Use the Lexology Getting The Deal Through tool to compare the answers in this article with those from other jurisdictions.

Overview

Market

Describe the significance of, and developments in, the automotive industry in the market.

The Korean automotive industry has played a significant role in the Korean economy. There are five automobile manufacturers in Korea (Hyundai Motors, Kia Motors, GM Korea, Renault Samsung, and SsangYong Motors). Their domestic sales volume decreased by 2.4 per cent from 1588,572 units in 2016 to 1,550,080 units in 2017. Among these Korean manufacturers, the sales performance of Hyundai Motors and Ssangyong Motors slightly improved, whereas that of other manufacturers including GM Korea decreased, and in 2017, GM Korea experienced a 26.6 per cent decrease in its domestic sales.

Except for Renault Samsung - which showed an improved 2017 export performance of 176,271 units, which was 20.5 per cent higher than its 2016 figure - other manufacturers have underperformed in Chinese and US markets with their export volumes decreased by 8 to 29 per cent.

Notably, the sales volume of imported automobiles in Korea has shown an upward trend. The total 2017 sales volume of imported automobiles increased by 3.5 per cent to 233,088 units in comparison to 2016. This figure represents 15.2 per cent of the total 2017 automobile sales volume in Korea. The regional ratio of imported automobiles is 72.7 per cent for European imports, 18.7 per cent for Japanese imports and 8.6 per cent for US imports (as of 2017). Nevertheless, Korean manufacturers represent 84.8 per cent of the total sales volume in Korea, particularly among which Hyundai Motors and Kia Motors take up 63.1 per cent.

Recently, SUVs and environment-friendly models (hybrid and electric cars) have been sold more, whereas sales ratio of diesel vehicles has decreased.

Regulation

What is the regulatory framework for manufacture and distribution of automobiles and automobile parts, such as vehicle-type approval process as well as vehicle registration and insurance requirements?

Major government agencies regulating automobiles and automobile parts in Korea are the Ministry of Environment, the Ministry of Land, Infrastructure and Transport, and the Ministry of Trade, Industry and Energy.

Homologation

First, in order to manufacture and import automobiles in Korea, the manufacturer or importer must obtain emission certification under the Clean Air Conservation Act and noise certification under the Noise and Vibration Contract Act for the subject automobiles from the Ministry of Environment. The specific certification standards are similar to the US and EU standards. Currently, diesel vehicles are subject to the Euro 6 standard and test methods in a similar manner to Europe. Also, automobiles and their parts must satisfy the Korean Motor Vehicle Safety Standards (KMVSS) prescribed by the Motor Vehicle Management Act. While similar to the EU type approval regime, the emission and noise certification needs to be obtained in a formal application process, and the safety standards need to be complied with in a self-certification process similar to the US self-certification regime.

Registration

Pursuant to the Motor Vehicle Management Act, automobiles must be registered prior to be in operation, and any changes in the ownership of the automobiles must be registered to be effective.

Insurance

Pursuant to the Guarantee of Automobile Accident Compensation Act, in principle, an automobile owner is required to purchase a liability insurance policy or enter into a liability mutual aid agreement. Without purchasing such liability insurance policy, the automobile owner is not allowed to operate the automobile on the public roads.

Other regulatory scheme

Fuel efficiency must be filed with the Korea Energy Agency, while the specification management numbers need to be registered with the Korea Automobile Testing & Research Institute, a sub-institution of the Ministry of Land, Infrastructure and Transport.

Also, the Ministry of Environment limits the contents of hazardous substances in automobiles and automobile parts within a prescribed level (corresponding to the Restriction of Hazardous Substances regime in the EU) and obliges automobile manufacturers and importers to comply with the recycling ratio for scrapped automobiles.

In certain cases, automobiles and automobile parts that use electromagnetic waves may be subject to conformity assessment regulations under the Radio Waves Act.

Finally, to those automobiles manufactured in the countries that enter into certain free trade agreements (FTAs) with Korea and imported to Korea, beneficial provisions of the applicable FTA (including exceptions from specific certification requirements under Korean law) will apply.

Development, manufacture and supply

How do automotive companies operating in your country generally structure their development, manufacture and supply issues? What are the usual contractual arrangements?

