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Once home to 'Japanese car killer,' South Korea's auto sector in decline

Annual output nears 4m minimum needed to sustain industrial base

A worker at GM Korea, which shut down one of its three South Korean plants last year.   © Reuters

SEOUL -- Cutbacks by foreign automakers are threatening to slash South Korea's annual vehicle production to below 4 million, a threshold that could doom an industry that accounts for about a fifth of the country's gross domestic product.

As the global car industry goes through a major downturn -- activity at carmakers was at a near record low in August -- driven in part by the U.S.-China trade war, factories in South Korea are being hit particularly hard.

Desperate to protect jobs from the downturn, Oh Keo-don, the mayor of Busan, South Korea's second-largest city by population, traveled to French carmaker Renault's headquarters in late August to ask if European-bound vehicles could be assembled in his city.

Busan is the home of the sole assembly plant run by the mid-tier joint venture Renault Samsung Motors. Its 1,800 workers however are in danger of losing their jobs due to the shakeup in Renault's alliance partner Nissan Motor.

As part of the Japanese carmaker's global production restructure due to a dismal first quarter, Renault Samsung will stop making Nissan's Rogue sport utility vehicle this year. The model, however, is responsible for nearly half Renault Samsung's output, putting the sustainability of the Busan plant in jeopardy.

Despite appeals to assign another model to the factory, Renault has yet to make a decision. The speed of the production lines will drop 25% starting this month. Renault Samsung offered early retirement packages last month to anyone willing to volunteer, but only a few dozen accepted.

Meanwhile, General Motors subsidiary GM Korea is moving to downsize. In May 2018, the company shut down one of its three domestic plants due to poor sales at home and underperforming exports.

The parent company itself is undergoing a global restructure headlined by the decision last November to close five North American plants. South Korean operations are expected to be the target of further reductions.

Hyundai Motor, South Korea's biggest automaker, is also heading toward production curtailment at home. Though the group commands a 70% domestic share, sales are struggling. In crucial offshore markets in North America, China and India, the automaker is shifting toward local manufacturing.

It is a stunning turnaround in an industry that thrived at the turn of the century. In the 2000s, the South Korean auto industry began offering attractively designed and affordable compact vehicles to middle-class buyers. The cars were a hit in the U.S. as well as in developing markets. Hyundai grabbed market share from Japanese rivals, earning itself the moniker of "Japanese-car killer".

South Korea eventually became the fifth largest producer of automobiles, only bested by U.S., China, Japan and Germany.

But in the middle of this decade, South Korean automakers failed to roll out innovative new models. This gave room for Japanese and European competitors to regain ground, while South Korean brands saw sales stall worldwide.

High labor costs and the appreciated won weighed down on finances, leaving South Korean automakers unable to spend enough capital on new vehicle development. That drove a vicious cycle in which they continued to lose market share.

South Korea produced 4.02 million vehicles last year, down 500,000 from five years earlier. That places the country in seventh place, making way for India and Mexico.

"Production [in South Korea] could potentially fall below 4 million in 2020," said Kim Pil-su, a professor of automotive engineering at Daelim University College.

An annual output of 4 million units is the absolute minimum needed to sustain the domestic auto industrial base, including the supply chain, says the Korea Automobile Manufacturers Association. Anything below that line would produce "parts suppliers who will have difficulty getting bank financing," said an industry insider.

Like semiconductors, automotive is a vital industrial sector in South Korea, accounting for roughly 20% of gross domestic product. An ebb could affect the tens of thousands of jobs generated by the industry.

Also contributing to the downturn are labor disputes. Workers at Renault Samsung held a monthslong strike that began last October, and GM Korea's union held its first comprehensive strike in 22 years this September. Hyundai endures strikes almost every year.

Salaries at automakers are considered to be the highest in South Korea. Hyundai workers make an average 92 million won ($77,000) a year, which lifts pay across the whole industry.

This summer, Hyundai's labor union agreed to a pay package without resorting to a strike for the first time in eight years. Despite Hyundai's weak earnings, the pay went up 1.7%. But the workers' decision not to strike indicates the harsh realities of South Korea's auto industry.

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