[News in focus] Car tax break did not boost sales, and to end soon

A 15-month tax break on car purchases doesn’t seem to have worked, as the local automobile industry still struggles from declining local sales, and profits remain weak.

And as the discounts will expire at the end of the year, experts believe that the decline is likely to continue next year and automakers in Korea will continue to struggle.

In July last year, the government cut the individual consumption tax for vehicle purchases from 5 percent to 3.5 percent to make cars more affordable. Although the discount was supposed to continue for just six months and end in 2018, as Korea’s economy stagnated, the discount was extended to the end of June this year. It was then extended for another six months through Dec. 31 this year.

It was the longest temporary tax discount the country has ever offered for automobiles.

Even with the extended break, sales continued to fall throughout the year. Local automakers sold a total of 1.37 million vehicles between January and November 2019, down 1.5 percent from the same period a year earlier.

Hyundai Motor was the only local automaker that performed well while the tax discount was in effect. During the period, it sold a total of 675,507 vehicles in Korea, up 2.9 percent on-year from 656,265 units.

The upgraded Sonata sedan, the Grandeur premium sedan and the Palisade large-size SUV recorded blockbuster sales.

Others domestic sales tracked the overall struggles of the global auto industry. Kia Motors sold 471,075 units in the country, down 3.8 percent from 489,500 units a year earlier, despite the popularity of the Seltos compact SUV.

GM Korea’s domestic sales nosedived 18.4 percent on year, while the total sales for Renault Samsung Motors fell 3.4 percent. SsangYong Motor’s domestic sales fell 1.3 percent on year from 98,484 units to 97,215 units.

While the discount provided some incentives for customers to buy new vehicles, experts say the discounts should not have been implemented for 15 months straight, as local customers grew numb to the promotion - some even starting to take it for granted.

“Such discounts are not something that can be done forever,” said Kim Pil-soo, an automotive engineering professor at Daelim University. “The government seems to have been a little too naive in extending the discount on and on.”

While domestic sales have fallen for local automakers, some import automakers, especially those with luxury models, benefited from the tax discount - quite the opposite of what the government was looking to achieve with its 15-month program.

Automobili Lamborghini sold a total of 150 vehicles through the end of November, sharply up from the 11 units sold in all 2018. BMW’s Rolls-Royce already sold more than 150 vehicles this year, which is higher than the total sales of 123 units it posted last year.

But as the tax discount comes to an end, the government is introducing a program that would encourage people with old fossil-fuel cars to buy new vehicles. The program provides up to a 70 percent cut on the individual consumption tax for new gasoline cars purchased by those owning a diesel or gasoline vehicles that have been used for more than 10 year.

According to the Ministry of Land, Infrastructure and Transport, Korea has about 5.63 million gasoline and diesel vehicles 10 years old or older. But experts like Kim are pessimistic about whether the program will stimulate the local industry.

“People don’t think they should buy new cars because there’s a tiny tax discount,” Kim said. “The discount tops out at around 1 million won ($850) per vehicle, which is not really much of an incentive for people looking to spend at least more than 20 million won for a vehicle.”

Kim added that the local economy must improve before anything else for car sales to increase, as people are more likely to wait for better options when their earnings remain low.

“There’s only so much that the government can do in stimulating car sales,” Kim added. “If this kind of slow growth rate continues for Korea, I don’t believe car sales will recover anytime soon.”

BY KO JUN-TAE [ko.juntae@joongang.co.kr]