Since August of last year, the domestic Vehicle Purchase Intent Index had fallen below the benchmark (100) for ten consecutive months, but it has now recovered to last year’s peak levels.
The Deloitte Korea group released the “Vehicle Purchase Intent Index (VPI) Report for June 2023,” which surveys domestic consumers’ intent to purchase vehicles.
As of June 2023, the VPI index for South Korean consumers stands at 102, marking a substantial increase of 16.1 points compared to the previous month. This surpasses the baseline established when the index began tracking in October 2021 and is the highest level since the peak of 119.3 in July of last year.
The VPI index plummeted from its peak in July last year, dropping to 62.6 in February of this year. It had remained below the benchmark for ten months, but began to recover in March, rebounding for four consecutive months to surpass the baseline of 100 in June.
Deloitte Korea analyzed that the recovery in consumer sentiment regarding vehicle purchases is attributed to various economic changes, including decreasing oil prices, stabilizing prices, resolutions in supply chain issues, and the competitive marketing strategies of major OEMs focused on budget models and the electric vehicle market.
According to the oil price information site OPINET run by the Korea National Oil Corporation, the price of premium gasoline in South Korea (per liter, monthly) peaked at 2,299 won in June 2022, just before the sharp drop in the VPI, and has since decreased to 1,857 won, returning to pre-pandemic levels as of June 2023. This has led to a reduction in concerns about maintenance costs from 22% in July last year (the top concern for purchasing new cars) to only 17% in June this year, positively impacting new car purchases in the country.
As reported by the National Statistical Office’s KOSIS, the consumer price index (CPI) in South Korea also peaked at 6.3% in July last year, after which it began to decline, reaching around 2.7% in June. This reduction has eased consumers’ burdens around buying high-ticket items, contributing to the increase in automotive purchase sentiment in June. The percentage of consumers planning to postpone purchases of high-ticket items stood at 51% in June, a 5 percentage point decrease from May.
The Global Supply Chain Pressure Index (GSCPI), as announced by the Federal Reserve Bank of New York, peaked at 4.31 in December 2021 and fell to a similar level to pre-pandemic conditions at 0.98 in January this year. As of June, it dipped further to -1.20. The resolution of supply chain issues has positively affected automotive demand due to normalizing production caused by the alleviation of semiconductor shortages and shortening vehicle delivery times.
However, there remain downward risks such as persistently high exchange rates and interest rates, the depletion of pent-up demand from the pandemic, the end of the tax reduction, and concerns over economic recession in major countries.
Major vehicle manufacturers (OEMs) achieved record performances last year by increasing the ratio of premium models to offset rising costs and production disruptions. However, this year, in response to high inflation and interest rates causing a reduction in nominal disposable income, they are shifting their strategies to diversify discount events, offer low-interest financing, and market budget-friendly vehicles to draw consumer interest.
The prices of electric vehicles are also contributing positively to increased consumer purchase intent amid intensified competition. The release of low-cost models by Tesla and incoming competition from Chinese manufacturers have accelerated the race to dominate the budget-friendly electric vehicle market. Major South Korean OEMs are also planning to respond to this competition by launching compact electric vehicles and models featuring Chinese batteries by 2024. The effectiveness of this strategy is reflected in Deloitte’s global consumer survey, where the percentage of South Korean consumers intending to purchase electric vehicles rose to 43% in June 2023, a 13 percentage point increase from 30% in September 2022.
Additionally, Deloitte Korea identified a shift in consumer sentiment regarding vehicle purchases as a significant factor in the rising VPI. Major concerns noted by consumers about vehicle purchases—such as the worry over depleting current savings (falling from 47% to 43%), the decision to delay the purchase of high-ticket items (down from 53% to 51%), inflation concerns (down from 65% to 60%), and worries about rising fuel prices (falling from 52% to 43%)—showed decreases ranging from 2 to 9 percentage points from September last year to June this year.
Kim Tae-hwan, the automotive industry leader at Deloitte Korea, mentioned, “The change in vehicle purchase sentiment due to reduced recession worries, as well as aggressive budget marketing strategies from automobile manufacturers and heightened competition in the budget electric vehicle market, are viewed as primary factors driving domestic automotive purchasing demand,” adding that, “While there are still factors that could lower intent to purchase vehicles, it is necessary to closely observe the overall market trends and devise effective marketing strategies.”
Lee Sang-jin daedusj@autodiary.kr