Economic and Technological Factors that Influence the Auto Industry
GDP and the Economic Growth
The South Korean economy has experienced a drastic increase over the past half-century with the annual growth of approximately 7%. However, a deepening economic crisis was evident in the period between 2011 and 2012; it was a result of the political instability in the country. Based on 2015 GDP data, South Korea managed to improve its GDP due to the increase in the production and exportation of its products of the auto industry to the foreign and international markets. GDP of South Korea was $1.38 trillion and ranked 11th with the United States one of $17.9 trillion on the 1st place as of 2015 (Aberdach, 2015).
While the income level of citizens has increased, the poverty has eradicated, as well. The specialization of the country focuses on the production process of the auto industry as a result of the expansion in the human capital base.
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The Korean GDP depends on the national economy, which is considered a closed one since there are little to no employment opportunities for its citizens in the auto sector. Therefore, the industry has less labor force; particularly, it lacks specialized human capital skills at the production phase.
Foreign Exchange Rates
Currently, the South Korean currency exchanges with the US dollar at a relatively low rate; therefore, the value of the South Korean currency is lower as compared to the USD. 1 South Korean won is equivalent to 0.000870 USD in the current stock market (Jeffreys, 2013).
The lower value of the South Korean currency as compared to the USD increases the exportation of products of the auto industry to the United States market. Thus, products of the auto industry from South Korea are relatively cheaper in the United States market. The importation of products of the auto industry from South Korea to the United States increases with each year. Furthermore, the South Korean auto industry generates more revenue thanks to the increased sales of such products to the broad-based market in the United States.
Periodic fluctuations in the currency exchange rates between the South Korean won and USD may cause heavy losses to the South Korean auto industry. Auto concerns in South Korea depend on the U.S. market heavily; therefore, any unfavorable currency exchange rates between the two countries would have adverse effects on the industry as a whole.
Interest Rate and Inflation Rate
According to Waugh (2009), the inflation rate in the US was 1.26%, while in South Korea, it was 0.97%. The inflation rate determines relative prices of the import and export of a given country.
A lower inflation rate in South Korea as compared to the United States encourages the exportation of products of the auto industry from South Korea to the American market. In line, in the US, prices for Korean auto products would be lower as compared to the same from local concerns.
Eventually, the constant increase in inflation rates in both the United States and South Korea would result in an increase in the price for products of the auto industry in the markets of both countries.
The free trade agreement between the US and South Korea was enacted in 2012. The agreement meant that the importation and exportation of products of the auto industry, as well as merchandise between the two countries, would be duty-free.
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The tariff reduction and quota elimination by South Korea resulted in a positive increase in the U.S. annual GDP of $12 billion and the growth of the total merchandise that was exported to South Korea by $10 billion (Tudor, 2012). On the other hand, the elimination of the existing 2.5% tariff boosted the importation of passenger cars from South Korea to the U.S. market; thus, it increased the sales of the Korean products of the auto industry (LEE, 2016).
The free trade agreement between the two countries resulted in the transfer of the highly educated labor of the auto industry from the United States to South Korea due to the availability of better employment opportunities in South Korea as compared to the US. Thus, the level of production of these goods is relatively higher in South Korea than in the US.
Corporate Tax Rate
The corporate tax rate of South Korea is categorized into three main groups depending on the level of returns of the auto industry. A uniform corporate tax rate that was imposed on the sector in the American market is 39.1% regardless of generated returns (Brady, 2010).
According to the tax rate comparison between the two countries, auto companies in South Korea are given incentives with the aim of expanding the sector in the entire country. The development of small auto businesses in South Korea is promoted due to the relatively lower tax rate that is imposed on them by the government.
On the other hand, higher levels of the tax rate for the auto corporations in the US hinder the development of small companies. Therefore, players of the American auto market do not compete fairly among themselves for the share.
Disposable Income and Unemployment Levels
According to Guillén (2001), the unemployment rate was 4.9% in the US, while it was 3.7% in South Korea. The figure is relatively low for South Korea due to the increased labor demand in the auto industry. The growth of labor results in the increase in the number of employed people; thus, it reduces the poverty level in the society as a whole.
