South Korea Autos Report Q2 2012

Includes 3 FREE quarterly updates

Although we expect the last two months of 2011 were an improvement on October for the domestic market, we have lowered our full-year forecast to growth of 0.8% year-on-year (y-o-y) at 1.477mn units. Moreover, our bleak economic expectations for 2012, including an uptick in unemployment related to a slowdown in exports, have prompted a downgrade of our 2012 sales growth forecast to a 2.5% contraction, to 1.440mn. This is not necessarily a collapse of the domestic market. Total vehicle sales have not crossed 1.5mn units since 2002, as the market is largely saturated. We believe there are some areas for growth, but unfortunately for the domestic brands these opportunities will be in the import market.

New vehicle sales in South Korea were up 4% y-o-y in H111 to 739,197 units, with production up 9.7% to 2,302,600 units. A six-day strike over working hours and pay at component producer Yoongsung Enterprises' Asian facility in May resulted in disruption to Hyundai Motor's SUV production. According to the Korea Automobile Manufacturers Association (KAMA), South Korea exported 1,540,646 vehicles in H111, marking a 15.1% y-o-y increase, while imports stood at 58,569 units, an increase of 17.2% on H110. Following its takeover of South Korean carmaker Ssangyong in February 2011, Indian automaker Mahindra & Mahindra has said it is keen to increase exports of Ssangyong's products to India and Africa. In addition, Mahindra says it is in the process of assessing South Korea's autos sector, so that it might bring its own models to the country in the future. Similarly, German carmaker Volkswagen has said it will export its Passat to South Korea from 2012.

Hybrid vehicle sales fell 38.3% y-o-y in February 2011, to 293 units. Nevertheless, South Korean carmakers made progress in the development of new energy vehicles in Q211. In April, Hyundai unveiled its Blue2 hydrogen fuel cell vehicle, with a fuel economy of 34.9 kilometres per litre, and in May, Hyundai and Kia Motors launched their respective Sonata and K5 hybrids. In the aftermath of the March 2011 earthquake and tsunami in Japan, Renault Samsung announced that it was looking to increase the proportion of parts its sources locally, in particular its powertrains. In addition, Mitsubishi Motors may turn to South Korean suppliers to overcome its shortage of electric vehicle batteries.

In line with our forecasts, import sales for 10M11 were up 18.9% y-o-y, at 87,928 units, and are on track to break the 100,000-unit barrier for the first time. Moreover, we believe the signing of free trade agreements with the EU and US will ensure double-digit growth in imports for the rest of our five-year forecast period, with the potential for volumes to double by 2016. We believe European brands will be the major beneficiaries, particularly those offering the high-end luxury products not catered for by the domestic brands.