Korea opportunities

A source at one Korean car manufacturer says his company can make 40 per cent more money per car in the UK than at home. The collapse of South Korea’s currency, the won, combined with the strength of the pound, means Korean goods can be made for considerably less than they are sold for internationally. There have been fears that Korean car manufacturers might exploit this situation and flood the UK with cut-price cars. But so far these fears have not been realised.

There are four Korean car makers in the UK: Hyundai, Daewoo, Kia and Ssangyong. Of these, Daewoo and Hyundai have particularly aggressive strategies for boosting sales.

Daewoo will this week announce plans to launch a $50m (31m) ad campaign across Europe aimed at building the brand in its 12 markets. The company has appointed incumbent UK agency Duckworth Finn Grubb Waters to run the campaign.

For these four companies, the temptation to exploit their currency advantage must be considerable. In one cut-price blitz, they could increase both sales and market share. After all, there are no trade barriers inhibiting the import of Korean cars to the UK. Statistics show up to 30 per cent more entered the country in 1997 than the previous year. The local car industry is in the midst of retrenchment, as shown by Rover’s recent decision to shed jobs. For Korean companies, generating income in a strong currency like the pound could ease some of the significant debts they are understood to carry.

These conditions have existed since the Asian economic crisis began last year. But despite this, figures from the Society of Motor Manufacturers & Traders show there has not been a dramatic leap in Korean sales, rather what pundits term “tentative” growth.

In the year to July, the four Korean car makers’ combined share of the UK market reached about 2.7 per cent, up on 2.3 per cent for the same period last year. That translates into 31,500 cars being sold this year. Compare this to market leader Ford, which has sold 214,970 cars so far this year, and it is apparent that the Koreans have a long way to go to achieve a major presence.

So why are the Koreans refraining from a price-cutting strategy? The answer may lie partly in their financial situation, but also, and perhaps most significantly, owes a lot to the careful stewardship of the brands by their UK and Korean representatives. In a nutshell, Korean car manufacturers are thinking long term and are petrified of damaging their brands through price-cuts.

Korean car makers made their mark in the UK in 1982 when Hyundai launched the Pony. It was marketed as a new car that could be bought for the price of a used one. Lex Service, which holds the Hyundai franchise in the UK, sold 3,000 models in the first year. The company is hoping to sell 30,000 this year.

Hyundai is no longer seen as an alternative to used cars. The company now aims to compete with quality new European and Japanese cars head on. Hyundai recently launched the new Sonata, retailing at 14,000 to 19,000, to take on the Ford Mondeo.

“Our whole strategy has been to move ourselves up into the mainstream to compete directly with European and Japanese cars,” says Hyundai public relations manager Stephen Kitson.

“Our strategy is to build consumer confidence in the brand. It would not make commercial sense for us to indulge in a strategy of price-cutting. It would damage confidence in the brand.

“The reality is that, if we took 1,000 off the price of every car we sold in the UK, we would see increased sales, but not great ones. The budget end of the market is very fickle. Consumers understand that price-cuts are distress measures. The way the market works, you can go out and buy market share but you are going to have a problem getting rid of all those used cars. That makes them less attractive. If you slash 1,000 off [one of our cars] today those people who bought [that car] yesterday will see it suddenly worth 1,000 less.”

Daewoo, which entered the UK market three years ago, takes a similar stance. Its new pan-European campaign, to be handled by Duckworth Finn and CIA Media, aims to promote the character of the company. That makes it similar to a campaign already embarked on by Hyundai, which advertises on Sky, MTV and Eurosport.

Daewoo has developed a larger UK share than Hyundai – and more quickly – thanks to aggressive and original marketing. The strategy has been to promote Daewoo as the “most customer-focused car company”. Daewoo has developed its own network of showrooms, staffed not by dealers working on commission but actual company employees. The cars are sold with road tax and delivery included, and with a three-year customer care package.

It is an approach that has had some success in the UK, but in the rest of Europe this type of promotion is not sustainable. On the Continent, Daewoo cars continue to sell on being better value for money. They are still competing at the lower end of the market, sometimes against used cars. The new campaign, which will focus on western Europe, is designed to develop Daewoo’s image in such markets.

Mark Carbery, head of Daewoo’s UK communications, says that since the company entered the UK its cars, which initially used old General Motors technology, have become much more state-of-the-art. Daewoo has opened a new design centre in Worthing, which contributed to the production of three new models last year: the Nubira, the Lanos and the Leganza. Now Daewoo is about to launch the Matiz into the “mini” market. Significantly, Daewoo cars now range in price from 6,300 to 17,500.

Carbery believes new technology has enabled Daewoo to “get well up the ladder because we have a brand that means something”. Price cuts would undermine that. “We can return much more profit if we can continue as we are,” he says.

Charlie Dawson, Duckworth Finn’s deputy managing director, agrees: “In the end, there’s no use selling lots of cars for one year. We need to be more robust than that and not as short term.”

Although Daewoo has not used the low value of the won to cut prices, it does mean the company has been able to avoid price increases. “We haven’t had increases in the price of our cars for 11 months – that’s virtually unheard of in the car market. We can continue to do it, and realise better profits at the same time. It [the low won] gives us a comfort zone,” Carbery points out.

All this paints a rosy picture of the Korean car manufacturers, but the situation is murkier than it may at first appear. To many observers, the jury is still out on their success in the UK. Analysts point to the turbulence of the Korean economy, labour problems at home and UK distribution as limitations on their growth.

Both the significant manufacturers, Daewoo and Hyundai, have had ups and downs financially. Lately, they have been restructuring in response to the Korean government’s demands for them to reduce their debts. Hyundai this week posted a won1.2bn (558,300) loss for the first half of the year, against a background of strikes by workers at home. Meanwhile, exports fell by 63 per cent in July. The Financial Times recently reported that Daewoo is looking to raise 7bn by 2,000 through asset sales and mergers. It is also understood that Daewoo is in negotiations to sell a stake in the company to General Motors.

A salutary message for both these companies comes from the example of Kia – the third Korean contender in the UK. Kia, a much smaller company than either Daewoo or Hyundai, launched here in 1991. It managed to build a market share of 0.25 per cent by 1997.

But last year its debts caught up with it. By July, the Korean government had stepped in and ring-fenced the company. It is now in receivership and interested buyers have been asked to come forward. Fiat, Hyundai, Daewoo, Ford (which, with Mazda, already owns 17 per cent of the company) and General Motors are among the contenders. A decision is due this week, although it is understood that it may take longer.

As for labour problems – which have taken the form of strikes in Korea – Hyundai, for one, says it is working to resolve them. Its latest factory is 97 per cent automated.

Despite this, City analysts still believe the Japanese have more significant opportunities than the Koreans. According to Greg Melich, auto analyst for Morgan Stanley Dean Witter, Japan’s share of the UK car market has grown from 13.9 to 15 per cent so far this year.

“Of course [the Koreans] are going to grow because they are starting from a very low level,” says another analyst. The question is whether they can turn their toe-hold in the UK into a larger, permanent presence. According to the Korean companies, this process will not involve massive price cuts because their good name is too important.

Business, of course, comes down to money. Clearly the Koreans have weighed up the benefits of a quick return from a cut-price blitz and decided more money can be made through steady growth with a good brand. They appear to have taken the message of one industry source to heart: “When you join the car market, you join it for the duration. There is a long game to play.”

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