Although there is an increase in the level of employment in South Korea by the auto companies, changes in the level of employment between the two countries result in the creation of the unbalanced employment between the two countries. This situation can result in the mass migration of unemployed individuals from the US to South Korea in the search for employment opportunities.
Implications of Economic Factors for the Plant Location and Sourcing Decisions
Economic factors result in some geographical changes for the auto industry globally; thus, they have to consider these issues in order to compete favorably in the market.
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The production of the auto industry has shifted from traditional locations, for example, Japan, to new regions in China and South Korea, in which the cost of production is relatively lower. This shift has been enhanced by the trade liberalization. The existence of the free trade agreement between the countries has promoted the sharing of vital knowledge in the auto industry. Auto products are differentiated depending on the preferences of their customers. The shift in the production of the auto industry is aimed at making these products uniform in design and able to meet a standard set of requirements. Honda and Ford are examples of auto corporations that have moved from Japan; currently, they make their productions in South Korea due to the availability of cheap labor.
Over the past decade, the growth of the annual GDP and overall economy of South Korea has resulted in the transfer of the major auto producers from Germany. The increase in the economy has a direct influence on its citizens as it contributes to the disposable income and creates more employment opportunities for its citizens (Barrar et al., 2016). Thus, demand for the means of transportation grows with the increase in the percentage of employed citizens. In such a manner, more people in South Korea want to buy a car today. Auto producers from Germany use these emerging trends in the South Korean market in order to make decisions about transferring their auto production to the country. The return generated from the sales of auto products in the local market is anticipated to be relatively high due to the availability of the broad market.
Based on the fact that the auto industry is capital intensive, automakers need to identify regions that offer the best economic incentives so that they can lower the start-up and operation costs (Nilsson, 2012). The government plays an important role in attracting auto companies to their country. Major manufacturers are moving to South Korea because of the number of economic benefits that are provided by the government for their development (Appiah-Adu & Bawumia, 2015).
The rise in the production cost of auto companies in a particular region plays an important role in determining decisions on the location of the production line. Production costs depend on the corporate tax rate that is imposed by the government and labor costs, as well as the nature of regulations on environmental conservations, which are established in a particular region. The availability of cheap and readily available labor force in addition to the affordable corporate tax rate that is charged by the government are among the main factors that attracted a number of auto businesses to South Korea.
How it works:
Periodic fluctuations in currency rates between different trading countries on products of the auto industry have necessitated the automakers to move their production to their marketplace. The move enables these companies to yield maximum sales and earn more profit by minimizing the losses due to the exchange currency rates, which may be unfavorable for the industry as a whole. Therefore, the major auto concerns in South Korea have expanded its production to the United States, which traditionally offers the largest market base for the South Korean auto products. The exchange rates between the South Korean won and USD has been fluctuating with more than 15% differential in the past 5 years.
Research and Development
South Korea has intensively invested in the research and development over the past half-century (Link & Tassey, 1982). Auto concerns of the country adopted the use of the high technology and capital in their production process. Research centers were established with the aim of learning and incorporating new technologies in the production of the auto industry. The graduate education system of the United States was incorporated in the Korean Advanced Institute of Sciences and Technology so as to train their companies on how to use the American technology in the own auto production. Today, the major automakers invest 3.42% of their total sales in R&D expenditures (Lamb, Hair, & McDaniel, 2012).
South Korean auto corporations have significantly benefitted by the acquisition of the foreign production technology at a relatively cheap cost. This knowledge enabled them to compete favorably in the global market in terms of the technological production of automobile goods.
Patents and Licensing
South Korea has increased its number of patent registration over the recent years; today, it is ranked 4th, while the United States is the leader (Rana & Singh, 2017). Nevertheless, South Korean auto companies rely heavily on the use of the foreign technology in the own production process. Therefore, their products meet international standards; this fact allows them to compete favorably with other automakers in the US. The total export of products of the auto industry, as well as GDP, of the South Korea has significantly improved.
