Korea Hoping Latest New-Car Tax Cut Pays Dividends

Korea hopes a second rollback in the consumption tax on new automobiles from 5% to 3.5% will shore up flagging domestic sales.

The government cut the tax to 3.5% in August. The result was a modest per-vehicle price reduction, although automakers provided additional discounts on some models.

Vehicle-price discounts in the Korean market historically are rare and small. Automakers more often will give away some low-priced convenience item as a purchase incentive.

In December, the final month of the 2015 consumption-tax cut, there was a rush to complete purchases before year-end and get both the price break and automakers’ year-end clearance discounts.

December sales by the country’s five domestic automakers set at an all-time record for the month, with 175,263 units sold. But in January, when the tax rollback expired, deliveries collapsed roughly 40% month-over-month to 106,308 vehicles, a decline of 69,000 from the previous month’s inflated levels.

The January year-on-year decline was a much softer 4.8%.

Analysts and government regulators think the return of the consumption tax to 5% was partly to blame for stunting the market. Accordingly it was rolled back again to 3.5% this month and will stay that way through June, possibly at different rates. Consumers who bought new vehicles in January will receive rebates.

Hyundai weathered the domestic slump fairly well, with January sales declining 1.1% year-on-year to 49,852. Affiliate Kia achieved a 4.6% increase with 38,505 new vehicles delivered.

But No.3 GM Korea sales crashed 21.1% from prior-year to 9,279 vehicles. Faring even worse was No.4 Renault Samsung, down 63.4% to 2,101 units.

Ssangyong, the smallest of Korea’s five domestic automakers, had a 3.6% decline in January.

Each company has put special discounts in place for February to enhance the effects of the renewed tax cut.

“Kia has introduced its special discount program to take part in the government’s policy to revitalize domestic consumption and also to give more benefits to our customers,” a spokesman tells WardsAuto.

Deals on Kia Wheels

In addition to the domestic tax cut, Kia is lowering prices for its K5 (Optima) midsize sedans 800,000 won ($665). The total discount includes a 300,000-won ($250) special reduction to recognize the record 2015 sales performance by Kia’s K models.

The K5 HEV model is being discounted 1.3 million won ($1,100), including the special 300,000-won discount.

Kia cuts the price of the older-generation fullsize K7 (Cadenza) 4.3 million won ($3,570), including the commemorative discount. The older-generation K7 HEV model is discounted 2.3 million won ($1,910).

Additionally, Kia is giving a 300,000 won ($250) discount to customers who replace a vehicle that is more than 7 years old.

GM Korea is trying to recover from its disastrous January by offering low- or zero-interest financing and cash-purchase discounts through February in addition to the price drop resulting from the tax cut.

For cash-paying customers the Chevrolet Malibu is discounted 2.1 million won ($1,800); the Cruze, 1.6 million won ($1,350); the ʼ15 Spark, 1 million won ($840); ʼ16 Spark and Trax, 600,000 won ($500) each; and Orlando SUV, 900,000 won ($750).

Discounts for the ʼ15 Spark range from roughly 7%-10%, and discounts on the ʼ16 Spark range 4%-6%.

Domestic sales of the little car, GM Korea’s volume leader priced at just 10.36 million-15 million won ($8,600-$12,500), dipped 2.5% 2015 to 58,978 units. Deliveries totaled 6,879 units in December only to plunge 38% in January to 4,285. This despite the Spark and Kia Morning being exempt from the consumption tax on the basis of their small engine size.