South Korea’s new vehicle market continues to grow strongly with sales growth of 8.7% in H108, although BMI suggests in its latest South Korea Automotives Report that there are risks to sustaining this growth for the remainder of the year. Rising raw material costs have forced Hyundai and Kia to raise vehicle prices for both domestic and export models, while the remaining three domestic manufacturers are considering similar action. According to Hyundai, the price of steel plate has risen by 60% since the beginning of the year, with other input costs rising by around 20%. Although BMI does not expect a huge impact immediately on sales, we still expect growth to slow to around 4% by the end of 2008.

The surge in sales of imported brands could ease the effects of production costs, at least for consumers. However, domestic firms are also planning to use imports to their advantage. Daewoo Motor Sales has announced plans to commission vehicles imported from Chinese manufacturers within the next two to three years. Daewoo Motor Sales CEO Lee Dong-ho referred to the Korean design houses that work with Chinese carmakers, adding that his company plans to enlist the help of these designers to 'commission production of cars that reflect the taste of Korean consumers'. Lee also added that imports will begin with smaller fuel-efficient cars, as well as vans and minivans. Despite being near saturation, South Korea is still an attractive market to invest, according to its third place in BMI’s Business Environment Ratings for the automotive industry in Asia Pacific with a score of 64.5 from a possible 100. Historically poor labour relations drag on the country’s overall rating, although long-term political and economic stability reduce the risk to returns.

Free trade agreements add to South Korea’s sound regulatory environment, although there is room for improvement if a deal with the US can be ratified and negotiations with the European Union (EU) prove fruitful. Hyundai and Kia retain a stranglehold on the South Korean market. In Q108, the two combined brands accounted for over 70% of sales by the five national manufacturers on the back of 10% year-on-year (y-oy) growth for each brand. However, imported brands continue to register growth and this has attracted new names to the market. Toyota plans to begin sales in H109, while Mitsubishi will get the head-start in October 2008. The two new entrants will bolster the Japanese presence in the imported market, which currently includes three brands in the top 10, with a combined market share of 33%.