Auto manufacturers in South Korea incur heavy losses because of the payment of royalties, particularly for the exportation of their products to the US. This payment is a result of the adoption of the American technology in the own production.
The IT Infrastructure
The rapid change in technology has resulted in the development of the modern information technology infrastructure by auto companies in South Korea and the US. The US is ranked 1st, while South Korea is ranked 4th among the countries with the well-established and developed IT and telecommunication infrastructure (Brady, 2010). South Korea has a well-established telecommunication facility that is used by the major auto concerns for their operations.
Auto concerns in South Korea benefit from the use of IT and modern communications channels in their production, distribution of their good to the market, and acquisition of the new knowledge through the use of the Internet. Therefore, the performance of auto businesses in both countries is significantly enhanced. The technology contributes to the development of the communication and relationship between automakers and their customers.
Risks involved in the adoption of the modern IT include the possibility of theft. The system of the auto industry is likely to be hacked, and valuable information can be acquired without the consent of the management.
The Transportation Infrastructure
Both the US and South Korea have a well-established transport network both on the land, sea, and air; their infrastructures are well-equipped (Porter, 2014). The auto industry is the major driving force of the South Korean economy. The increase in demand for the means of transportation in the country is a result of the gradual development of its economy. Main modes of transportation include the rail, road, airplane, ships, and pipeline, which facilitate the transfer of auto industrial elements and products in and out of the plants.
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Well-connected transportation facilities in South Korea lower the production costs of auto companies due to the easier and faster movement of raw materials to the manufacturer, as well as the delivery of industrial products to the global market by the sea.
Supply Chain Security Issues
The supply chain defines the success of auto companies in South Korea to a great extent. Competing suppliers possess the global market knowledge and have access to infrastructural facilities, which form a network that is aimed at facilitating the exportation of products of the auto industry to the global market.
South Korean automakers increase their sales and generate more revenue due to the exportation of more products to the market at a relatively low cost and within a limited time; thus, it reduces the disturbance and any delays during the exportation.
The online platform was adopted by automakers in South Korea with the aim of increasing sales by enabling their customers to communicate with them directly. This strategy can result in the theft of vital information from the industry by the hackers through the weaknesses in the system.
Implications of Technological Factors for the Plant Location and Sourcing Decisions
Changes in the technology influence the decisions of the market players in the auto industry. Automakers usually invest in the incorporation of the modern technology in their production and marketing of their products globally.
Auto producers in South Korea adopt the networked system technology at all phases of the business, including research and development, production, transportation, and marketing their auto products (Lesser, 2014). The introduction of the Internet connection and well-established telecommunication facilities promotes the transformation of auto businesses into fully functional automobile companies. Therefore, automakers create a platform that a potential buyer can use in order to request details of a particular auto product being offered. Structures that are established through the incorporation of the modern information technology facilitate the transportation and procurement of products by the adoption of the assemble-on-order basis. The system lowers the costs that are incurred as a result of the traditional transportation and procurement of these goods. Auto businesses with huge capabilities have global assembly centers for its products; thus, when a customer requests a particular commodity via the online communication, the requested product is delivered within the shortest time possible.
The provision of the technological incentive by the South Korean government plays a critical role in attracting automakers to the country. The state has invested a large amount of budget in establishing a reliable Internet connectivity, as well as telecommunication infrastructure across its territory. This strategy has enabled auto producers to establish various auto production centers in the South Korea since it contributes to the increased performance of auto businesses in terms of the production, distribution, and procurements of their products. Technological incentives that are provided by the government enable automakers to use the minimal start-up capital (Elms & Low, 2013).
The clustering of industries in South Korea acts as a pull factor for the development of new auto players in the region (Kang, 2013). Clustering such companies in a particular region influences the decisions concerning the size of the start-up capital to be invested. A region with the readily established auto industry is suitable for all the necessary structures that are required for the successful production and overall performance of market players. South Korea has established stable industrial and information technology sectors, as well as engineering institutions, which facilitate the success of auto businesses in the country (Mankiw, 2012). All these sectors are the forces that support the development of automakers in South Korea.