Industrials

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Executives at South Korea's carmakers on Tuesday blamed strained Chinese relations for a massive sales shortfall in the world's largest auto market. Foreign affairs only partly explains the story. 

Missing Out
Shares in Korean carmakers have underperformed the overall market in recent years
Source: Bloomberg

Just as Bejing's boycott over Seoul's plan to host a U.S. missile defense system hurt Korean makeup and toy brands, it also hit the auto industry: in the first half of the year, China sales at Kia Motors Corp. and Hyundai Motor Co. fell 47 percent from the year before.

But actually, the carmakers were losing market share well before the boycotts began.

Sport utility vehicles, whose extra space and perceived safety benefits have won over Chinese consumers, illustrate the point. Korean brands had 6 percent of China's market in March, down from 18 percent in 2009, according to Bloomberg Intelligence and researcher China Automotive Information Net. 

Narrowing Lanes
Chinese carmakers are gaining market share of SUV sales in their home country, edging out Korean, Japanese, and American brands in China
Source: CAIN, Bloomberg Intelligence
Note: Market share data calculated from rolling trailing 12-month unit sales

Taking over the roads are homegrown companies like Geely Automobile Holdings Ltd., which responded to the SUV popularity surge faster than most of the foreign competition. Domestic brands have also boosted the quality and performance over the last decade while undercutting overseas marques on price. Local companies now command 52 percent of the nation's SUV market, up from just 23 percent in 2009, Bloomberg Intelligence and CAIN data show.

Korean firms can learn from the recent plight of Japanese automakers such as Honda Motor Co. and Toyota Motor Corp., who lost their footing after a 2012 dispute over islands in the East China Sea sparked tensions that throttled auto sales. The companies never fully recovered from what was supposed to be a short-term hit because executives assumed that business would return to normal after political pressure simmered down. 

They didn't appreciate that Chinese consumers tend to have little brand affinity. So by the time the political rhetoric ebbed, tastes had changed, and the Japanese couldn't offer the latest bells and whistles.  

The same thing is happening now to Kia and Hyundai, which lag in the nation's three fastest-growing areas: SUVs, electric vehicles, and luxury models.

Revving up production and marketing of SUVs is the most pressing matter. They currently make up a fifth of China's car market, suggesting there's room to grow if the love affair with large cars continues. In the U.S., SUVs and trucks make up two-thirds of the market.

Korean car brands are also going to have to go back to their roots and sell vehicles at lower prices.

That's because the number of SUV models on sale in China has quadrupled since 2010 and competition is rising, according to Bloomberg Intelligence analyst Steve Man. 

Profit-nipping price wars are bound to follow, and Korean manufacturers are going to have to participate in order to win back Chinese consumers.

If Korean carmakers want to rebound from the Beijing-induced speed bumps, they're going to have to worry less about statecraft they can't control and more about the business they can. Even in China, good products at reasonable prices tend to trump short-term political woes.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net