INVISIBLE BARRIERS

BY NEWSWEEK STAFF ON 6/24/01 AT 8:00 PM

HTTP://WWW.NEWSWEEK.COM/INVISIBLE-BARRIERS-153433

In posh Kangnam, at the bustling heart of Seoul, a lonely Ford dealer makes an odd pitch to
shoppers who barely glance at his shop. Inside the nearly deserted showroom, a display of
flowers and pink ribbons presents a green Lincoln LS as the car of choice for--movie stars?
Football players? No: government ministers. Salesman Jeon Kyeong Seob says the idea is to
convince consumers they will no longer be punished for buying foreign autos. The pitch isn't
working too well. This is Ford's main showroom in South Korea, and it has sold only about
100 cars so far this year. Why? "Patriotism," says Jeon, gazing out on a street filled with
Korean cars made by Hyundai, Kia or Daewoo. "Koreans are patriotic people."

The supposedly inexorable force of globalization can't change that. After years of pressure
from the Americans, Europeans and Japanese, South Korea has cut tariffs, taxes, rules and
regulations, becoming one of the most open car markets in the world--on paper. Nevertheless,
South Koreans almost never buy foreign cars. The combined marketing might of the world's
great carmakers persuaded South Koreans to buy 4,400 imports last year--a mere 0.4 percent
of the total market. Last week a visiting U.S. trade delegation demanded even lower barriers.
Local importers can only sigh. They say no edict from Seoul can undo decades of
government, corporate and union exhortations to buy Korean. "It is easy to change
regulations and tax systems," says Son Eul Rae, a Mercedes dealer who heads an auto-
importers association. "But changing a culture or a mind-set is not."

This culture was built on anger. After decades of Japanese occupation ended with Japan's
defeat in World War II, South Korea set out to win a respectable place in the world. "Nation
building through exports," the rallying cry of President Park Chung Hee in the early 1960s,
was emblazoned on factory walls all over the country. Luxury-import buyers were publicly
denounced as traitors. Until the 1980s, smoking foreign cigarettes was a crime punishable by
jail. But no luxury item had more power as a patriotic symbol than the car.
That's still true. The Buy Korean campaign tapped into a deep Confucian bias against
displays of wealth. During the 1997 Asian financial crisis, officials in Seoul loudly blamed
their currency's plunge on profligate Koreans' buying foreign goods. The real problem was
that the country's consumers were scared to buy anything. But TV news reports on the crisis
routinely showed footage of foreign-car salesrooms anyway. Citizen vigilantes took up the
cause, slashing tires and scratching paint jobs on foreign cars left unattended in Seoul. "I
heard so much about harassment of import cars or their drivers," says a 41-year-old restaurant
owner who uses only secure pay lots to park her blue BMW. "I actually hesitated buying this
car because of that."

The harassment decreased as the economy recovered, but the resentment still lingers. An
import dealer says he doesn't allow TV crews in his showroom if they are from the city desk
of a big Seoul network, because he knows the footage will be used to bash foreign-car buyers,
who are abused enough. In a recent survey of 200 domestic-luxury-car owners, 70 percent
said buying imports would lead to greater "social disparity," and nearly half avoid imports for
fear of "dirty looks" from fellow Koreans.

That hostility is about more than cars. It's about economic class and corruption, too. Back in
the Park era, when tax dodging was a national sport, one of the easiest ways to catch rich
cheats was to audit anyone who traveled abroad or bought pricey foreign cars. Many of the
targets were doctors, lawyers and other professionals with substantial cash incomes, rather
than executives, whose corporate salaries were easier to trace. Until only a few years ago,
simply owning a foreign car was enough to trigger an audit. Foreign carmakers protested the
practice as an underhanded form of protectionism by intimidation.

Everything is different now, Seoul insists. Formal barriers started eroding in the early '90s
under former president Kim Young Sam, who cut auto-import tariffs from 20 percent to the
current 8 percent. That's lower than tariffs in the European Union, Australia, Taiwan and
many other wealthy nations. Since then Seoul has revised discriminatory taxes on foreign
cars, eased complicated testing requirements and otherwise tried to satisfy foreigners'
demands for an open market. Yet the gross imbalance of the South Korean car trade remains-
-the 4,400 imports last year, versus 1.5 million exports--keeping alive the suspicion that
South Korea is still trying to export its way to prosperity. The less-than-1 percent import
share of the South Korean market compares with 6 percent in Japan and 30 percent in the
United States.

Seoul is increasingly focusing its reform efforts on informal, cultural barriers. Until recently
Korean business and government leaders would never have dared to be seen riding in a
foreign car. Lately, though, President Kim Dae Jung has repeatedly urged them to start
buying imports for official purposes. Early this month Hwang Doo Yun, the Trade minister,
bought a Lincoln LS with much fanfare. "With my action, I would like to convince people
that foreign-car owners don't face any disadvantages," said Hwang. "In this age of
globalization, riding a foreign car is not against national interests." He went so far as to
predict that Korean car buyers would one day embrace imports in the same way that "Korean
kids have switched from kimchi to hamburgers."

One day, perhaps. Ford dealers see hints of change even at Posco, a steel giant and a bastion
of Korean export strength. Foreign cars used to be banned from even entering the grounds of
Posco's mills. (A company spokesman denies that such a policy ever existed.) But Ford
officials say they were surprised recently to get a request from Posco's presidential office for
price quotes and brochures on Ford cars. "They have not yet placed any orders, but that itself
was a major shock," says Ford's Korea sales rep, Jay Jung. "We are still in a survival mode,
but see a growth trend ahead."

The Kim administration is trying to allay the car buyers' lingering fears of punishment. In
April a senior tax officer proclaimed that import owners are no longer to be targeted for
audits. Many people remain skeptical. Nearly two thirds of the luxury-car owners in the poll
said they still think import buyers are inviting an audit. Import dealers are desperately trying
to lure wary customers, at times offering zero-interest-rate loans and two or three years of
free maintenance. Foreign-car dealers are even starting to battle the nationalists head on. Last
week, as workers at Daewoo Motors escalated their protests against a possible General
Motors takeover, the importers were trumpeting the benefits that foreign capital could bring
to the industry.

South Koreans' refusal to buy American gives GM more incentive to tangle with Daewoo's
angry workers and massive debts. Daewoo could enable the U.S. firm to slip through the
invisible barriers. The French automaker Renault managed the same trick last year when it
bought a controlling stake in Samsung Motors. Samsung's cars were originally designed by a
Japanese maker, Nissan, but the domestic brand name is what counts with South Korean
consumers. With less than a decade in the automaking business, Samsung sold 28,000 cars in
South Korea last year--compared with only 182 for GM. "By acquiring Daewoo, GM can
secure easy access to the difficult Korean auto market," says J. M. Park, an auto analyst with
Jardine Fleming, who foresees a wave of foreign investment in Korean makers. "Eventually,
it will be meaningless to differentiate domestic carmakers from foreign makers." The strategy
is pretty simple: if you can't sell to Koreans, buy their car companies.