Wednesday, June 29, 2016

Everything Korea: June 27 Episode, Brexit, Korea and Hyundai

Difficult not to be following Brexit
(short for British Exit from the EU).

Things are still fluid, so my commentary targets the impact on Korea-facing global business and specifically the Korean car sector (and dominated players, Hyundai and Kia).

That said, as a cultural historian it’s hard not to mention my initial reaction is a potentially wider pendulum swing toward populist Protectionism-Isolationism after years of “The World is Flat” Globalism and Free Trade Agreements.
To begin….

Headlines abound like “the Pound tanked, while the Dollar and the Japanese Yen gain ground,” and “… Brexit a blow to integrated global economy,” the later a Korean headline.
From a broader trade perspective, South Korea’s exposure to the U.K. is minimal.

Due to this low trade exposure we expect the Brexit to have no major impact on the Korea economy’s projected growth. Korea’s exports to the U.K. amounted to just 1.4 percent of all export shipments. This said, the Brexit’s wider implications have many in Korea on alert and noting “the uncertainty” that was common term cited last year with the downswing in the global economy.

More significant, and something I comment on often is the foreign exchange market. As we see when there is some global economic crisis, the immediately effect is the Won-Dollar exchange rate impacted—in this case Korean currency sinking compared to the U.S. dollar by the greatest % rate in five years.

This is not always a bad thing….

As a result, US Dollar profits repatriated back to Korea are worth more in Won, so essential US overseas operations getting more bang for the Buck.

We need to watch carefully the Won with relation to the Japanese Yen, too. South Korean carmakers fared well between 2007 and 2011 as the Won fell as much as 50% against the Yen. That trend reversed in the middle of 2012. So, noted in my introduction, the Yen is strengthening.
Regarding car imports to UK….

The Brexit departure could revive a 10-percent tariff on exports of Korean passenger vehicles to UK unless a deal similar to the EU-Korea trade pact is negotiated. Short term this will have little impact, as there is a 2 year grace period for the withdraw from the EU.

If no UK-Korea trade agreement is implemented, the Korean car brands will have disadvantage in price competitiveness compared to Japanese and German rivals, which have production bases in the UK.

For the Hyundai and Kia…. the real concern is the effect it will have on the European market as a whole, as well as the global economy…. In recent months, both Hyundai and Kia have seen an upswing in business in the EU As of last year, Hyundai Motor and Kia Motors sold about 850,000 vehicles in the European countries, with 20 percent sold in the U.K.

Thanks to the FTA benefits, Korea has exported cars over 1,500 CC without any tariffs. Starting from July, those under 1,500 CC are also exempt from tariffs.

Over time… We’ll see UK move to becoming a “regulatory island adopting its own rules for tariffs, duties and standards. The European market will be more like Asia—with different rules in we find in Japan, South Korea, Hong Kong, and China.

To share a reach out for a comment from a close colleague and a leading global economist focused on Korea…. my friend notes: “Probably a lot of turbulence over next several weeks because many aspects of the Brexit were not considered by the Leave camp. But I think the markets are probably oversold as London’s position as financial center is not affected in short-run, and neither is trade. Put differently, the material effects are not as catastrophic as might appear in short-run …”

In closing… look for my follow ups this week…. As well as share you comments and questions… so, please share your remarks…. ☺

As mentioned in my introduction, whether Brexit is isolated, or the first of a broader populist Protectionism movement—it is something of interest to be followed…

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