Kim Ju-hee says the Korean cars favored by her parents and winning customers around the world aren’t bad, just rather dull. So as she looks for a new set of wheels, she’s skipping the Hyundai Motor Co. and Kia Motors Corp. dealerships near her Seoul home to scout Audi AG and Bayerische Motoren Werke AG showrooms in the city’s ritzy Gangnam district.

“Audis are just better looking and offer something unique,” said the 27-year-old accountant, who has her eye on an Audi A6. “South Korean cars may have come a long way from where they were a decade ago, but I still find them a bit boring.”

While the car will cost her around 58 million won ($54,000), versus 43 million for a similarly sized and equipped Hyundai Genesis, that’s cheaper than it would have been 18 months ago as a 2011 free trade agreement between South Korea and the European Union cut import duties to 3.2 percent from 8 percent. A similar pact that took effect this year between Korea and the U.S. could give a boost to American brands, the U.S. International Trade Commission predicts. 

The two trade deals and a shift in consumer sentiment have cut domestic sales of Hyundai, Kia and the country’s three other automakers by 5.2 percent this year, according to the Korea Automobile Manufacturers Association. That hurts in a country where just a decade ago domestic brands were more dominant than in any of the world’s 20 biggest markets. In western Europe, Hyundai and Kia are headed for 2012 growth of 14 percent, and in the U.S. they’ll likely be up 12 percent, according to company reports.

“The recent rise of imports definitely threatens Hyundai and Kia at home,” said Lee Sang Hyun, an analyst at NH Investment & Securities Co.

While South Korean producers held 99 percent of the market in 2002, their share fell to 92 percent last year, according to the Korea Automobile Importers & Distributors Association, as imports won over buyers. This year, imported cars have accounted for 10 percent of the market for the first time, and Lee predicts they could ultimately get as high as 15 percent.

“We are improving the design and quality of our products,” Hyundai said in an e-mailed response to a Bloomberg query. “We also have a comparative advantage in terms of sales and service networks, which we continue to upgrade.” Kia declined to comment.

Foreign producers are attracted by the strength of South Korea’s economy, where the benchmark Kospi Index has risen fivefold since the 1997 Asian financial crisis, household incomes are at a record high, and economic growth is forecast to beat Asian peers.

Imports have seen a 24 percent sales increase this year in the world’s 11th biggest auto market, according to the importers’ association. German automakers account for 65 percent of imported cars sold in South Korea. Audi sales rose 44 percent, BMW rose 21 percent and Volkswagen AG was up 42 percent. Sales from Japanese manufacturers have jumped 24 percent this year and U.S. brands have risen 17 percent.

While models such as the Hyundai Elantra and the Kia Soul have helped Korean makers take share in foreign markets, many Koreans are looking for more prestige with imports.

Buyers are flocking to Seoul’s Gangnam, a district made famous by singer Park Jae Sang, better known as Psy, in his hit “Gangnam Style.” The area, which locals liken to Beverly Hills or Tokyo’s Shibuya, is considered Korea’s 1 percent enclave where Hyundai Motor and Samsung Electronics Co. have their headquarters. And each of the 24 car brands imported into the country has at least one dealership.

The video for the Psy song, the world’s most watched YouTube clip with almost 1 billion views, doesn’t feature locally made vehicles. Instead it uses a red Mercedes SLK 200 from Daimler AG to satirize the habits of the wealthy in Gangnam.

“I think imported cars look good and are more reliable, especially the German brands,” said 56-year-old Yoo Myung Sook, a homemaker who lives in Gangnam and is looking to trade in her Kia Opirus for a Mercedes. “You can see a lot of imported cars on the streets these days. Everyone in Gangnam seems to be driving one.”

Kia has accelerated overseas growth to cut its dependence on sales at home. The Seoul-based company, 34 percent owned by Hyundai, says it has made 20 percent of its sales in Korea this year, versus 89 percent in 2002. Korea accounted for 42 percent of Hyundai sales in 2002, versus 15 percent this year.

While international growth is limiting the impact of lost market share on Korean producers, it is hitting the automakers where profit margins are often the highest, according to industry researcher IHS Automotive.

“Having strong domestic market share helps Hyundai and Kia maintain their presence and network,” Christian Yang, a senior analyst at IHS, said in an e-mail. “Profitability is high due to low distribution cost and destination costs.”

The free trade agreement between South Korea and the U.S. halved the tariff imposed on U.S.-built cars to 4 percent when the accord took effect in March, and it will be eliminated by 2016. The pact may lead to a 54 percent increase in U.S. exports of cars and auto parts to South Korea, the U.S. International Trade Commission said in a March 2011 report.

Under the agreement with the European Union, the EU’s 10 percent tariff on Korean cars will be phased out over three to five years.

Though Japanese automakers don’t have the benefit of a free trade deal between their country and South Korea, Toyota Motor Corp. and Honda Motor Co. are taking advantage of the U.S. pact.

Toyota is now shipping Camry sedans, Sienna minivans and Venza wagons built in the U.S. to South Korea. Honda exports its Pilot SUV, Odyssey minivan and, since last month, Accord sedan, from the U.S. to Korea.

“We were exporting the Pilot and the Odyssey before the trade agreements came through,” said Akiko Itoga, a spokeswoman for Honda. “But with the trade agreement, we’re hoping for exports to expand.” 

(Bloomberg)