International Law

KFTC: Why Does Hyundai Sonata Cost 56% More in Korea?

The English edition of the Chosun Ilbo reports noises from the Korea Fair Trade Commission over suspicious pricing of Hyundai and Kia automobiles (for the uninitiated these two are under common ownership, like Ford and Lincoln-Mercury). Apparently KFTC is investigating why the Sonata NF costs W16 million (about US$17,300) when sold to Americans, but W25 million (US$27,000) here in Korea. As a Korean consumer, I’m glad to see the KFTC start to dig into these issues:

The FTC has issued several warnings to Hyundai Automotive Group on the issue. In a briefing on its regulations on unfair business activities in January, the commission distributed a document which said that Hyundai Motor and Kia Motors have greatly increased their prices for small and mid-sized cars since they came to have a near monopoly in those markets with their merger in 1998. At the same time the automotive group lowered the prices of large cars which had to compete with imported cars, the FTC said in the document.  This, as a result, has imposed a greater burden on consumers with lower incomes, the FTC added.

“It’s clear that consumers have become the victims in an automotive market stuck in a monopolistic structure,” an FTC official said Tuesday.

It’s interesting to note the KFTC mentioning, if only in passing, that the effect of foreign competition has been to hold down consumers’ costs. I’d really like to see the KFTC making more of this issue, and campaigning to open Korean markets for the benefit of consumers.

But before we organize a mob of pitchfork-wielding villagers, there are actually a number of reasons which could explain at least part of the price difference. Korean prices include Value-Added Tax (VAT) of 10%, while US prices are generally quoted before state sales tax. The engine-displacement tax is also different—a 2.0 liter engine in Korea is considered “extravagant” and subject to a punitive excise tax, while in the US a mere 2.0 liter engine would be considered as a pipsqueak. Finally, there is also the chilling possibility that the costs of production are different: The Sonata NF is produced both in Asan and Montgomery, Alabama. Could the US worker be more economically efficient than “low-wage” Korea?

And I’m sure there is some element of price gouging. In 1998 I had the experience of purchasing a 19” Samsung computer monitor—a big beast of a CRT (remember those?) manufactured in Suwon, about 15 miles from Seoul. Through a friend on the Yongsan Army Garrison, I did a “hey mister” and had him purchase for me at the PX. The price was US$360, while the local price on the Korean economy was W850,000.

At that time the exchange rate was W1300 to the dollar, so a proper comparison would be a “US price” of W470,000 to the “Korea price” of W850,000. Manufactured goods aren’t exactly perishable like heads of lettuce. There is no reason for a car or electronic device to decline in value by 40-60% simply because it’s put on a ship and shipped 7500 miles to America.

Full post as published by Korea Law Blog on December 04, 2007 (boomark / email).