Information labels of a hydrogen-powered Hyundai car is seen during the London EV Show in London, England, Nov. 29, 2022. Reuters-Yonhap

This article is the second in a series of interviews with chief economists and analysts covering the Korean economy and industries on what the global credit rating agencies expect for 2023 amid rising interest rates and high inflation. ― ED.

Korea's migration to 5G networks to support stable leverage for SKT, KT and LG Uplus

By Kim Yoo-chul

Because of the COVID-19 pandemic, the last three years have seen large-scale disruptions to the global automotive market.

While analysts covering the car industry and executives at leading carmakers have no doubts that the automotive industry will remain vulnerable to global macro-economic challenges this year due to continued supply chain disruptions, rising energy prices and even weak end-demand, some expectations are that 2023 could be a year of relative stability.

The degree of stability, however, won't look like the past, especially before the pandemic. This assessment reflects Fitch Ratings' view that the outlook for the global car sector will remain neutral throughout this year, which will be applicable to Hyundai Motor and its sister company Kia, the country's top carmakers, given their global exposure.

The central question is about what will be the norms in the automotive industry this year. It's safe to say any signs of addressing concerns over supply chain disruptions would allow for higher global vehicle production this year and this means that profitability for carmakers and suppliers could be backed by lower commodity prices and an easing of costs in some areas such as logistics.


Speaking to The Korea Times, Fitch Ratings Senior Director Pak Jeong-min said he expects Hyundai Motor's credit profile to "remain stable" throughout this year.

"High pent-up demand, due to industry under-production in the past several years, is likely to support demand, as are more normalized vehicle pricing and mix, which will bring back some customers who were priced out of the market. As vehicle production has been running at recessionary levels for nearly two years, we don't expect a sales decline in 2023 but foresee this situation could last two or more years before global sales return to pre-pandemic levels," Pak said.

While the ongoing supply chain-related issues have postponed release of some strategic vehicle models, a set of new models are on the horizon in the U.S., the most important commercial vehicle market, with the arrival of Kia's two electric vehicle (EVs) models and Hyundai Motor's IONIQ 6 model, helping realize a more diverse selection of vehicles for purchase. The EV segment is viewed as a promising sector with sales of conventional fossil-fuel and commercial vehicles falling.

From left are Fitch Ratings head of Asia-Pacific Sovereigns Thomas Rookmaaker, Fitch Ratings Asia-Pacific Corporates senior director Pak Jeong-min, Asia-Pacific Corporate director Shelley Jang, and Sovereigns director Jeremy Zook. Courtesy of Fitch Ratings

"Higher levels of production will lead to a normalization of vehicle mix and higher incentives, which will bring down net pricing and auto manufacturer margins from the very high levels experienced in 2022. Hyundai Motor had also benefited from a weak Korean won in 2022, which contributed further to its profitability. A stronger won could also have a negative impact on margins in 2023," the director responded, adding overall vehicle sales, however, will be limited by weaker economic conditions in the U.S. and Europe.

Migration to 5G, growing non-telecom businesses to benefit SKT, KT, LG

2022 was a meaningful year for Korea's telecom industry as leading mobile carriers have further widened their coverage of faster wireless service supporting fifth-generation (5G) technology amid growth of corporate data centers and cloud computing.

This year, the domestic telecom sector is set to see further gains from ongoing 5G wireless subscription growth. Prospects in the steady deployment of high-speed 5G connectivity in Korea, one of the world's most-wired countries, would fuel extra growth of wireless subscribers, which will also help the country's three telecom companies including SK Telecom, KT and LG Uplus see improvements in their cash holdings.

"Continuous migration to 5G networks and growing non-telecom businesses may support solid operating cash generation and stable leverage for South Korean telecoms. Strong growth from data centers and cloud services will also contribute to overall revenue growth. Rising inflationary pressure may lead to higher operating costs such as labor costs, which will offset upside from wireless growth to some extent, while a stable competitive environment will keep marketing costs at a lower level further into 2023," Shelley Jang, director at the global credit rating agency, who also covers corporates in Asia-Pacific, said in a separate call.

