As South Korea-U.S. tariff talks enter the final stretch, complete carmakers that produce automobiles, the largest export item to the United States, and auto parts companies are closely watching the progress. If the talks are concluded and the tariff rate the United States imposes on automobile items is lowered to 15% from 25%, the industry expects to regain some price competitiveness.
According to the industry on the 24th, there is an outlook that South Korea-U.S. tariff talks will be concluded at the end of this month on the occasion of the Asia-Pacific Economic Cooperation (APEC) meeting in Gyeongju. There is also speculation that a joint-statement-level agreement could be released at a South Korea-U.S. summit during APEC.
The automobile and auto parts industries are taking a direct hit from tariffs. Since April, the United States has imposed a 25% item tariff on Korean-made automobiles and, since May, on parts. Although the United States decided in July to lower the tariff on Korean automobiles to 15%, implementation has not begun because follow-up discussions have not been finalized.
Until now, Korean automobiles had no tariffs under the South Korea-U.S. free trade agreement (FTA), while Japanese and European automobiles were subject to a basic tariff of 2.5%, giving Korea a price advantage. However, the situation reversed as the United States cut the tariffs imposed on Japanese and European Union (EU) automobiles and parts to 15% from 25%.
Hyundai Motor Group saw its operating profit in the second quarter drop by about 1.6 trillion won due to the tariff burden. There are also projections that operating profit will fall by 2 trillion won in the third quarter. In the second quarter, it shipped volumes in advance to build up inventory, but as inventory has been depleted, it is shouldering the tariff burden without raising prices.
NICE Investors Service projected that if the tariff rate on South Korea's automobile exports to the United States remains at 25%, Hyundai Motor Group's annual expense would exceed 8 trillion won and its operating margin would fall to 6.3% this year from 9.7% last year. If the tariff rate drops to 15%, it estimated the expense would decrease to about 5.3 trillion won annually and the operating margin would be around 7.5%.
The auto parts industry, including engines, transmissions, brakes, and tires, is also on high alert over the outcome of the talks. Because many parts suppliers are small and midsize companies, the damage from tariffs is relatively large. From the 1st to the 20th of this month, exports of automobiles and auto parts fell 25% and 31.4%, respectively, from a year earlier as U.S. tariffs coincided with the Chuseok holiday period.