Why is a car that’s made in Korea cheaper in the U.S.?

Why is a car that’s made in Korea cheaper in the U.S.? Higher taxes and more optional features, says Hyundai Motor. September 02, 2008

Hyundai Motor’s premium sports sedan Genesis was launched in the U.S. this June. It was an ambitious project for the company. Hyundai Chairman and Chief Executive Officer Chung Mong-koo said that Genesis was the company’s first entry into the luxury car market, which had previously been dominated by European companies. In the U.S., the Genesis V6 3.8L sells at a starting price of $33,000, while a basic V8 4.6L costs $38,000. But in Korea, it went on sale this January with the Genesis V6 3.8L selling for about 52.8 million won ($48,485). This is a difference of more than $15,000. So why would a car made by a Korean company be cheaper in a foreign country than in its domestic market? According to Hyundai Motor, taxes and a different production system are to blame. A 24.3 percent tax is levied on domestic cars after they are made. Also, there are over 20 more optional features, including a sunroof and an electric power braking system, in the Korean Genesis 3.8L than the U.S. one. A Hyundai representative said, “In Korea a 3.8L model is considered relatively high-end whereas in the U.S., it is considered a basic model which is why we took out the extra options for the U.S. cars.” Even with all of this taken into consideration, the U.S. 4.6L Genesis has very similar optional features as the domestically sold 3.8L Genesis, and is 800 cubic centimeters bigger, but still costs less than the domestic 3.8L Genesis. Even if we exclude the extra tax on the domestic 3.8L Genesis, it still costs over 42.4 million won. In the face of customer dissatisfaction at these double standards, some Korean companies are moving quickly to “re-import” Genesis cars that were exported to the United States. This means that after a car that is made for the U.S. market is exported from Korea, it is brought back in by automobile import companies. So a customer who orders this re-import would be driving a U.S.-version Genesis on Korean roads. The automobile industry estimates that around 10 companies are preparing to re-import the Genesis. And customers are signing up to buy them. Kang Jin-seung, an executive at a Korean automobile import company, said that a significant number of customers have signed up to buy the re-imported Genesis. He added that the re-imports will arrive by October and be ready to run with Korean license plates. The 3.8L full-option Technology Pack Genesis in the U.S. has a starting price of $38,063 (excluding some options, such as seat warmers). With shipping and Korean tax fees, this comes to 60 million won. That’s around 5.8 million won less than the comparable Royal VIP Pack with full options sold in Korea. Automobile re-importing is mainly popular in Europe with expensive cars like Porsches. The re-import of regular passenger cars like the Genesis, however, is extremely rare. People who are skeptical of the Genesis re-import plans say that the savings are insignificant because the won has depreciated against the dollar recently. Others say that foreign imports have fewer optional features. Experts also argue that the difference in price is due to the cost of auto parts and raw materials as well as commodity prices in each country. Hyundai Motor also pointed out in its defense that in developing the Genesis, it carried out consumer surveys and studied the prices of similar cars in the U.S., including the Chrysler 300C and the Lexus GS. Hyundai Motor said that it had to lower the retail price of its cars in the U.S. market because fewer people have heard of the brand compared to other bigger automakers. The recent U.S. economic slowdown also contributed to the price being lower there. Representatives of Hyundai Motor added that Japanese and German cars are also much cheaper in the U.S. than in their home countries. These arguments, however, still do not sit well with many Koreans, who are furious that domestic-made cars and other products cost more here than overseas. Experts say that the domestic market for re-imported cars will grow if Korean companies keep their prices high. This means that more customers will choose to buy re-imports because they are cheaper. Many customers have complained following reports about the price differences in the Genesis. In July, Hyundai Motor advertised a new 3.8L Genesis in Korea with fewer optional features, for 47.5 million won. This gap in domestic and overseas prices can also be seen in foreign brands which have been imported to Korea. U.S.-based fashion brand Banana Republic first opened its doors in Korea last summer. But consumers were in for a nasty shock as the clothes were almost twice as expensive here than in the U.S. Some items cost up to 70 percent more here than their U.S. equivalents. Shinsegae International, which imports the brand to Korea, said the discrepancy was due to the high costs of leasing store space in Korea. Even so, Banana Republic in Korea received numerous complaints from local customers. As a result, the brand lowered its prices earlier this year. To achieve this, some clothing items are now delivered by ship, whereas they were all air freighted before. Banana Republic’s spring/summer collection in Korea was, therefore, considerably cheaper. A dress which would have cost 289,000 won last year was selling at 219,000 won this year. Men’s cotton T-shirts, selling last year for 179,000 won, now cost 139,000 won. By Cho Jae-eun Staff Reporter/ Han Ae-ran JoongAng Ilbo [jainnie@joongang.co.kr] WHAT ARE PARALLEL IMPORTS? Regular importing of goods is when a company brings a product for sale in its own country from another country through an agreed, legitimate deal between the two companies. Parallel importing is the importing of a genuine product from another country without an official deal with the original company. This allows for more than one local import company to bring foreign brand items into Korea. So for example, if an American toothpaste brand, called A, does not have an official deal to export their products to Korea, many smaller Korean importers can bring A’s products into Korea and sell them. The re-importing of Genesis is possible because the Korean government permits companies to make parallel import transactions, with some exceptions. Sometimes parallel importing is done to sell items which consumers want but can’t be found in Korea. Other times, this is done to sell products at a lower price. In New Zealand for example, some car dealers buy Mercedes-Benz cars in Malaysia at a lower price than they are sold at in New Zealand. Then they import the cars into New Zealand at a lower price than Mercedes-Benz cars sold directly there without this deal. In Korea, a recent popular parallel import item is the Nissan Cube mini MPV. This Japanese car is not yet officially imported here but around 100 parallel imports are being driven on Korean roads. Korean singer Lee Hyo-ri drives the Cube and since her appearance with the car, its popularity has escalated here. Nissan said that the car will be exported to the United States, Europe and Korea by the first half of next year.