Hyundai Motor·Kia Receive Second Official Notice to Halt Supplies...Will It Ignite the 'Supply Price Linkage System' Debate?

Partner Company Notifies "Fuel Tank Supply Unavailable Until the 9th"
"Raw Material Price Increase and Electrification Transition Heighten Sense of Crisis"

[Asia Economy Reporter Kiho Sung] The resumption of some Kia vehicle production lines, which had been halted due to the suspension of parts delivery by first-tier suppliers, is expected to be delayed. This comes as suppliers have announced additional supply stoppages. It is believed that dissatisfaction has surfaced because first-tier suppliers, unable to receive raw materials from lower-tier suppliers due to the Cargo Solidarity Union strike, experienced production disruptions and did not raise delivery prices despite the sharp rise in raw material costs. There are also expectations that the ongoing debate over the delivery price linkage system, currently being promoted by the government and political circles, may reignite.

According to industry sources on the 4th, TIO Automotive, a first-tier supplier providing fuel tanks to Hyundai Motor and Kia, sent an additional official notice on the 1st, informing Hyundai Motor and Kia that it would be unable to supply fuel tanks until the 9th. The company stated, "It is impossible to secure safety stock to stabilize supply due to supply disruptions."

TIO Automotive had sent a notice related to production cuts on the 24th of last month and then issued a first official notice on the 29th indicating supply impossibility. As a result, starting from the 30th of last month, production has been sequentially disrupted at Kia’s Hwaseong Plant 1 Sorento production line, Gwangju Plant 2 Sportage, and Gwangmyeong Plant 1 Carnival. The fuel tanks affected by the current supply shortage are three out of seven specifications, mainly parts installed in hybrid vehicles. The parts subject to supply suspension in the second notice are also for the aforementioned vehicles.

Within the industry, while the direct causes of this production disruption are the rise in raw material prices and the aftermath of the Cargo Solidarity Union strike, the fundamental reason is seen as the suppliers’ anxiety due to the delivery price linkage system and the transition to electric vehicles.

The delivery price linkage system is a mechanism that reflects raw material price increases in delivery payments. Discussions began in 2008 but did not achieve significant results. However, recently, with the spread of COVID-19, global supply chain instability, and the Ukraine war causing raw material prices to soar, it has become a central issue. As raw material prices have risen to unprecedented levels, political circles have submitted related bills to the National Assembly and decided to promote them as party policies. The government also announced that it will pilot the delivery price linkage system using standard contracts for some raw material items in the second half of the year.

However, the government’s pilot operation is not mandatory, and even if the linkage system is introduced, controversy is inevitable during the detailed system design process. Issues such as the industries and raw materials to which the system applies, reference prices, timing of raw material price increases and decreases, and linkage ratios are contentious between large corporations and small and medium enterprises. There is also debate over whether to mandate the system and provide incentives to companies that comply or to impose penalties on those that do not.

The rapid transition to electrification is also cited as a factor increasing anxiety among parts suppliers. The Korea Automotive Technology Institute estimates that the number of domestic internal combustion engine parts companies will decrease from 2,815 in 2019 to 1,970 in 2030, a reduction of 845 companies, due to vehicle electrification. The government also expects that if the share of electric and hydrogen vehicles rises from the current 2-3% to 33% by 2030, 35,000 jobs will be lost.

An industry insider explained, "Parts suppliers find it difficult to develop technology independently, so transitioning from supplying internal combustion engine parts to electrified vehicle parts is not easy. Amid the rapid electrification of vehicles, current suppliers are filled with survival anxiety, feeling that ‘in the future, supplying will no longer be possible.’"