New Car Effect Surges Past COVID... Driven by Tax Cuts and Word of Mouth

Offsetting COVID-19 with Unrelenting New Car Launches This Year
Word of Mouth Gathers Due to Waiting Demand from Delivery Delays
Reflecting Consumer Polarization with Premium and Cost-Effective New Cars
Car Purchases Made Easier by Tax Cuts and Interest Rate Reductions

[Asia Economy Reporter Su-yeon Woo] Despite the deepening economic recession caused by the novel coronavirus infection (COVID-19), the domestic automobile market is clearly showing the 'new car effect.' The domestic automobile industry, facing a crisis due to an export cliff, is defending against COVID-19 damage by targeting the domestic market with new cars.

According to the Ministry of Trade, Industry and Energy on the 17th, last month’s domestic automobile sales, including both domestic and imported cars, reached 172,956 units, a 10.1% increase compared to the same month last year. During the same period, domestic car sales rose 9.3% to 149,912 units, while imported car sales increased 15.3% to 23,044 units.

The reasons for the increase in domestic automobile sales last month, despite weakened consumer sentiment due to COVID-19, can be attributed to three factors: new cars with enhanced product competitiveness, a word-of-mouth effect due to increased waiting demand, and policies such as individual consumption tax and interest rate cuts.

In the domestic market, more than 30 fully redesigned and partially redesigned new cars were launched from the fourth quarter of last year through the first quarter of this year. Among them, completely new models newly added to the lineup, such as the GV80, Trailblazer, XM3, and Mercedes-Benz A-Class sedan, led sales growth.

Experts have diagnosed that the new car effect, sequentially launched since last year with improved product competitiveness, offset the consumption contraction caused by COVID-19. It is analyzed that the marketing effect of continuously providing new products to Korean consumers, who are sensitive to consumption trends, worked effectively.

Notably, in the first quarter of this year, the new car portfolio was divided into small models emphasizing cost-effectiveness (performance relative to price) and premium lines emphasizing luxury, reflecting the recent polarized consumption patterns. Premium models GV80 and G80 achieved more than half of their annual sales targets within a day of launch, while the compact sedan Avante and small sport utility vehicle (SUV) XM3 set new records for popularity by being recognized for their excellent cost-effectiveness.

The word-of-mouth effect due to increased waiting demand was also significant. In particular, the temporary suspension of domestic factory operations in February due to parts supply disruptions caused by COVID-19 positively influenced last month’s sales. Vehicle deliveries contracted in February were delayed until last month, causing a surge in sales. At the same time, the perception that "they are so popular that they cannot be sold due to lack of stock" spread, resulting in a word-of-mouth effect.

The government’s proactive individual consumption tax reduction and interest rate cut policies, which began last month, fueled domestic automobile consumption. The temporary individual consumption tax cut attracted hesitant demand, and the interest rate cut policy lowered automobile installment interest rates. According to the industry, as of this month, Hyundai Motor’s 60-month installment interest rate dropped by 0.4 percentage points from a month ago to 3.3%. Also, contracts can be made by paying only 10% of the vehicle’s delivery price as a down payment, making it easy to purchase a car with a small initial fund.

Additionally, rental and lease programs applying various financial products also contributed to increasing consumption. According to Kaizyu statistics, as of the first quarter of this year, the proportion of corporate cars, including rentals and leases, among newly registered passenger cars was 29% (102,121 units), about 4 percentage points higher than the same period last year.

Professor Ho-geun Lee of the Automotive Department at Daeduk College said, "Consumers looking at premium cars are less affected by the economy, and the recent economic downturn has shifted corporate car demand from imported cars to domestic cars." He added, "On the other hand, the release of many cost-effective small cars early this year also matched the timing well."

However, considering the course of the COVID-19 situation, it seems difficult to maintain this positive atmosphere this month as well. Even if the industry’s new car marketing and consumption stimulation policies continue, it is uncertain whether automakers can supply in a timely manner due to unclear production plans. Furthermore, if the liquidity situation of automakers changes rapidly, variables may arise in the new car launch plans scheduled for the first half of the year.

A senior official from an automaker said, "No one can gauge the depth of the economic recession, but even if the market is difficult, we must find remaining demand." He added, "To meet demand, the capability to release new cars, which have been developed over several years, on time is absolutely necessary."

This content was produced with the assistance of AI translation services.