Question

Hyundai and Kia are two successful Korean car manufacturers that decided to be more aggressive in the European market. Whereas the European car market decreased by 7.6% during the first three quarters of 2012, Hyundai and its subsidiary Kia have been able to increase their sales by 9.3%. What is amazing is that all other car manufacturers have seen their sales decrease in Europe, due to the tough economic conditions (austerity measures, high unemployment and fears about the future). Even the German car manufacturer Volkswagen which was considered to be the most resistant manufacturer to the crisis, lost 1.2% in sales. The worst decreases occurred for the French manufacturers Peugeot (−13%) and Renault (−17.7%). As a result, the market share of Hyundai and Kia in Europe, which was 3.4% in 2006 increased to 6.1% in 2012.

Many reasons can explain the success of the Korean manufacturers.

1.	Their main plant in Korea produces two thirds of their international production: the two brands and the whole range of cars are produced there. They also decided to reduce the number of industrial assembly plants worldwide from 20 to 6 between 2006 and 2012.
2.	They historically control 80% of the Korean market, which equates to minimum sales of 1.2 million cars per year. This helps them support their R&D investments.
3.	The Korean currency, the South Korean Won, is clearly undervalued compared to the Euro or the US dollar, which reduces the prices of their cars abroad.
4.	The Korean manufacturers invested to develop new, stylish models with a European design house including the i-series for Hyundai; and the new Pride and Ceed for Kia. They also invested in production facilities in the Czech Republic and Turkey. Those investments are made as a way to better adapt their cars to the European market.
5.	Both Hyundai and Kia, which suffered a low quality image in the past, improved the quality of their cars and decided to provide a 5 or 7-year guarantee!

Because of the success of Hyundai in Europe, some politicians, such as the French industry minister denounced the free-trade deal between South Korea and the European Union, which cut tariffs from 10% to 8%. Others complain that European regulations are tougher than in Asia regarding emissions or safety, which increases the cost of design and production in Europe.

a-1.	Could the European Union change their monetary or fiscal policies to encourage European manufacturers?

a-2.	Would those policies be supply-side or demand-side?
	Supply-side Demand-side

b.	What kind of demand shock would be realistic for European manufacturers?

c.	Are car manufacturers sensitive to the business cycle?
	Yes No

d.	List the main competitive advantages that would explain why Hyundai and Kai’s sales are increasing when the economy is going down.

e-1.	Could you identify barriers to entry for European car manufacturers wanting to compete in the Korean market?

e-2.	Are those barriers to entry also competitive advantages for the Korean car manufacturers?
	Yes No

Answer 1

a-1) Yes ofcourse, the European Union can alter their monetary and fiscal policies so as to encourage European car manufacturers more by taking various measures :-

i) Abolition of the free trade policy with Korea and imposing heavy tariffs and trade tax on its companies so as to control their market captivity,

ii) By giving European companies subsidy at various level of production and distribution,

iii) By working on the issues of environmental controls, GHG (green house gas) emmissions and safety by the government and relaxing on the regulations imposed on the European car manufacturers so as to reduce their cost of production and thus the prices of the car.

a-2) The change in monetary or fiscal policy always have an impact on the demand-side of an economy first.

The sitiuation would be similar in the above case too as It will reduce the car prices of the European manufacturers, and similarly make Korean cars a bit costlier, thus, bringing down the competition in the car market for European car companies.

b) A positive demand-shock condition would be much realistic in this particular case as it will increase the demand for European cars drastically.

c) Yes, almost all the car manufacturers worlwide are very much sensitive to a slight change in the country's business cycle as it can affect the demand-side directly. Any economic fluctuation can shook the demand for a luxury item like car.

d) Hyundai and Kai’s sales increased when the European economy was going down because it had various competiive advantages over Korean and other car companies present in the European market. They are as follows :-

i) It had a large number of its car manufacturing and assembly units in its own country,

ii) It controlled almost 80% of its Korean car market, enabling it to invest more in the R&D,

III) The prices of the Korean cars got down automatically as its currency Won was undervalued in comparison of Euro and US dollar.

iv) Inorder to get their cars adapted in the European markets the Korean car manufacturers invested more in production facilities and in developing new design models with an European Design House.

v) It gradually improved the quality of its cars and also offered 5 to 7 years of manufacturing gaurantee to its customers which enhanced its market image.

e-1) The major barriers for European car manufacturers wanting to compete in the Korean car market are as follows :-

i) As the value of Euro and US Dollar is higher than Korean Won, the European cars would be far more expensive for a Korean to afford,

ii) The major part of Korean car market is captured by Hyundai and Kia only, which is approx 80%.

e-2) Yes, obviously any barrier faced by the competitors (European car companies) in the same field will turn out to be the competitive advantage for the Korean car companies.