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South Korea: A Roadmap to COVID-19 Economic Recovery — Industry and Automotive First Mover

Apr 27, 2020

In this second segment COVID-19 recovery series, following up on the first, we look at how Korea as a first mover could be a model for best practices in maintaining the industrial workforce and preserving jobs.

Like most of the world, government intervention is the cornerstone of South Korea’s recovery. South Korean President Moon Jae-in has announced a massive relief package worth billions for South Korea’s key industries disrupted by the coronavirus pandemic.

Preventing layoffs and creating jobs have become the top priorities for the government.

The funds are meant to help them weather the crisis, which the Korean president characterized as the worst since the 1997 IMF financial meltdown, and to help maintain employment. Moon also unveiled an additional job protection program to cushion the COVID-19 impact on the country’s overall job market. This includes new job creation in the digital sector.

Drilling Deeper

A significant portion of Korea’s economy and the backbone of the country’s employment is from export-driven sectors, especially in hard-hit key industries that include aviation, oil refinery, shipping, shipbuilding, and car production.

Noting the huge task for Korea amid global downturns with much of the country’s employment driven by export-driven sectors such as automotive, how Korea preserves its workforce and jobs will take considerable effort and savvy.

As in past crises, senior government officials recently met with a group of top chaebol executives. The participants included Samsung Electronics, Hyundai Motors, SK Holdings, LG Corporation, and Lotte Corporation. Although closed-door meetings, they seemed to have centered strongly on persuading the leading employers to maintain employment in the face of coronavirus-related challenges.

The Auto Sector

In a separate round of talks, senior officials from five local automakers and nine auto parts manufacturers met with the Ministry of Trade, Industry, and Energy.

The five domestic automakers, Hyundai Motor, Kia Motors, GM Korea, Ssangyong, and Renault-Samsung account for 150,000 jobs in Korea. Within their supply chain, their roughly 8,850 partner companies employ 240,000 workers.

An upswing in local sales is welcome news considering Hyundai, Kia, and the other automakers have weathered many challenges over the past few months.

According to the Korea Automobile Manufacturers Association, the auto industry officials said they need a total of $34 billion to maintain their workforces, operate facilities, and keep up with fixed costs for the next three months. With $10 billion already secured, the local automobile industry asked the government to provide $26 billion in emergency loans to save automakers and associated companies struggling from the impact of the coronavirus pandemic.

Automakers also requested tax cuts to overcome the pandemic’s negative impacts on sales and production.

As a condition for the funding, the government pressed the automakers to maintain their employment numbers. To make up for overseas losses and boost domestic sales, the government will also expedite the order of 8,700 EVs and make an advance payment of up to 70 percent.

Strong Local Demand

Still, we are seeing strong demand in Korea’s domestic auto market. As COVID-19 cases have been dropping without mandating drastic measures such as a nationwide stay at home and remote work, Korean customers are again venturing back into auto showrooms.

Hyundai’s domestic sales in March hit their highest level in more than four years, up 80% from February 2020. Much of this was driven by attractive discounts and installment payment plans, as well as a cut in consumption tax. Hyundai also noted robust local pre-orders for new models like the Elantra and Genesis G80.

An upswing in local sales is welcome news considering Hyundai, Kia, and the other automakers have weathered many challenges over the past few months.

In February, Hyundai and Kia had to suspended operations — hamstrung by a lack of Chinese sourced parts with the coronavirus outbreak crippling China’s industrial output. As COVID-19 peaked in Korea some plants also closed briefly as a safety precaution.

More pressing, although local sales are a cushion, little has prepared the automakers for the drop-in demand overseas and the unexpected halt in their global production facilities.

Although domestic production in March was at 95%, with the slump in global sales and demand taking hold, we are beginning to see Korea’s production, too, take drastic moves. For example, Hyundai halted production for 4 days of the sport utility vehicles Palisade, Tucson, Santa Fe, and Genesis GV80.

Sister firm Kia Motors, too, is looking to suspend 4 of their Korean plants with a mix of closures to keep inventory levels manageable and stay flexible to overseas demands.

As an additional countermeasure, Hyundai Motor and Kia Motors have decided to halt all their domestic factory lines from May 1 for Korea’s Labor Day to May 5 for the nation’s Children’s Day — both public holidays. Korea’s other car brands and related industries are mulling similar moves, too. Some suppliers are now considering extended shutdowns into mid-May.

Preserving the Workforce

Noting the huge task for Korea amid global downturns with much of the country’s employment driven by export-driven sectors such as automotive, how Korea preserves its workforce and jobs will take considerable effort and savvy. It will be a difficult balance between mitigating business losses while holding on to jobs.

For one, as Korean groups have shifted manufacturing overseas, the lesson from COVID-19 is to have a less concentrated supplier and production base which ultimately means spreading things around. This does not, however, help Korean employment.

Next, government funding is but a part of the solution, more so may be an agile and scalable production model — one that can grapple with and carry on through the unforeseen and disruptive times. Again, countermeasures need to be in place as new situations unfold.

With unemployment spiking globally, the lessons learned if Korea as a first mover can successfully maintain their workforce in the wake of the crisis will be of the greatest interest as regions and nations emerge from COVID-19 — many facing the same tough challenges.

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