Compact Car Market Dwindles as Consumers Splurge on Size

Compact cars, once the typical entry-level or second cars in Korea, have seen their market share in Korea decline.

The Korea Automobile Manufacturers Association on Sunday said domestic sales of compact cars dipped 2.2 percent in July on-year to 11,068 units, the 20th consecutive month of decline.

In the first seven months of this year, only 73,177 compact cars were sold, down 10.6 percent from the same period last year. Peaking in 2012 at over 200,000, sales fell to just over 130,000 last year.

The reasons are rising incomes, newer and more competitive compact SUVs, and lack of new models.

The country's top three subcompacts models, i.e. with an engine capacity of under 1,000 cc, are Kia's Morning and Ray and GM Korea's Spark. The Morning used to be a best-selling model and still reigns at the top spot in its segment but sales dropped 10-30 percent. The Ray fared a little better in the first half of this year as a new version came out.

Compacts are losing their competitive edge as compact SUVs now boast excellent fuel efficiency and more space for a price tag of around W20 million (US$1=W1,118). Sales of compact SUVs have seen exponential growth, going from just 11,998 units in 2013 to 147,429 last year, up 12.3-fold in just four years.

In the past, compact cars sold steadily when priced under W10 million, but nowadays the price tag can easily rise to W12 million with options, which means that consumers would rather spend another W3 million to move up a class.

But the government is also to blame. Tax incentives for compact cars have barely changed over the past 10 years, and similar tax breaks and discounts on parking and toll fees are also given to hybrids and electric cars.

Moreover, since carmakers consider the segment unprofitable, they have made minimal efforts to develop new models or improve quality. Hyundai makes no compacts at all, and Kia only on a consignment basis.

But voices are growing for Korea to foster the segment given that the country is small and crowded and SUVs take up far too much space on the road, whether or not they are relatively green and fuel efficient. Compact cars account for just six to seven percent of cars in Korea, compared to some 50 percent in Europe and 37 percent in Japan.