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Operating Margin of Korean Auto Parts Makers Remains at 2% Level
Survival under Threat
Operating Margin of Korean Auto Parts Makers Remains at 2% Level
  • By Jung Min-hee
  • October 17, 2018, 12:04
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The operating margin of listed Korean auto parts companies barely exceeded 2 percent in the first half of this year.

As domestic automakers, such as Hyundai Motor Co. and Kia Motors Corp., are struggling with weak domestic demand and stronger global competition, local car component producers have been directly hit.

This year, the U.S. sales of Hyundai Motor stood at 335,000 units, down 3.3 percent from a year ago. Its sales in the largest Chinese market increased a mere 1.9 percent on-year despite the base effect caused by China’s economic retaliation for the deployment of the THAAD anti-missile system. Ko Moon-Soo, executive director of the Korea Auto Industries Cooperation Association (KAICA), said, “The productions of the domestic automakers came to 9 million units in 2016 but it decreased 10 percent last year. Their productions in China also dropped 35 percent.”

The operating margin of listed auto parts companies, which are the first and second suppliers of automakers, barely passed 2 percent in the first half of this year. Excluding operating funds and purchasing costs, they are actually losing money. As automakers, including Hyundai Motor, have been struggling with both domestic demand and exportation, car component manufacturers are plunging into the red. When parts producers continuously fail to make profits, the supply chain network of the auto industry will be structurally destroyed.

Auto parts manufacturers have shown a high growth through vertical integration based on exclusive deals. It means that there has been a considerable number of merits busy supplying components and equipment. In fact, the assets of 45 listed component producers nearly doubled from 9.4 trillion won (US$8.36 billion) in 2009 to 17.9 trillion won (US$15.93 billion) in the first half of this year. Hyundai Motor also saw its turnover grow from 35.4 trillion won (US$31.49 billion) to 69.9 trillion won (US$62.19 billion) at similar rates over the same period.

In addition, market experts pointed out that exclusive deals between local auto makers and their parts suppliers have increased the latters’ dependency on the formers and degraded their competitiveness in the global market. According to the Korea Institute for Industrial Economics & Trade (KIET), the proportion of component exports to the regions, where Hyundai Motor and Kia Motors’ plants are established, fell from 77 percent in 2014 to 69.5 percent in 2017 but the figure rose again to 71.3 percent in 2018. It means that though car parts producers tried to decrease the supply to Hyundai and Kia Motors’ plants and increase the supply to automakers in other regions, they have been shifting back. An official from the industry said, “This is partially due to the fact that they have been focusing too much on meeting the standards of domestic automakers. It is also true that small and mid-size component producers have a low technical competitiveness, except for some large ones.”