Policies that Shaped the South Korean Automotive Industry

South Korea’s Automotive Industry

            Pundits the world over have always been fascinated by Korea’s social and economic revolution. Their interest has mostly been peaked by relatively short period of time that it took the country to develop into a hub for the automotive industry. Within a single generation, the former aid-recipient of the Korean Peninsula made giant leaps that fueled by economic growth. The South Korean government was well aware of the fundamental nature of a steady economic growth, which is why it decided to focus on specific niche industry. The automobile industry was immediately singled out as an integral sector whose positive spillover consequences would have progressive impacts on other related activities. South Korea soon became an Asian success story and is currently ranked as the sixth-largest automobile producers in the world.

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Starting with the production of automobile body parts, the industry has grown to a point where it is now responsible for flagship in-house models that signal its technological advancement. From the moment the Seong brothers first mounted and improved their first jeep engine on a military car, the South Korean automotive industry showed signs of future success (Ahrens 29). The government’s response to this new state of affairs was to cooperate with industry leaders to create conditions conducive for growth. The idea behind this support was to promoted domestic production in ways that would improve the production experience and soon make South Korea a global leader in the automotive industry. Modern automobile plants were set-up across the country within the shortest time possible as a way of ensuring that this dream was realized. The government then proceeded to supporting the implementation of modern production lines that would make it possible for the country to keep up with international volume demands. It is, thus, critical to discuss the contributions of the South Korean government towards this endeavor and how specific policies consequently shaped the auto industry.

Policies that Shaped the Korean Automotive Industry

The Automobile Industry Promotion Policy (1962)

The automobile industry in was an attractive sector for the South Korean government. In the preliminary stages, the President Yun Posun viewed this particular industry as an integral part of his development agenda and efforts to hurtle South Korea into a new age. His idea was encapsulated in the production of a vehicle that was authentically Korean and which would then improve the country’s international standing. The recently concluded Korean War (1950-53) had affected every aspect of life in the peninsula and ravaged industries that were developed after 1945. It was therefore necessary to reclaim this lost glory with a vibrant Korean automotive industry which was supported by specific government policies.

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The automobile industry promotion policy of 1962 was one such strategy that targeted the automotive industry and how it functioned. In order to promote this burgeoning industry, the government had to institute a number of changes that would give it a leading role in surmounting any of the challenges that would be encountered by major players in the industry (Amsden 98). Pursuant to this objective, the automobile industry promotion policy sought to provide favorable conditions for manufacturers while also repairing a damaged market. The government first embarked on an economic policy that involved an assessment of major externalities impacting the market. Experts in economic matters had initially underscored the importance of a cost or benefit assessment when seeking a competitive equilibrium.  Through the automobile industry promotion policy of 1962, the Korean government took the measures required to appraise all market transactions through a series of internalized externalities. The government also decided to exploit the economic divergences that were evident in the country at the time. Social and private initiatives had always recorded varying return to investment rates which hampered unidirectional development. Thus, the automobile industry promotion policy of 1962 was an attempt to implement the neoclassical paradigm to support the automotive industry without government intervention.

Automobile Industry Rationalization Policy (1982)

The South Korean government was also keen on making certain that it incorporates various forms of reorganization as a way of improving the operational efficiency. Global expansion had always remained the primary goal of senior officials who were responsible for the development of this particular policy.  It would also include various structural changes whose aim was to ensure that a new system is developed for posterity. Rationalization was viewed as an essential part of the automotive industry since it was capable of increasing the annual revenue that was usually collected (Nieuwenhuis and Wells 13). In addition to this, it would also reduce the production costs that were initially incurred by assembly companies therefore improving their bottom line. Rationalization also became an easy way of organizing the lifecycle of the manufactured goods. It now became quite practical to control the number of cars produced for it was only through a workable number that the automotive industry would grow and make the necessary steps to improve after complex improvements. The 1982 policy also outlined the effects that the automobile industry would have on the South Korean economy and the impact that would be felt if it was removed completely. Part of the government’s plan was to quantify all costs related to this project by reducing the intricacy of the supply chain.