Some Korean automobile manufacturers have their own steel and automobile part companies as affiliates. Thus, Korean automobile companies manufacture a considerable portion of automobile parts on their own, or procure them through original equipment manufacturers (OEMs). They also import a large number of parts from automobile part companies in various countries, including Germany and Japan.

Distribution

How are vehicles usually distributed? Are there any special rules for importers, distributors, dealers (including dealer networks) or other distribution partners? How do automotive companies normally resolve restructuring or termination issues with their distribution partners?

Automobiles manufactured in Korea are sold in Korea or exported to foreign countries.

In Korea, foreign automobile manufacturers import and sell automobiles manufactured in foreign countries by designating one or multiple dealer companies responsible for sales in Korea. In cases where the foreign automobile manufacturer has established a subsidiary in Korea, it generally conducts its business by importing automobiles into Korea through its subsidiary, which then sells such automobiles to the designated dealer companies that sell them to customers in Korea. However, there are also cases where Korean dealer companies directly import automobiles to sell them to end consumers without dealing with any Korean subsidiary separately established by the foreign manufacturer.

There are approximately 200 dealer companies in Korea, while most dealer companies operate A/S centres, garages to fix cars, for the automobiles they sell in Korea.

Mergers, acquisitions and joint ventures

Are there any particularities for M&A or JV transactions that companies should consider when preparing, negotiating or entering into a deal in the automotive industry?

There are no M&A or JV transaction issues particular to the Korean automobile industry. However, companies should be mindful that the Korean automobile industry has a significant impact on overall Korean employment. If a company intends to conduct business in Korea, it should sufficiently examine the labour issues related to the Korean automobile industry.

Incentives and barriers to entry

Are there any incentives for investment in the automotive market? Are there barriers to entry into the market? What impact may new entrants into the market have on incumbents?

The Korean government provides support such as tax incentives to foreign invested companies. Also, companies established in certain areas such as free economic zones may benefit from deregulation and tax incentives.

Further, the Korean government implements policies that support research and development of certain technologies such as electric cars, hydrogen fuel cell cars, and autonomous cars.

While the barriers to entry into the automobile industry may differ depending on the type of business, the requisite compliance with regulatory standards such as environmental certifications and the KMVSS may work as a barrier to automobile manufacturers and importers. Also, notwithstanding non-legal barriers, it may be necessary for them to fully understand the labour issues in the Korean automobile industry.

If a new entrant emerges in the Korean automobile industry, its competition with pre-existing companies may be further intensified.

Product safety and liability

Safety and environmental

What are the most relevant automotive-related product compliance safety and environmental regulations, and how are they enforced? Are there specific rules for product recalls?

The Motor Vehicle Management Act provides that manufacturers and importers of automobiles and parts must self-certify the compliance of automobiles and parts with the KMVSS. Failure to do so may result in imprisonment of up to one year or a criminal fine of up to 10 million won, and an order from the Minister of Land, Infrastructure and Transport to suspend manufacturing, assembling, importing or selling such automobiles or automobile parts. If they fail to meet the KMVSS, they must be recalled. Generally speaking, most provisions of the KMVSS are harmonised with the international standards.

For automobiles in violation of environmental standards such as the permissible emissions standards, emission certifications may not be issued, or the certifications previously issued may be revoked, which may lead to criminal sanctions, imposition of administrative surcharge or recall.

Product liability and recall

Describe the significance of product liability law, and any key issues specifically relevant to the automotive industry. How relevant are class actions or other consumer litigation in product liability, product recall cases, or other contexts relating to the automotive industry?

Defects contained in automobiles or parts may raise product liabilities. However, Korea has no formally established class action system similar to that in the US.

In around 1999, legal actions were instituted in multiple cases against Korean automobile manufacturers to claim for damage compensation caused by unintended acceleration. However, the court did not acknowledge the liabilities of such manufacturers.

In principle, the Korean product liability regime is based on the continental law, compensating the actually incurred damages. However, in the wake of recent high-profile product safety incidents and public calls for a strengthened product liability system and enforcement, the Korean National Assembly has passed an amendment to the Product Liability Act to adopt a punitive damages system. The new system, along with other recently passed amendments to the Product Liability Act, became effective on 19 April 2018.

