Gutting Domestic Industry?
As global automakers such as Hyundai, Volkswagen, and Ford are establishing new electric vehicle production bases primarily in North America, domestic auto parts and electronics firms are following suit in droves. Even secondary suppliers are concentrating their new investments and employment in the North American region, raising concerns that the Korean auto industry ecosystem is hollowing out and the polarization in the parts industry is deepening.
The government of the state of Tennessee in the U.S. announced on Aug. 1 (local time) that Hanon Systems, the world’s second-largest automotive thermal management parts company (formerly known as Halla Climate Control), will invest US$170 million to establish an EV thermal management system factory in Loudon County in eastern Tennessee. Hanon Systems, which produces automotive heating, ventilation, and air conditioning (HVAC), powertrain cooling, and heat pump systems, is the world’s second-largest company in the vehicle thermal management system sector, following Japan’s Denso.
This announcement of Hanon Systems’ investment in the U.S. follows a US$40 million investment in a Georgia factory (employing 160 local people) last May, marking its second round of investment in the U.S. Tennessee Governor Bill Lee thanked Hanon Systems, saying, “Hanon Systems’ investment will create over 600 new jobs.” LG Magna e-Powertrain, a supplier to Ford, also confirmed an investment of US$790 million last month to construct a factory in Tennessee, planning to employ 1,300 people.
With the anticipated operation of global automakers’ North American EV factories as early as 2024-2025, investments in the North American region by parts companies aiming to meet this demand are being confirmed. As automakers preparing for mass production of electric vehicles are increasingly ordering not single parts but modules and systems bundled together, it is inevitable for them to head to the U.S. to align with local automakers.
In this context, total investment in North America by domestic automobile, parts, battery, and tire companies from 2021 to 2025 is estimated to exceed US$14.26 billion, likely surpassing US$15 billion. LS ELECTRIC and its auto parts subsidiary LS eMobility Solutions are building factories in Texas, the U.S., and Durango, Mexico, respectively. Core parts companies of the Hyundai Motor Group such as Ajin Industrial (US$317 million), Seowon America (US$300 million), and SECO ECOPLASTIC (US$250 million) have also committed to investing in the U.S. Recently, even secondary vendors have begun to follow suit, with companies like DIC (Kentucky, the U.S.), DH AUTOWARE (Monterrey, Mexico), and Seohan Auto (Georgia, U.S.) leading the charge.
Industry experts warn that as new investments by automakers, battery companies, and mid-sized parts companies are concentrated in the U.S., the hollowing out of the domestic EV industry ecosystem may accelerate. Small and medium-sized parts companies are under triple pressure: the burden of transitioning to electrification, undermining of existing trade lines, and increase in logistics costs, as major companies establish bases in North America.
In particular, the burden on internal combustion engine parts companies is growing. According to the Korea Automotive Industry Alliance, 70% of auto parts companies have experienced a slowdown in operating profit this year due to rising raw material prices and labor costs. The difficulties of small and medium-sized parts companies are further aggravated by the deepening labor shortage due to the declining domestic population and the increasing burden of operating funds due to high interest rates.
Kang Nam-hoon, chairman of the Korea Automotive Industry Alliance, emphasized, “To enhance the competitiveness of parts companies during the future car transition period, the continuation and expansion of the domestic future car production base investment incentive system is necessary.”