Parts Producers Collapse One after Another
As Korea's finished car producers are suffering from a deepening slump in business performance, the Korean automobile industry as a whole is undergoing an unprecedented crisis.
Concerns about the industry are growing as the domestic automobile industry is vertically integrated. In this system, the crisis of finished car companies spreads to their partners and parts suppliers, weakening the competitiveness of the industry as a whole.
The five Korean finished car producers are suffering poor business results this year.
Hyundai Motor Co., which announced its third quarter results on Oct. 25, recorded 288.9 billion won (US$253 million) in operating profits, a whopping 76 percent plunge from the same period last year. Its operating margin was a mere 1.2 percent, down 3.8 percentage points from the same period last year.
The company’s operating profit was far less than the 800-900 billion won market consensus and amounted to about one tenth of its biggest quarterly earnings of 2.537 trillion won (US$2.22 billion) posted in the second quarter of 2012.
The bigger problem is that the deterioration of profitability is not a temporary phenomenon.
Hyundai's operating profits, which exceeded 2 trillion won until 2013, have remained in the 1 trillion won range since then, but fell below 1 trillion won in the fourth quarter of last year, and have remained below that level for the fourth consecutive quarter.
Kia Motors Corp., which announced its third quarter results on Oct. 26, reported 171.3 billion won (US$150.06 million) in operating profits. Its operating margin was 0.8 percent, even lower than that of Hyundai Motor.
Although Kia turned around from a deficit in the same period last year, its profitability has in fact deteriorated. The profit in the third quarter of this year was thanks largely to the low-base effect. It incurred losses a year ago due to a change in calculating ordinary wages.
SsangYong Motor Co. suffered a 22 billion won operating loss in the third quarter of this year, which is bigger than last year's deficit. The company fared well in the domestic market, but its exports were sluggish.
Ssangyong sold 102,246 cars in the first nine months of this year, down 4.1 percent from the same period last year.
GM Korea, which has started to normalize its business since May this year, is still struggling to get out of the doldrums.
Cumulative sales from January to September of this year were 341,349 units, down 15.1 percent from a year ago. The company suffered a sharp drop in domestic sales, which totaled 66,322 units, down 35.3 percent.
GM Korea, which has been in the red for the past few years, is in a position to reflect structural adjustment expenses, such as large-scale voluntary retirement allowances paid with the closure of the Gunsan plant in the first half of this year, in its accounting books.
For this reason, some predict that the deficit will reach one trillion won this year, which is much bigger than last year's 840 billion won.
Renault Samsung also had a tough time this year, with its accumulated sales in the first nine months of this year totaling 171,895 units, down 16.1 percent from the same period last year.
It suffered negative growth in both domestic demand (-17.1%) and exports (-15.5%). Furthermore, it has yet to reach an agreement on wages and collective bargaining.
The poor performance of finished carmakers directly affects the automobile industry's ecosystem.
The less cars sell and the less profitable they become, the less parts they should procure from partner companies, which in turn will lead to a decline in parts sales, a decline in plant utilization, a decline in employment, and a decline in quality.
The parts industry has already been experiencing the shock.
According to the Korea Automobile Manufacturers Association, 42 of the 89 first-tier parts producers whose stocks are listed recorded an operating loss in the first quarter, while 28 recorded a net loss.
Sales of the 89 companies fell 8.6 percent from the same period last year, with their operating ratio tallied at 0.9 percent, 2.8 percentage points lower from the 3.7 percent of the first quarter of last year. The total amount of loans extended to the automobile industry stands at 28 trillion won. Of it, about 10 percent is believed to be nonperforming.
In June of this year, Hyundai Motor's first-tier partner company, Leehan Corp. applied for workout, and Dynamec, Gummoon Industry, and E-Won Solutech entered the corporate rehabilitation process (court receivership) one after another.
In the end, the parts industry asked the government for financial support worth about 3 trillion won, and the government announced a plan to provide a 1 trillion won in payment guarantees to parts makers.
Professor Kim Ki-chan of Catholic University said at a recent conference hosted by the Korean Society of Automobile Industry, "The Korean automobile industry has never been in such a crisis during the past 30 years. We should not rule out the possibility of the industry’s ecosystem breaking down."