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Except for Hyundai, thanks to the Korean government lavish rescue funds and to systematic borrowing, all Korean automakers (Daewoo, Kia, Samsung and Ssangyong) went bankrupt. Why?
The cost of producing a mid-sized car, for example, of acceptable quality in Korea is higher than the cost of producing the same car in Europe, Japan and America owing to the following:
1) Labor in Korea is costlier, less productive and less skilled.
2) Korea lacks the advanced technology of the west and Japan.
3) Bad and inefficient management and corruption of corporate Korea.
4) Work stoppage rate due to strikes systematically organized by Korean automobile militant labor unions is the highest in the world.
5) The automobile feeding industry which is financially troubled is all but unreliable.
Yet, the Korean automakers position the retail prices of their cars in the international market to be 15%-20% lower than retail prices of Japanese, American and EU cars of the same class.
This means that Korean-made cars are sold at below-cost prices on the international market. The average loss incurred per mid-sized car sold outside Korea 4-5 years ago was in the range of US$ 1,500-2,000. The Korean automakers made up the difference from higher retail prices in their local market and from borrowing.
When the local market stagnated and external loans matured in 1988, the Korean automakers went bankrupt.
To date, nonetheless, the Korean automobile industry situation remains unchanged. Korean cars are sold outside Korea at below-cost prices to sell more cars for the sole purpose of justifying more borrowing. The only change is cosmetic. It is in the doctored accounts and books which falsely show that the debt to asset ratio miraculously dropped from 6:1 to 2:1 on the average. False accounting which is common place in Korea is aimed at justifying more borrowing and at keeping stock prices from tumbling.
The other change is that at least 80% of the US$ 160 billion rescue funds arranged by the Korean government has either been used to subsidize retail prices outside Korea of Korean cars and electronic goods or channeled to the private accounts of the families that own and run the automobile-manufacturing companies in Korea.
The debt servicing burden which increasingly becomes heavier causes the chain of price dumping and borrowing to break. Therefore, the automakers in Korea dump quality to save cost. They also inflate and falsify specifications of their cars to falsely upgrade them to a higher class where dumping is not needed and profit can be made. They have also developed another source of finance for the dumping operations. They use the huge profits they make from insider trading to subsidize the prices of their cars.
The vicious dumping and borrowing circle which has severely damaged the Korean economy will soon deal another fatal blow to it from which it will never fully recover.
Worse still, it is sabotaging the economies of other countries where the Korean automakers sell, or rather dump, their cars. The automobile industries in America, EU and Japan have been hit hard as a result where tens of thousands of workers lost their jobs.
Paradoxically, then, to continue to exist and to justify more borrowings at the same time, the Korean automakers must sell as many cars as possible on the international market at below-cost prices since selling over-cost prices will make the Korean cars unsellable because they will be more expensive than Japanese, American and EU cars of the same class.
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