for HCI (Heavy and Chemical Industry) in which automobile industry is the main pillar in the development of Korea. In this stage, Korean automakers relied greatly from foreign technology, license and reverse engineering of foreign technology. Many analysts have agreed that Korea had skipped from phase 1 to phase 3 in terms of car production during its catching-up process. Though the involvement of foreign firms was visible, their significance was downplayed since the government tried to limit the control of foreign firms, and the managerial control was mainly under domestic firms, even in the case of Daewoo where GM hold 50% of ownership.

25 20 Secondly, from later 1970s to the end 1990s, it is the period of booming and struggling. Korea automakers had successfully developed their own model, whether by foreign assistance or indigenous efforts. In this stage, the export-led policy played great roles in shaping and restructuring the industry because the mid 1980 saw the rationalization of banking sector and trade liberalization. Major firms like Hyundai, Kia and Daewoo pulled their resources to R&D sector to achieve competitive edge in both domestic and foreign markets, and the same period saw the increase in national players such as Ssangyoung and Samsung Renault that entered the market in early 1990s. Last but not least, the turn of century came along with a clear prospect of Korean automakers. The market share in foreign market continues to increase, and Korean cars are now competing directly with other world-class producers. Korean cars are exported to every continent in the world, and more and more factories are being established abroad. At the meantime, various R&D efforts are to achieve competitive edge in innovative technology to compete or supersede other mature producers. With regard to the importance of export-led policy, two significances were found. On the one hand, export-led policy forced Korean automaker to go abroad and in turn allowed then to meet economies of scale that they cannot capture in local market. On the other hand, severe competition abroad pushed Korean carmakers to put more efforts in improving productivity and innovative technology through R&D efforts Limitation and Recommendation Since the mid-1980s, the rationalization and democratization of Korea limited the intervention of government over the industry; therefore, the industry growth is mainly

26 21 determined by market mechanisms. Notwithstanding this new landscape, Korean auto industry prospect is very promising as the continuous growth continues to be seen. Despite bright successes, Korean auto industry still faces some challenges. First, the image of Korean cars is still perceived as cheap and low quality even the industry has become a mature and competitive global player. In terms of technology, Korean auto industry is still lagging behind major producers such as Toyota and Honda. In 2009, Hyundai and Kia combined spent only $3 billion on R&D while its Japanese counter parts Toyota and Honda invested $8 billion and $5 billion respectively (OnhsmanAlam, 2009). On the other front, Korean auto makers still compete in the lower end of the market where new entrants such as China and India are also entering. While most advanced countries producers are now moving to luxurious models, Korea is stuck in the middle between the most advanced and new giant entrances. To counter the challenges, the image of Korean cars should elevated through the improvement in specification design and innovative technology such fuel efficient engine, which Japanese firms such as Toyota and Honda took the lead. Plus, the Korean automaker while competing in the lower end market should seek to gain more recognition in the luxurious car market, but not mainly basing on price competition. However, it is quite hard to realize and this requires time to take effects. This research mainly focuses on the internal factor which internally embarked by the government of Republic of Korea during the development stage of automobile industry, meaning that the standpoint is placed upon the significance of various policies, particularly export-led policy and government intervention in combination. Now that Korean automobile industry has moved from cheap humble assembler to a global competitor, the future prospect of the industry

27 22 is very favorable. More importantly, this research paper has disregarded the external factors which also explain the success of Korean automakers such Hyundai, Kia, Daewoo in relation with export-led policy. In other words, it is recommendable that the future research should be conducted to modify clearly the external causes which enabled Korea to develop its automobile industry, for the national policies are not the sole causes of successful export-oriented industry. The success of Korean auto industry is a coincidence between the international environment, which allowed it to industrialize and export, and sound national policy. In this sense, many international factors which are out of Korean government control are also important in shaping the future of auto industry development.

28 23 Appendices Table 1: Global production by country Table 2: Production by makers Table3: Key Elements of Government Policy

29 24 Table 4: Worldwide automobile production ranking, 1992 and 1995 (Unit: thousand) Table 5: South Korea: international cooperation of the leading auto producers

30 25 Table 6: Production, Domestic sales, Exports and Imports, Table 7: Export by makers Table 8: Export by regions

31 Table 9: HMC and Kia Motors: royalty payments and sales,

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