Under the amended Product Liability Act, a manufacturer could be subject to treble (ie, three times the actual damages) if the manufacturer knew of a defect in its product but failed to take necessary remedial measures and the defect caused death or serious injury. The new punitive damages system, coupled with the statutory presumption of causation between alleged defect and harm, is expected to significantly increase manufacturers’ product-related risks across all industries.

Moreover, there are four pending bills proposed by different legislators to introduce the class action litigation system in Korea: the Class Action Bill, the Consumer Class Action Bill, the Class Action Bill for Protection of Consumer Rights and Interests, and the Fair Trade Related Class Action Bill. Under all four bills, a class action may be initiated if there are more than 50 claimants and common questions of law or fact in their claims, and class action would be an effective means to provide remedy to the entire affected group. Needless to say, if the class action system is introduced in Korea, the risk level for product manufacturers and distributors will rise substantially.

In some of the recent cases in which an alleged product defect was found to cause harm to consumer health and safety on a wide scale, not only did the defendant manufacturers face civil liabilities but their senior managers faced criminal liabilities in some cases. This trend imposes greater burdens on product manufacturers and distributors and heightens the need for stricter monitoring and compliance.

Depending on the specific facts and circumstances, there may be cases where consumers request additional compensation other than the recall for the manufacturing defects.

Disputes

Competition enforcement

What competition and antitrust issues are specific to, or particularly relevant for, the automotive industry? Is follow-on litigation significant in competition cases?

Competition and antitrust issues are subject to the Monopoly Regulation and Fair Trade Act in Korea. Competition and antitrust issues particular to the Korean automobile industry may include: price fixing, intervention in management activities such as requesting financial information of the other transacting party, stealing technology of the transacting party by requesting its technical information and issues arising from the unilateral termination of OEM agreements.

In particular, owing to an alleged cartel, the Korea Fair Trade Commission recently investigated against and sanctioned (i) commercial vehicle manufacturers and importers and (ii) automobile parts suppliers, respectively.

One of the major competition acts that may have an impact on the automobile industry is the Fair Transactions in Subcontracting Act, which also applies to cases where automobile parts have been supplied based on an OEM contract. The Fair Transactions in Subcontracting Act prohibits, among other things, unreasonable cancellation of entrustment, unreasonable return of goods, reduction of the subcontract consideration such as price fixed at the time of the entrustment of manufacturing without a justifiable ground, unfair requests for economic profits, etc.

Competition cases may involve follow-on litigation, some of which may develop into collective actions.

Dispute resolution mechanisms

What kind of disputes have been experienced in the automotive industry, and how are they usually resolved? Are there any quick solutions along the supply chain available?

The kinds of disputes that may arise in the automobile industry include disputes between manufacturers, disputes between manufacturers and automobile parts suppliers, disputes between importers and dealers, disputes among dealers, and disputes between manufacturers, importers, or sellers and consumers. Normally, such disputes are resolved by legal proceedings rather than arbitration. They may also be settled upon agreement among the parties without legal proceedings.

Upon filing for legal actions, the parties may seek interim remedies in parallel such as preliminary seizure or injunction, which are in fact pursued frequently.

Distressed suppliers

What is the process for dealing with distressed suppliers in the automotive industry?

As automobile manufacturers and automobile parts suppliers form a long-term, mutually cooperative business relationship, manufacturers may support distressed parts suppliers through price adjustments and financial assistance. Also, manufacturers may invest in or acquire the parts suppliers in financial difficulties. Such decisions are made by the relevant parties as, in principle, the government does not intervene in this process. However, if a financial crisis in large-sized manufacturers or parts suppliers has the potential to cause a serious impact on regional employment such as mass unemployment, the government may choose to intervene to the extent necessary.

Intellectual property disputes

Are intellectual property disputes significant in the automotive industry? If so, how effectively is industrial intellectual property protected? Are intellectual property disputes easily resolved?

Intellectual property protection is a significant issue in the Korean automobile industry. Utilising its superior position, the automobile manufacturer may request a parts manufacturer for its technical information to steal its technology. Also, there has been a case where an employee attempted to leak automobile development technology to a foreign competitor, although this attempt was detected. Further, an R&D employee transferred to a competitor and leaked the core technology.

