South Korean Automotive Industry

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Jason Choi
Student ID: 910687406
Professor Simeon
IBUS 690_01
Automotive Industry in South Korea

I. Introduction (Sector Analysis)

A. Country Background
Known as one of the Four Asian Tigers, South Korea, officially known as the Republic of South Korea has become a major force in today’s globalized economy. With a population of just around fifty million people, South Korea has a thriving economy, which is Asia’s fourth largest economy with a GDP (nominal) of $1.151 trillion (ranked 15th) (CIA, 2009). South Korea’s rapidly growing economy is evident when observing how its real GDP has expanded by 8 percent annually, from $2.7 Billion in 1962 to $230 Billion in 1989. Most of South Korea’s early economic development is attributed towards emphasizing most of their labor-intensive work in the industrial sectors. Here, many large conglomerate known as “chaebols” started and made their impression on the world. Factories in Seoul and the Gyeonggi Province contributed to nearly half of the country’s employment, with 2.1 million factory workers back during the economic development times (Green, 1992). Throughout the 1960’s – 1980’s, South Korea’s major contributing sectors to their economy were their shipbuilding, mining, construction, armaments, and their automobile industry. A good sense of a country’s industrial level can be measured from their automotive industry due to that fact the automotive industry is a prime example of generating added value through economies of scale for the country (Lee, 2011). South Korea’s automotive industry is fifth largest in the world in terms of production and sixth largest in terms of exportation in 2010. B. Sector Background

The origins of the Korean automobile industry have ties with the development of parts manufacturing and service stations as a result of Japanese colonial policy before World War II (Kim, C.K., Lee, C.H. 1987). Furthermore, the development of South Korea’s automobile industry came with help from the government when the First national Economic Development Plan was passed in May 1962. The first modern assembly line was built that year, which was the beginning of an industry that would have tremendous growth for many decades (Kim, C.K., Lee, C.H. 1987). This special law helped promote the manufacturing of automobiles by facilitating joint ventures with Japanese producers since foreign automakers were prohibited from manufacturing solely by themselves (McDermott, 1996). Certain key aspects of this special law were the imposition of ban on imported finished cars while having favorable duty benefits on the importation of components for assembly. In the initial stages, there were only a handful of companies in South Korea’s automobile industry. Kyeongseong Precision Industry, more commonly known as Kia, Shinjin, Asia, and Hyundai were the byproduct of a proliferated industry after the economic development was signed in 1962 (Kim, C.K., Lee, C.H. 1987). Despite many parts assemblers finding themselves a bigger role in the automobile industry, three big companies are the only ones whom emerged significantly, (HMC) Hyundai Motor Company, Kia, and (DMC) Daewoo Motor Company. Due to a shift in the Korean auto industry contributed by the second oil crisis in 1980, the South Korean government asked Kia to withdraw from the passenger car market because it was the smallest of the three assemblers at the time (McDermott, 1996). This action was the result of the government trying to eliminate excessive competition and costly duplication, which they thought would be corrective measures with an industry facing bankruptcy (Green, pg.6). In return, the government granted Kia a monopoly in the production of light trucks where both HMC and Daewoo had to vacate. After much legislation was enacted, the industry slowly looked more stable as new entrants into the industry was prohibited. Thus, in 1986, HMC had 89.2% of passenger car production. Kia and...
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