U.S. President Donald Trump recently said he would impose a 25 per cent tariff on imported cars as early as early April, a move that has sent a strong shockwave through the Korean auto industry. South Korean car companies originally expected that the U.S. tariffs on Korean-made cars might remain at around 10 per cent, and the U.S. government's final decision of a 25 per cent tax rate far exceeded expectations, which will put the competitiveness of South Korean car companies in the U.S. market to a severe test. Considering that South Korea's auto exports to the U.S. reached $34.7 billion in 2024, accounting for 49.1 per cent of overall auto exports, the new U.S. tariff move could put the South Korean auto industry in a difficult position.
With the surge in auto exports to the U.S., South Korea has become the second-largest supplier to the U.S. import car market, after Mexico. Last year, South Korea's Hyundai Motor and Kia Motors sold a total of 1.77 million vehicles in the U.S., of which 630,000 were produced in the U.S. itself, 140,000 were produced in Mexican plants, and the rest of about 1 million were exported directly from South Korea to the United States. If the new tariff initiatives landed, the export price of this about 1 million Korean-made cars will rise sharply, making Korean cars in the U.S. market price competitiveness greatly reduced. The situation is even more serious for the South Korean General Motors Group, which exports more than 90 per cent of its production to the U.S. In the face of such high tariffs, the company may even face an existential crisis.
South Korea's auto industry is extremely dependent on the U.S. market. On the one hand, South Korea's Hyundai Kia Motors Group and South Korea's General Motors Group have production lines and supply chain systems in their countries that directly affect about 340,000 automotive workers, and the shrinking market brought about by increased tariffs could lead to a large number of job losses. On the other hand, the South Korean financial sector has also expressed concern about the economic impact of the new tariff initiatives. An economic research report by the Korea Bank for Small and Medium Enterprises (KBSME) states that once the imposition of the 25 per cent tariffs comes into effect, South Korean automotive exports to the US will be reduced by about 9.1 trillion won (US$6.3bn), and taking into account the recent growth in automotive exports to the US and exchange rate fluctuations, the actual loss could be more than 10 trillion won.
Another South Korean financial institution previously predicted that if the U.S. imposes a 10 per cent tariff on cars made in South Korea and a 25 per cent tariff on cars made in Mexico, then Hyundai Motor's annual operating profit will be reduced by 1.9 trillion won, and Kia Motors will be reduced by 2.4 trillion won; and if 25 per cent tariffs are also levied on cars made in South Korea, the total profit loss for the two companies could be as much as 10 trillion won, the Accounting for more than 35 per cent of last year's total profit of 27 trillion won.
The industry generally believes that South Korean car companies in the global production layout compared to competitors still have a big disadvantage. Data show that Hyundai Motor and Kia Motor's U.S. domestic production ratio of only 35 percent, lower than Japan's Honda Motor and Toyota Motor and other companies, which makes South Korean car companies in the face of trade policy changes in a more vulnerable.
Although the U.S. government has said it may exempt South Korean car companies from some of the tariffs if they can expand their production in the U.S., the actual operation is not easy. South Korea's Hyundai Kia Group already operates two plants in the U.S. with annual production capacities of 360,000 and 340,000 vehicles in Alabama and Georgia, respectively, and is building a new 300,000-vehicle-a-year plant in October 2023 in Georgia. Although some analysts have pointed out that if the group further expands its production facilities in the US, it could theoretically increase the proportion of localised production in the US to 70%, the reality is still very difficult to execute. On the one hand, a new plant requires huge investment; on the other hand, the local parts supply chain and market size in the U.S. limit the feasibility of large-scale production expansion. In addition, the three plants of Hyundai Motor and Kia Motor in the United States mainly produce nine models, while as many as 24 models are exported from South Korea to the United States, so it is very difficult to adjust the production mode and enrich the production line in a short period of time.
In the face of the U.S. government's proposed new tariffs, the South Korean government and industry are actively seeking countermeasures. The Korean industry hopes that the government can actively intervene at the diplomatic level to reduce the increase in tariffs or delay the implementation of the new tariffs. At the same time, South Korean automakers are also considering adjusting their export strategies, such as increasing the proportion of exports to other markets to reduce dependence on the U.S. market. In addition, Hyundai Motor Group plans to further increase its production capacity in the U.S. to cope with potential market changes.
However, industry insiders point out that even if South Korean carmakers can gradually adjust their production layout, short-term losses will still be difficult to avoid. Market analysts warned that if the South Korean government and companies cannot quickly find effective countermeasures, the entire South Korean auto industry may face the risk of long-term export decline and industrial restructuring.
Many experts pointed out that South Korean automakers set up factories in the United States not only creates a large number of jobs, but also provides support for the U.S. auto parts supply chain, and if the U.S. government imposes excessive tariffs on South Korean cars, it will likewise negatively affect the U.S. domestic auto industry chain. South Korea needs to emphasise to the U.S. government the contribution of the South Korean auto industry to the U.S. economy and job market in order to gain more room for negotiation.
