Toyota Gains From U.S.-S. Korea Trade Pact

The biggest beneficiary of the new trade agreement that will end South Korea’s tariffs on U.S.-made cars may be based in Japan.

Toyota Motor Corp. is looking to profit as it fights a rising yen blamed for an operating loss (7203) in its fiscal first half. Japan’s biggest carmaker began exporting Sienna minivans from Princeton, Indiana, to South Korea this month and may do the same with Camry sedans next year, said spokeswoman Amiko Tomita. The Camry was the third most popular import in South Korea in 2010.

Until this month, the 17 Toyota and Lexus models sold in South Korea were all from Japan. The dollar has declined against the won in the past year while the yen has gained.

“Because of a more favorable dollar-won exchange rate compared with the yen-won rate, Japanese carmakers can shift sourcing to the U.S., allowing them to lower their prices in Korea,” said Christian Yang, an analyst at consultant IHS Automotive. “Japanese imports look to gain market share through more aggressive pricing against domestic competitors.”

The Toyota City, Japan-based company, until last year the world’s biggest carmaker, reported an operating loss of 32.6 billion yen ($425 million) in the fiscal first half and said the strong yen reduced operating income by 130 billion yen. With 6.79 million sales globally through September of this year, General Motors Co. (GM) leads Toyota by 1 million vehicles.

Yen’s Gains

The yen has gained about 3.6 percent in the past six months against the dollar, while the currencies of nine developed- nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes have declined more than 5 percent.

The currency’s advance hurts the overseas competitiveness of Japanese manufacturers and reduces the value of repatriated earnings.

“Japan’s entire auto industry will collapse” if the yen continues to gain, Toyota President and Chief Executive Officer Akio Toyoda said at a Nov. 7 briefing. Two of every five vehicles made in Japan are from Toyota.

Cars built in the U.S. can be sold at lower prices than those built in Japan, Satoshi Ozawa, Toyota’s executive vice president, said Nov. 8.

The free-trade agreement with the U.S. may expand South Korea’s trade surplus by an average $2.77 billion annually in the first 15 years of the accord, with automobile, electronics and chemical exporters among the biggest contributors, the finance ministry said in an Oct. 13 statement.

Tariff Cuts

The accord was signed by President Barack Obama on Oct. 21 and by South Korean President Lee Myung Bak yesterday.

The tariff imposed on U.S.-built cars will be cut to 4 percent from 8 percent when the accord takes effect and eliminated within five years, according to the U.S. International Trade Commission.

The tax cuts may offset the additional transportation costs. Shipping vehicles from the U.S. instead of from Japan may increase costs by as much as 3 percent, Yim Eun Young, an analyst at Dongbu Securities Co., estimated.

The accord may lead to a 54 percent increase in U.S. exports of cars and auto parts to South Korea, the ITC said in a March report.

Japan carmakers sold 23,870 units in the country last year, or 26.4 percent of total imports by volume, according to data by Korea Automobile Importers and Distributors Association.

Toyota, which entered South Korea in 2001 with its Lexus cars, sold 10,486 units in the country last year, 48 percent more than in 2009.

Sport and Leisure

“Korea, being a part of Asia, is definitely where we expect growth,” Toyota’s Tomita said. “While we’re aware that Hyundai dominates the overall market, we’ve noticed that demand for sporty, leisure cars is growing in Korea, and we are aiming to expand in those segments,” Tomita said, citing the company’s Sienna models.

Camry sales account for 53 percent of Toyota’s revenue in South Korea, according to the industry group. Lexus was either the most popular or second-most popular import in six of the 10 years through 2010, slipping to No. 8 last year.

Nissan Motor Co., Japan’s second-biggest carmaker, began selling its U.S.-made Altima sedans, the carmaker’s best-selling model in South Korea, in 2009. Nissan, which exports its luxury Infiniti models from Japan, has no plans of boosting exports to the country.

BMW Most Popular

“Exporting cars from the U.S. to Korea is being discussed, but we have not made any final decisions yet,” said Hajime Kaneko, a Tokyo-based spokesman for Honda Motor Co., which sold 5,812 cars in South Korea last year.

Even as imported-car sales rose more than 11-fold in the past decade and reached a record 90,562 units last year, that still made up only 7 percent of the industry’s total. Hyundai Motor Co. (005380) sold 482,261 vehicles in 2010 while Kia Motors Corp. (000270) sold 434,881, according to the Korea Automobile Manufacturers Association.

European automakers led by Bayerische Motoren Werke AG (BMW) saw a 27.4 percent increase in South Korean sales in the three months through September, after a free-trade deal with the European Union went into effect July 1.

BMW is the best-selling foreign brand this year, followed by Mercedes-Benz, Volkswagen, Audi and Toyota, according to the Korea Automobile Importers and Distributors Association.

Bulky and Rugged

Detroit-based automakers have 0.6 percent of the market, according to the ITC, citing registration numbers.

“U.S. cars are big, bulky, rugged,” said Kang Sang Min, an automotive analyst at Hanwha Securities Co. American cars need a “complete makeover” to appeal to South Koreans, Kang said.

GM expects to lower prices by 2 percent to 3 percent because of the accord, while Chrysler plans a reduction of 2 percent, the companies said in e-mailed statements.

“The accord will improve Korean customers’ perception of U.S. cars,” Ford Motor Co. (F) said in an e-mailed response to queries. The agreement will allow Ford to offer Korean customers more choices, it said.

“It all boils down to the price,” Park In Woo, an analyst at LIG Investment & Securities Co. said. “While Japanese automakers may be able to gain market share from other import players, I doubt they’d be able to price their vehicles low enough to threaten Korean cars.”

Hyundai’s Sonata, the top selling car in Korea, costs 20.2 million won ($18,000) and Kia’s K5 21.5 million won.

Shipping cars from the U.S. may help Toyota’s plants there run at full capacity, Dongbu Securities’ Yim said.

“It is a symbolic gain,” Yim said in an interview. “Japanese companies will be able to show increasing demand and that they are able to meet that demand, not just in Korea but globally.”

To contact the reporters on this story: Rose Kim in Seoul at rkim76@bloomberg.net; Anna Mukai in Tokyo at amukai1@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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