Korea's Car Industry Is Doomed Without Labor Reform

      May 31, 2018 13:30

      GM Korea closes its assembly plant in Gunsan on Thursday. Built in 1997, it was the last car factory to be built in Korea, employing over 2,000 workers at one point and another 10,000 at subcontractors. Gunsan now faces a massive population drain. Over the last three years, the plant had been operating at only about 20 percent capacity, yet unionized workers were paid more than W10 million in bonuses a year and were given 80 percent of their wages even when assembly lines sat idle (US$1=W1,081). Delayed assignments of new models, deteriorating brand competitiveness, failed marketing campaigns and weakened sales networks all contributed to the plant's demise.

      The story is a microcosm of the Korean auto industry. The average annual salary of workers at Korea's five automakers stands at a whopping W92.13 million (as of 2016), which is more than Toyota and Volkswagen pay, but it takes Korean automakers much longer to roll out a car. At Hyundai, the labor productivity of domestic plants is below all seven of its overseas factories'. The average annual wage at Hyundai's Ulsan plant is W94 million, a staggering nine times more than what it pays workers in Chongqing, China. And still the Ulsan plant's productivity is only 63 percent of the Chongqing plant's. This high-cost, low-productivity structure has become endemic in Korea's car industry as militant labor unions had their way.

      No wonder Chinese automakers are overtaking their Korean rivals. They no longer get their parts from Korean suppliers but go straight to global component makers with better cost competitiveness, and roll out cars that are less expensive than Korean models. The Chinese no longer consider Korean automakers major rivals.

      Now U.S. President Donald Trump has threatened to impose 25 percent tariffs on Korean-made cars, and most of his threats have become reality. That would mean Korean carmakers will have to decrease production volume in Korea even further and boost the production in the U.S. Korean factories roll out 850,000 cars for the U.S. market a year. If a quota is slapped on Korean-made cars as in the case of Korean-made steel, car plants here will have to slash output by 260,000 vehicles, equivalent to shutting down another car plant the size of the Gunsan factory. That would lead to catastrophic results for the domestic automobile industry, which employs 1.75 million workers, and cause huge ripple effects on the Korean economy.

      Korean carmakers need the consent of their militant unions even if they only want to build a single new assembly line. This labor-management structure has had nothing but negative consequences. And now the government's policies are backing unions and undermining any attempts at labor reform. Even a minor reform policy that the previous administration achieved with great difficulty was scrapped as soon as the Moon Jae-in administration came to power. In the meantime, militant unions show no signs of backing down. That is why no new automobile plant has been built in Korea for 21 years, and there is no guarantee that the Gunsan factory will be the last to shut down.

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