In Korea, any person who steals technologies or leaks trade secrets may be subject to criminal penalties and damage compensation liabilities. However, owing to the particular nature of intellectual property, the damage caused by leaked intellectual property is irrevocable. Thus, providing remedies for such damages in an ex post facto manner may be ineffective. Therefore, interim remedies such as preliminary injunction may be more effective.

Employment issues

Trade unions and work councils

Are there specific employment issues that automotive companies should be aware of, such as with trade unions and works councils?

In the course of entering or investing in the automobile industry in Korea, companies should sufficiently examine the applicable labour laws and regulations and labour issues raised in the automobile industry. For instance, the Trade Union and Labour Relations Adjustment Act sets forth provisions on the establishment and operation of the labour unions, while the Labour Standards Act provides the general labour standards.

Most of the Korean automobile manufacturers have labour unions with a strong sense of unity and traditions. The automobile labour union is one of the most representative labour unions in Korea. Depending on the provisions of collective bargaining agreements, manufacturers may have to consult with the labour unions prior to making managerial decisions relating to issues such as production models and working hours. Manufacturers may also experience business interruptions owing to labour union strikes.

Effectively coordinating labour relations is a very important matter in the Korean automobile industry.

New technologies

Legal developments

What are the most important legal developments relating to automotive technological and mobility advances?

Korea has a growing interest in new automobile development technologies such as autonomous cars, connected cars, electric cars, hybrid cars, and hydrogen fuel cell cars. In this regard, the Motor Vehicle Management Act introduced a legal definition of autonomous cars in August 2015 and separately provided procedures to obtain temporary driving permits for autonomous cars intended for tests and research. Further, separate standards on low-speed electric vehicles and regulations on their operation area were introduced in 2009.

In terms of environmental laws, certain electric cars may be exempted from certifications under the Clean Air Conservation Act and the Noise and Vibration Control Act or subject to separate provisions on submission of documents for certifications.

For new automobile technologies as above, legal developments are expected to continuously unfold in the future.

Update and trends

Trends and new legislation

Are there other current legal developments, emerging trends or pending legislation relevant to the automotive industry that should be noted?

As a general note, Korean consumers have become more sensitive to automobile defect issues.

Under the amended Product Liability Act, which became effective on 19 April 2018, a manufacturer could be subject to treble damages (ie, three times the actual damages) if the manufacturer knew of a defect in its product but failed to take necessary remedial measures and the defect caused death or serious injury. The new punitive damages system, coupled with the statutory presumption of causation between alleged defect and harm, will significantly increase manufacturers’ product-related risks across all industries. This trendim poses greater burdens on product manufacturers and distributors and heightens the need for stricter monitoring and compliance.

Under the recently amended Motor Vehicle Management Act, to allow consumers who purchase a new vehicle and experience a defect to seek a replacement or refund from the manufacturer and provide related standards and procedures, the ‘Lemon Law’ has been introduced in Korea, entering into effect on 1 January 2019. A vehicle owner may seek a replacement or refund for a defective vehicle from the vehicle manufacturer within two years of delivery of the vehicle under certain requirements. The amended act also contains a provision on presumption of a defect, under which a defect discovered within six months of delivery of the vehicle shall be deemed to have existed at the time of the delivery, thereby shifting the burden of proof as to the cause of the defect to the manufacturer.

Further, owing to alleged non-compliance with the homologation-related regulations in Korea, many automobile importers were hit with administrative sanctions such as revocation of emission certification, recall, administrative surcharge and criminal sanctions such as criminal fine. Some are still involved in legal proceedings. In particular, the Customs Office investigated several automobile importers with respect to automobiles imported without proper certifications or modification certifications, and some companies are currently involved in the criminal proceedings in this respect.

Finally, automobile manufacturing is a key issue on the agenda for the FTA amendment negotiations between Korea and United States, which were initiated upon the request of President Trump. As the final results of the negotiations are expected to affect both the Korean and US automobile industry and could have certain implications for the Korea-EU FTA, if any, it is prudent to pay attention to such results.