The production volume was, therefore, always taken into consideration by this policy since incremental productivity would always ensure that business remained solvent. Moreover, the government was also aware of the industrial over-capacity that was sweeping across the country and the fact that a majority of these models were not profitable. The automobile industry rationalization policy therefore came in handy since it was part of a wider stabilization program that would make sure that the industry is commercially viable. Efforts aimed towards this objective began with mergers between specific enterprises to decrease excessive capacity at any given point (Rhee 45). The government was also acutely aware of the threat posed by monopolies. Rationalization became an approach that would go a long way in managing the industry especially since excessive competition had been a constant worry for many policy makers. The government also participated in a structured campaign of investment coordination aimed at promoting the industry. By so doing, the automobile industry was designated as a sector that would receive tax benefits, ultimately improving its competitiveness.

The Five-Year Automobile Industry Plan

By 1962, South Korea was still reeling from the damaging effects that it suffered as a result of the Korean War (1950-53). Although the political climate was still uncertain, South Korea was determined to make headway and develop the country within the shortest possible time. It is noteworthy to acknowledge that, by this time, South Korea was a basket case since it relied heavily on aid from the United States. All this changed when patriots were irked by this state of affairs and decided to fan an internal revolution that would transform the manner in which the government was run. General Park Chung-hee emerged as a leading contender for political office and soon usurped political power from the incumbent. As part of his new policy, General Chung-hee accentuated the importance of being self-reliant and using locally available resources to improve the nation (Sachwald 12). The five-year plans soon became synonymous with General Park Chung-hee’s rule and were designed to create a sense of unity in the country while increasing its wealth. The automobile industry was soon singled out as sector that would promote the country’s positive growth and supported by the government. Pilot agencies injected capital into many of the private automobile companies that were operational in the country at the time and also went as far promoting any new technological advancement. The government was also instrumental in removing barriers that would restrict expansion of the industry while clearly promoting industrial structural adjustments.

Three-Year  Automobile Localization Policy

From the onset, localization was an important facet of General Park Chung-hee’s government. It was implemented as a way of making sure that all locally produced automobiles would increase in volume with added value. Locally produced automobiles were soon in vogue and projected to have a positive effect on the South Korean economy. The three-year automobile localization policy focused primarily on making investments locally with the aim of promoting this fledgling industry and introducing it to the Korean public (Savada and Shaw 34). Within the first two years, the local inhabitants became aware of the automobile industry and the government’s effort to support it. Koreans were encouraged to purchase local brands such as KIA motors, Pyeongwah motors, Hyundai, Daewoo and SsangYong. Furthermore, vehicle owners were encouraged to use locally-made spare components since this simple act would support the automobile industry in Korea. The three-year automobile localization policy also required local automotive producers to increase their local content and focus more on producing universal components (McDermott 76). As a result, the automobile industry soon became quite competitive with the improvements that were made and the rise of a self-design capability. It is also vital to concede that localization led to a sudden rise in autonomous production

Vehicle Excise Duty (1985-95)

The vehicle exercise duty was a common hallmark of the automotive industry in South Korea. It was levied on all registered cars that used public roads and generated substantial revenue for the government. This policy was specifically implemented to make sure that the government had steady access to funds that would aid it in promoting the automotive industry and road networks across the country. The use of cars was also limited and controlled by the government as a way of ensuring that the infrastructure was protected from harmful practices (Nelson 67). Additionally, the South Korean government also realized the importance of limiting emissions and protecting the environment. The vehicle excise duty was also implemented to constantly monitor emission, provide incentives for newer cars and severely tax older cars.

Conclusion

The South Korean government is developed policies and institutional mechanisms whose main objective was to promote the automotive industry. From the Automobile Industry Promotion Policy (1962), Automobile Industry Rationalization Policy (1982), Five-Year Automobile Industry Plan, Three-Year Automobile Localization Policy to the Vehicle Excise Duty (1985-95), strategy became the easiest way of ensuring success in this industry.  Hence, the South Korean government was responsible for enacting policies that prevented stagnation in the automobile industry while promoting high performance.

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