Barely Holding on
As a couple of Hyundai Motor’s secondary vendors have failed to sell the companies and are facing bankruptcy, the entire domestic car component industry consisting of more than 10,000 firms is seized by fear. Component producers have been put under pressure from clients to lower prices and haven’t been able to invest in technology development. They have been barely getting by but are now losing their clients as well.
According to investment banking (IB) industry sources on July 24, three companies that supply components to Hyundai Motor Co. and its smaller affiliate Kia Motors Corp. are currently going through a restructuring process. MT Korea has been supplying automotive interior and exterior materials to Hyundai Motor for 30 years, taking care of the whole process ranging from materials design to corrective action after delivery. The company has no competitors in South Korea in the foam-injection molding sector and even Japanese parts makers cannot overtake it in terms of price competitiveness. However, MT Korea has failed to sell the company because its operating margin stands at only 5 percent and the foam-injection molding area has relatively lower technology barriers.
In addition, ENA Industry Co., a secondary parts supplier for domestic automakers that has also supplied automotive dustproof rubber parts to 40 global automakers, including Volkswagen Group and Audi AG, is on the verge of bankruptcy as it couldn’t pay its matured bills. The company succeeded in securing various clients around the world since its inception in 1990 and its sales surpassed 100 billion won (US$88.11 million) in 2015. However, ENA Industry saw its sales decrease for two years in a row and its operating profits have turned to losses.
An abrupt deterioration in business performance hits a hard blow to component producers, in particular, small and mid-sized ones. According to DataGuide, among auto parts makers with over 100 billion won (US$88.11 million) of sales, only 7 percent are in operating loss, while among the companies with less than 100 billion won in sales, the ratio reaches 20 percent.
Small and mid-sized component manufacturers, which are barely holding on, do not have any opportunities to improve their competitive edge, for instance, by investing in technology for electric vehicles. The Industrial Bank of Korea (IBK) Economic Research Institute released a shocking report based on data from the Japan Automotive Products Association. It said that 2,886, or 28 percent, of the 10,211 South Korean auto parts producers can go out of business when they fail to adapt to the era of electric vehicles.
More specifically, all of the 1,920 engine component makers in South Korea could go belly up. It also said that 70 percent of the manufacturers of electrical devices for internal combustion engines and 37 percent of the power transfer unit producers could also disappear. These estimates were based on the Japanese case that illustrates an economic environment that Korea will face several years in the future.
In fact, the domestic auto parts industry imports collision avoidance and control systems and autonomous cruise control technology for high-end vehicles from foreign firms. The level of Korea’s automobile technology stands at 78 to 83 compared to 94 to 100 of major countries, including the US, Japan and Europe.
An official from the IB industry said, “It’s mostly the secondary vendors that went bankrupt so far. However, it is widely known in the industry that most of the primary vendors that post hundreds of billions of won in sales are suffering from a lack of funds and have turned to losses. Most of them have failed to take out loans and had to increase capital by issuing new stocks or corporate bills or even convertible bonds, running right into a dead end.”