The director expects "competitive intensity" to remain stable in the domestic telecommunication market as SK Telecom, KT and LG Uplus are focusing on internal user-base migration to 5G networks rather than trying to expand market share in the already saturated domestic telecommunications market.

"The three telecoms' wireless market share remains stable. The operators want to avoid excessive subsidy competition and focus on improving network-service quality and developing business models for their 5G networks. We forecast wireless revenue to grow by the low-single digits in 2023 on the back of ARPU gains through sales of higher-value 5G tariff plans with the popularity of high-end 5G mobile and content-driven heavy data consumption," Jang said. ARPU is short for average revenue per user and it is measured by the total sales of a telecom company divided by its total number of users. It is a core indicator to track growth and sources of revenue.

The director went on to say that the 5G penetration rate may exceed 50 percent of handset subscribers by this year. As of the end of the third quarter of last year, the Korean 5G user base reached 26 million, representing a 34 percent market share. SKT leads with a 48 percent 5G subscriber base, followed by KT and LG Uplus with 30 percent and 22 percent, respectively, according to Fitch estimates.

An attendee tests out the bHaptics haptic gloves and vest for AR/VR gaming at CES Unveiled ahead of the Consumer Electronics Show (CES) in Las Vegas, Jan. 3. AFP-Yonhap

Not surprisingly, the semiconductor sector will continue deteriorating throughout this year because the industry is still facing "inevitable inventory corrections" following two years of robust revenue growth and pandemic-related economic lockdown policies. But Jang expects the sector to see signs of normalization after the second quarter of this year because the tech cycle is short and ongoing digitalization investments could spur a recovery in the cycle. However, supply chain migration from China to other regions could lead to higher-than-expected capital expenditures and raise production costs and barriers to accessing markets.

"Greater geopolitical tensions between the U.S. and China could further affect (semiconductor) companies' growth. It may delay investment decisions and affect global supply chain costs with the diversion of manufacturing away from China. Despite weak sector outlook, the ratings on Samsung Electronics continue to be supported by its technology leadership and strong market positions that help to mitigate cash-flow fluctuation. Fitch expects the company's financial position to remain strong, backed by robust cash generation and substantial financial flexibility," according to the director. Samsung is the global leader in DRAM and NAND chips.

0.25% rate hike expected

Regarding its outlook for this year on the Korean economy, Asia's fourth-largest, two senior Fitch economists said in separate calls that while the Bank of Korea (BOK) is anticipated to make further tightening moves, inflationary pressures are expected to ease this year.

Samsung Electronics' chip production plant in Pyeongtaek is seen in this handout picture obtained by Reuters on Sept. 7, 2022. Reuters-Yonhap

"While some central banks still follow U.S. Fed policy, the large gap with the pre-pandemic trend growth may partly explain why core inflationary pressures have generally been more subdued in Asia-Pacific than elsewhere, but could also indicate that there is still potential for an inflationary uptick in 2023," said Thomas Rookmaaker, head of Asia-Pacific Sovereigns at Fitch.

"Geopolitics are likely to continue to play an important role for sovereigns like South Korea. Tensions between the U.S. and China will remain elevated, but economic linkages will most likely decline only gradually. High-tech and other industries deemed strategically important will be particularly affected by these trends," Rookmaaker said in a separate interview.

Fitch director Jeremy Zook expects an additional 0.25 percent rate hike by the country's central bank to a terminal rate of 3.5 percent in 2023.

"We expect the BOK's tighter stance, along with base effects and declining commodity prices, to cause inflationary pressures to subside and for inflation to fall to 2 percent by the end of 2023. Still, the BOK will potentially have to manage external challenges if the Fed hikes rates beyond our expectation of a 5 percent peak. The easing of external pressures over the past couple months, reflected in the appreciation of the won against the greenback, gives the BOK a bit more breathing room in the near-term," Zook said.

He elaborated hiking beyond 3.5 percent could add greater pressure on the country's economic outlook and local financial market volatility.