Falling Behind Chinese EVs Would Spell Trouble... Government Belatedly Plays Its 4 Million Won Card

Push to Include Electric Vehicles in the "Domestic Production Tax Credit"
Excluded from August Tax Reform Plan, but Concerns Grow Over Weakening Price Competitiveness
Ruling and Opposition Parties Reach Consensus as Legislative Debate Gains Momentum

As Chinese-made electric vehicles mount an increasingly strong challenge in the domestic market, the government has decided to support finished-vehicle production. The tax reform plan announced in August excluded finished electric vehicles from the domestic production tax credit. However, the policy direction has shifted amid growing concerns over the declining market share of Korean-made vehicles and their weakening price competitiveness. After Deputy Prime Minister and Minister of Finance and Economy Lee Hyung-il met with Euisun Chung, Executive Chair of Hyundai Motor Group, to discuss support for the automotive industry, Lee also decided to actively participate in discussions on legislation related to the tax credit. Parliamentary discussions are gaining momentum as ruling and opposition lawmakers submit bills on the issue and build consensus.

Lee Hyeongil, Deputy Prime Minister and Minister of Finance and Economy, tries riding an autonomous driving test vehicle during a visit to Hyundai Motor Group's Namyang Research and Development Center in Hwaseong, Gyeonggi-do, on the 2nd. Ministry of Finance and Economy

◆Support for batteries and materials, but not finished vehicles... A changing market environment= In its tax reform plan announced in August, the government selected six sectors for the domestic production tax credit: solar power, wind power, secondary batteries, semiconductors, key materials, and artificial intelligence (AI) robot components. The aim was to focus support on sectors with a weak domestic production base or strategic importance to economic security, but finished electric vehicles were not included. At the time, then-Deputy Prime Minister Gu Yun-cheol identified batteries and high-performance cathode materials as the core competitive strengths of electric vehicles. The government also considered that finished-vehicle manufacturers already had production facilities and sales networks, that benefits such as purchase subsidies were already available, and that direct support could lead to trade friction.

However, industry and academic circles had called for support for finished-vehicle production even before the tax reform plan was announced. In April, the Korea Automobile & Mobility Association (KAMA), together with the Korea Auto Industries Cooperative Association and the Korean Metal Workers' Union, issued a joint labor-management proposal calling for the introduction of a tax incentive to promote domestic electric vehicle production. In May, Oh Moon-sung, president of the Korea Tax Policy Association, also proposed at a tax policy seminar introducing production-based tax credits for nationally strategic sectors, including electric and hydrogen vehicles. Nevertheless, finished vehicles were ultimately left out of the August tax reform plan.

◆Urgent need to secure price competitiveness amid Chinese automakers' push... Widespread sense of crisis= The need for production tax credits has become more pronounced as Chinese companies have recently gained influence. Domestic finished-vehicle manufacturers now face the dual challenges of expanding sales while maintaining production in Korea and securing price competitiveness. An official from the Ministry of Trade, Industry and Energy said, "The reason the domestic production tax credit is cited by the industry as the most effective measure is that it helps secure price competitiveness." The credit could be used to lower vehicle prices and narrow the price gap with Chinese-made vehicles, the official said.

Lawmakers from both the ruling and opposition parties have introduced bills to amend the Restriction of Special Taxation Act to include electric vehicles among those eligible for the credit. Proposals under discussion include providing a tax credit of up to KRW 4 million per domestically produced electric vehicle. Another proposal would apply a preferential coefficient for non-metropolitan production. An official from the Ministry of Finance and Economy said, "Deputy Prime Minister Lee has said since his confirmation hearing that he would consider various support measures, including a production tax credit for electric vehicles." The official added, "The specific details of the relevant bills will be decided during the National Assembly's review of the tax law amendments, and the government will also actively participate in parliamentary discussions."

◆Tax credits alone have limits... Future vehicle technology and component competitiveness must be supported= Introducing a domestic production tax credit would not immediately restore competitiveness. If the support amounts only to tax benefits for existing production volumes, its impact could be limited. It should therefore be designed in conjunction with new investment, increased production, domestic parts sourcing, and employment retention. To ensure support for finished-vehicle makers also benefits parts suppliers and local economies, the government should support the conversion of internal combustion engine parts manufacturers to new businesses and retrain their workforce, while strengthening domestic supply chains for key components. An official from the Ministry of Trade, Industry and Energy said, "The share of internal combustion engine vehicles is declining further, and the market is being reshaped around future vehicles such as autonomous and electric vehicles." The official added, "Whether Korea secures leadership in the future vehicle market will determine the competitiveness of the Korean automotive industry." The official also said, "Hyundai Motor will invest as well, but the government is also looking to provide as much support as possible for research and development (R&D) investment."

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