December 6, 2010 – * New U.S. trade pact may hit Japanese car sales in Korea
* Hyundai shares fall 2 pct; Kia shares down 0.8 pct
By Hyunjoo Jin
SEOUL, Dec 6 (Reuters) - Hyundai, South Korea's top automaker, is expected to see little impact from Seoul's reworked free trade deal with the United States, while analysts touted the prospect of two-way trade worth billions of dollars between the two nations.
U.S. and South Korean negotiators struck a deal on Friday on the long-delayed pact, which was signed in 2007 but had not been ratified for three years because of U.S. auto and beef industry concerns.
President Lee Myung-bak was criticised by the opposition for caving into Washington's demands on autos -- which delays full elimination of tariffs on Korean made vehicles -- but was lauded for not giving any ground on the sensitive issue of beef.
Under the revamped deal, South Korea will reduce its tariff on U.S. auto imports by half to 4 percent for four years before eliminating it. In exchange, the United States will keep a 2.5 percent tariff on Korean-built cars, instead of immediately cutting it as previously agreed, and fully eliminate that tax in the fifth year.
Shares of Hyundai Motor , the world's No.5 auto group, fell around 2 percent, but analysts said the impact was limited as the carmaker has been raising U.S. production for the past few years.
"The revised draft of the Korea-U.S. FTA has made it easier to import more U.S. cars to South Korea," said Kevin Lee, an analyst Shinhan Investment Corp.
"But I do not think this will significantly affect domestic automakers. Rather, the competition will be contained within foreign automakers within South Korea, especially with Japanese automakers."
U.S. President Barack Obama said the revised deal would boost U.S. exports to South Korea by $11 billion and support at least 70,000 American jobs. It will be the second-largest U.S. free trade agreement after the North American Free Trade Agreement with Canada and Mexico in the mid-1990s.
"It is the first supply side reform from the Obama administration. And it is exactly the kind of policy that Korea needs to boost the investment rate, which we think will be needed to offset a slowdown in labour force growth and prevent potential growth from slipping from its post-Asian crisis average of 4.7 percent," ING economist Tim Condon said.
The deal may also boost imports of U.S. branded cars into Korea, which had been severely hit by growing popularity of Japanese cars, and help revive U.S. auto industry still reeling from the industry's worst crisis, analysts said.
Korean producers control around 80 percent of the Korean market and U.S. automakers have strongly demanded Korea open its auto market to boost its exports. U.S. automakers have seen their market share tumble to 10 percent among imported car brands in Korea, as Japanese firms have steadily eaten into their market share to control 28 percent, according to industry data.
The new deal will now be put to both the South Korean parliament and U.S. Congress for approval. Seoul eyed the deal taking effect from the start of 2012.
Obama said the agreement underlined the strength of Washington's alliance with Seoul at a time of heightened tensions on the peninsula after last month's deadly attack by North Korea on the small island of Yeonpyeong.
The U.S.-South Korea trade deal is expected to push Hyundai Motor to raise its U.S. output to avoid tariff barriers and tackle limited capacity as it seeks to continue its growth momentum in the world's No.2 auto market, analysts said.
In the longer term, Hyundai is seen emerging largely unscathed as it has steadily raised U.S. output and the company may expand capacity further to boost output at its U.S. plant, already running at full capacity.
"The latest deal will raise the possibility that Hyundai would construct a new plant in Alabama," said Lee Myung-hoon, an analyst at E*Trade Securities.
"Hyundai needs to build a new plant in the United States, as the U.S. market will ultimately recover, and its Alabama plant is running at full capacity," Lee said.
A Hyundai spokesman said the company does not plan to build a new plant in Alabama for now, given the slow recovery of the U.S. auto market.
Hyundai and its affiliate Kia Motors have steadily raised their U.S. production to 47 percent of total U.S. sales, up sharply from 32 percent last year and 28 percent in 2008, according to government data.
Shares in auto component makers such as Hyundai Mobis and Mando rose on Monday, lifted by the deal. Hyundai Mobis, South Korea's top auto parts maker, climbed 1.9 percent in a broader market down 0.19 percent by 0227 GMT. Hyundai Motor shares fell 1.63 percent, while Kia shares slipped 0.77 percent. (Editing by Jeremy Laurence and Anshuman Daga) "