Korean preference for luxury cars shifting to foreign brands

Article by Anita Panait, on May 21, 2013

More and more customers in South Korea are opting to acquire luxury vehicles built by foreign carmakers instead of local ones. The reason is obvious – foreign luxury carmakers now offer cheaper vehicles that are of the right sizes, better quality and more fuel-efficient.  Lee Tack Young, a 65-year South Korean, told Bloomberg News that his last seven cars were all local-made, starting with a Hyundai Excel in the 1980s.

Lee, however, is making the big shift to German carmaker BMW. He said that Hyundai's luxury vehicles are oversized, overpriced gas eaters. According to Lee, he was looking for a “quality car that wasn't too big," making him decide for a BMW 528i.

Lee’s experience typifies the growing demand for foreign luxury carmakers like BMW, Mercedes-Benz, and Audi. They slowly but surely eat through the market share of local carmakers Hyundai and Kia, which domestic luxury sales account for much of their earnings.

In fact, foreign carmakers have managed to increase their share of the South Korean market for luxury vehicles from 28 percent to 41 percent in the past two years, according to Korean industry groups. South Korean consumers are starting to shift their preferences for foreign luxury vehicles – which are now cheaper thanks to lower tariffs.

Lee Sang Hyun, an auto analyst at NH Investment & Securities Co., told Bloomberg that this growing trend for foreign luxury cars is something Hyundai and Kia are worried about, and “they should be worried." He added that this trend will “undoubtedly have an adverse effect” on Hyundai's profits.

Tariffs on European imports have dropped to 3.2 percent from 8 percent since a trade agreement was put into action in action. Tariffs will be eliminated for most cars by 2014. An agreement with the United States has halved tariffs for passenger vehicles to 4 percent and will get rid them by 2016.

BMW, Audi and Mercedes-Benz all posted at least a 25-percent growth in luxury sales in South Korea in the first quarter of 2013, a faster pace than in China. Hyundai, meanwhile, logged a 4.7-percent drop in luxury sales in its home market in the first three months of 2013. The German Big 3 sold 18,114 vehicles for over KRW40 million in South Korea in the first quarter of 2013, compared to Hyundai’s 31,444.

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