The Korea-EU free trade pact is expected to spark price competition among European carmakers operating in Korea, which will likely boost their popularity with local consumers.

Last month, most German automakers here lowered prices by 1 to 2 percent in expectation of a lower tariff on their imports with the Korea-EU FTA. Korea currently levies an 8 percent tariff on European cars but the trade pact requires them to be entirely tariff-free by 2016.

Foreign carmakers do not anticipate higher profits from the tariff cut, but said they expect sales to go up in the medium-term as lower prices attract more buyers.

“We lowered our prices by 1.43 percent in June, which is about 900,000 won ($835) off a BMW priced at 68 million won. There won’t be much change to our revenue, but the EU FTA will give a stronger footing to foreign carmakers in general,” an official at the German carmaker said.
Park Sang-do, director of the automotive committee at the European Union of Chamber of Commerce Korea, said the 8 percent tariff would be gradually eliminated from the import price of vehicles, not the sales price, giving carmakers less scope for increased revenue.

“The trade pact is beneficial for both local and foreign carmakers in the long-term. The elimination of tariffs potentially expands their market but because this happens across five whole years, there won’t be much impact on their revenue when adjusted with inflation,” Park said.

Swedish carmaker Volvo became the first European brand to cut prices. On May 23, it lowered the price of all Volvo cars and accessories even before the company was subject to less tax, showing strong commitment to local consumers. The price cut ranges from 2.5 to 3.5 percent, which translates as an up to 1.12 million won discount.

Mercedes Benz, the second-largest foreign brand here by sales, made price cuts of 1.3 percent on average in June. Volkswagen will follow suit soon.

“We will make price cuts on all Volkswagens invoiced from July 1 onwards. The cuts will differ by vehicles,” a spokesperson at the German carmaker said.

BMW and Mercedes sold the majority of imported vehicles here last year, with the proportion further expanding this year to around 55 percent. Industry watchers expect the trade pact to accelerate the pace for European players.

“Price cuts by most European carmakers are likely to boost their sales. And among those who made cuts, the top German players will take a substantial part of the increase,” said an official from the Korea Automobile Importers and Distribution Association.

According to the KAIDA, foreign carmakers sold about 427,000 cars in the first five months of this year, up 24.4 percent from the same time last year. The boost was driven by European brands, taking up 75.3 percent of the foreign share. The figure is significantly higher than market share held by their Japanese (17.2 percent) and American (7.5 percent) counterparts.

By Cynthia J. Kim (cynthiak@heraldcorp.com)