Kia Halts Production Due to Fuel Tank Shortage... Concerns Over Disruptions Spreading in Car Production Lines (Comprehensive)

Aftermath of Cargo Solidarity Strike Amid Rising Raw Material Prices
Companies Say "Business Deterioration May Last Until Next Year"

[Asia Economy Reporter Kiho Sung, Sejong=Reporter Hyewon Kim] Some finished car production lines have once again come to a halt due to the suspension of deliveries by a first-tier supplier that provides fuel tanks to Hyundai Motor Company and Kia. The blow from the Cargo Solidarity Union strike, which directly impacted raw material supply shortages, coupled with rising raw material prices increasing production costs, appears to have affected the mass production of fuel tanks.

According to the related industry on the 1st, TIO Automotive sent an official letter on the 29th of last month to Hyundai Motor Company and Kia’s chassis parts purchasing and development teams, notifying them of the inability to supply fuel tanks.

In the letter, the company explained, "On the 24th of last month, we requested understanding for a 20% production cut this week and a 30% cut next week, but since this was not reflected in the actual ranking, supply disruptions occurred."

Accordingly, starting with the Sorento production line at Kia’s Hwaseong Plant 1 the previous day, production was sequentially disrupted at Gwangju Plant 2 for the Sportage and Gwangmyeong Plant 1 for the Carnival. The fuel tanks affected by the supply shortage this time are three out of seven specifications and are mainly known as parts installed in hybrid vehicles.

The primary reason TIO Automotive suddenly notified Hyundai Motor Company and Kia of the supply suspension was due to difficulties in production caused by not receiving proper raw material supplies from lower-tier suppliers following the Cargo Solidarity Union strike. Finished and semi-finished product inventories have been depleted, fundamentally limiting the ability to supply fuel tanks.

Secondary causes are reported to be the rise in raw material prices and the shift in focus from internal combustion engine vehicles to eco-friendly vehicles. An industry insider said, "Many suppliers feel burdened in production due to the rise in raw material costs compared to delivery prices," adding, "There are voices on the ground calling for the realization of delivery prices." Additionally, as Hyundai Motor Company and Kia gradually reduce the proportion of internal combustion engine vehicles and transition to eco-friendly vehicles, fuel tanks are classified as manufacturing specification industries, creating a reluctance among suppliers to produce them.

Hyundai Motor Company and Kia, which have repeatedly experienced production stoppages and customer delivery delays due to domestic and international parts supply shortages, have launched an urgent review of production plans following the fuel tank supply suspension.

Concerns Over Expansion of Disruptions in Vehicle Production Lines

This is the third time this year that some finished car production lines at Hyundai Motor Company and Kia have stopped. Following the intensification of the global supply chain crisis due to the Russia-Ukraine war, some production lines were temporarily halted in March, and operations stopped due to parts supply disruptions caused by the Cargo Solidarity Union strike. This time, the aftereffects of the strike have compounded with the suspension of deliveries by a first-tier supplier, forcing some factories to halt production lines. With raw material price increases and global supply shortages expected to continue into the second half of the year, there are concerns that the aftershocks of the strike could become visible in other finished car manufacturers as well.

A Hyundai Motor Company and Kia official stated, "We have not completely stopped the line but are conducting ‘gonghaenggeo’ (production adjustment) for vehicles that include the affected parts," adding, "We are assessing the specific situation and will do our best to normalize production."

In the market, there are concerns that production disruptions could be prolonged as parts supply issues caused by the Cargo Solidarity Union strike have persisted for a long time. The seven-day strike last month caused production disruptions of about 300 vehicles per day and approximately 2,000 vehicles over the week across five production lines at Hyundai Motor Company’s Ulsan Plant. The industry estimates the cumulative damage to exceed 30 billion KRW.

Production stoppages in the finished car industry are not new. Since 2020, shortages of Chinese wiring harnesses and, this year, the suspension of Ukrainian wiring harness supplies due to Russia’s invasion of Ukraine have caused global automakers to suffer production delays. A bigger concern is that raw material shortages could cause fundamental problems in automobile production.

New car deliveries by finished car manufacturers have been delayed by 12 to 18 months due to semiconductor supply issues. An industry insider explained, "Popular models like hybrid and electric vehicles can only be received about a year after ordering," adding, "This period coincides with the time from ordering to supply of automotive semiconductors." The fuel tanks causing the recent production stoppage at Hyundai Motor Company and Kia are mainly installed in hybrid vehicles. Therefore, it is expected that deliveries of hybrid vehicles may be further delayed due to this production halt.

According to the Korea Resource Information Service, iron ore prices have risen more than 25%, from $120.19 per ton at the end of last year to about $150 recently. As raw material prices rise, 'carflation' (a portmanteau of car and inflation) ? the increase in car prices ? is becoming more pronounced. While imported cars including Tesla continue to raise prices steadily, according to the Korea Automobile Manufacturers Association (KAMA), the average new car sales price in Korea in 2021 was 44.2 million KRW, up 4.71 million KRW from 39.49 million KRW in 2020.

The finished car industry is closely monitoring the situation. While sales increase when exchange rates rise, rising raw material prices are burdensome. Finished car manufacturers can endure, but parts suppliers who process and deliver raw materials face difficulties. If the parts industry suffers a severe shock, the foundation of the industry could be shaken.

Companies expect the rise in raw material prices and global supply chain shocks to continue long-term. The Bank of Korea recently conducted a survey from May 12 to June 2 targeting 570 companies nationwide to examine the impact of price increases on businesses. All 250 respondents reported experiencing raw material price increases. Among them, 60% said raw material prices rose less than 20% over the past year, while 40% said prices rose more than 20%.

More than half of the respondents expect the Ukraine crisis to continue "until the end of this year" (60%), but a significant number also foresee it lasting "beyond next year" (41%).

Raw material price increases are also adversely affecting small and medium-sized enterprises (SMEs) responsible for deliveries and other tasks. The SME business outlook index for July was 81.5, down 4.6 points from the previous month. The outlook index has been declining for two consecutive months. After reaching a record high of 87.6 in May since the domestic COVID-19 outbreak, it fell by 1.5 points in June and dropped further by 4.6 points in July.

SMEs cited 'domestic demand slump' (55.8%) as the biggest management difficulty, followed by 'raw material price increases' (54.5%). The Korea Federation of SMEs stated, "Concerns about recent raw material price hikes, interest rate increases, and global economic slowdown have somewhat dampened expectations for the SME business climate next month."