Japanese car sales slump in South Korea as diplomatic row worsens

Sales of Japanese-branded autos in South Korea slumped in July amid a worsening diplomatic row between the two countries that has led to consumer boycotts and efforts by Seoul to cut the economy's reliance on imports from Japan.

Toyota Motor's sales in the country tumbled 32% from a year earlier while Honda's sales skidded 34%, industry data out of South Korea showed on Monday.

Although automakers are still assessing the main factors driving the declines last month, industry participants and analysts expect an intensifying boycott campaign to hurt demand further, as diplomatic tensions grow.

Japan tightened controls in July on exports to South Korea, escalating a row over wartime forced laborers and sparking a boycott by South Korean consumers of Japanese products and services, from cars, beer and pens to tours.

On Friday, Japan escalated tensions by removing South Korea from a list of export destinations approved for fast-track status.

"Showroom visits are declining while consumers are holding off on signing contracts," a Honda Korea official told Reuters, asking not to be identified because of the sensitivity of the matter.

South Korean representatives for Honda and Toyota did not provide any commentary on the sales trends and said they would need to assess the reasons for the decline.

However, industry watchers said public sentiment was a factor behind the sharp falls.

"The South Korean public is angry about Japan... It will soon become a taboo to drive Japanese cars in Korea," Daelim University College automotive engineering Professor Kim Pil-soo said.

The data from the Korea Automobile Importers & Distributors Association (KAIDA) also showed Lexus, Toyota's luxury badge and the third-most imported brand into South Korea after Mercedes and BMW, saw sales down 25% from the previous month, although they were still up 33% from the previous year.

Japanese officials have cited unspecified security reasons for the export curbs to South Korea. But they have also pointed to an erosion of trust after South Korean court rulings last year ordered Japanese firms to compensate wartime forced laborers, a matter Tokyo says was settled by a 1965 treaty normalizing bilateral ties.

South Korean shares ended down 2.6% to their lowest in more than three years on Monday, tracking broader moves in Asia as the Sino-U.S. trade war intensified but also weighed by uncertainty over the diplomatic dispute between Seoul and Tokyo.

SELF-SUFFICIENT

Earlier on Monday, South Korea's government announced plans to invest about 7.8 trillion won ($6.48 billion) in research and development for local materials, parts and equipment over the next seven years to help cut reliance on Japanese imports.

South Korea plans to improve economic "self-sufficiency" in regards to the production of 100 key components, materials and equipment items used to make chips, displays, batteries, automobiles and other products. The government aims to stabilize supply of these items over the next five years.

South Korean President Moon Jae-in, who promotes rapprochement with the nuclear-armed North Korea, said later on Monday that an inter-Korean economic cooperation would allow Korea to overcome Japan's lead.

"Japan can never prevent our economy from making a leap forward," he said at a weekly meeting with senior presidential aides, adding that Japan will be a "catalyst" for Korea's resolve to become an economic powerhouse.

While foreign-branded cars make up a small portion of domestic auto sales in South Korea, the business community is concerned a consumer swing away from Japanese imports for political reasons could grow in other sectors, such as tourism and retail.

Japan's Fast Retailing fashion brand Uniqlo has been a prime target for the boycott, with its 186 stores in South Korea making the country its second-biggest overseas market in terms of outlets.

Fast Retailing chief financial officer Takeshi Okazaki last month acknowledged there had been some impact on its sales as a result of the campaign, without elaborating.

Japan's Asahi Group Holdings, whose Asahi Super Dry is the most popular import brand in South Korea, said on Thursday the boycott had hit its beer sales as it lowered its profit guidance slightly.