[At-Risk Auto Parts Companies] Decreased Volume and Raw Material Price Hikes... Concerns Over Wave of Bankruptcies

Operating Profit Margin of 83 Listed Companies at 2.2%
24 Companies Also Recorded Negative Results

[Asia Economy Reporter Kiho Sung] Domestic automotive parts companies are being pushed to the brink of collapse. The soaring raw material prices have increased cost burdens, and the sharp decline in finished car production has drastically reduced delivery volumes, causing these companies to bear losses outright. In particular, small and medium-sized parts companies that failed to respond swiftly to the rapid shift toward electric vehicles are facing closures one after another. There are concerns that the crisis of parts suppliers, which are the core of the automotive industry ecosystem, could lead to the collapse of the automotive industry.

According to the Korea Automobile Industry Cooperative on the 28th, the average operating profit margin of 83 listed parts companies registered in the Financial Supervisory Service's electronic disclosure system for the first quarter was 2.2%. This means that for every 1,000 won worth of parts delivered, the profit earned is only 22 won. During the same period, the average profit margin of mid-sized companies (69 companies) was 1.7%, and small companies (3 companies) was 0.7%. Notably, among the 83 companies, 24 (28.9%) recorded negative operating profit margins. This can be interpreted as 3 out of 10 companies being in the worst management difficulties.

Amid the pouring adverse factors, large companies also could not avoid the fallout on their performance. The second-quarter results of four major parts companies?Hyundai Mobis, Hyundai Wia, Hanon Systems, and Mando?showed sharp declines or predominantly negative outlooks. The semiconductor supply shortage causing delays in automobile production, rising raw material prices, and increased logistics costs are complex adverse factors that have rapidly deteriorated profitability. The problem is that while large companies have the capacity to endure, the worsening profitability of small and medium parts companies and second- and third-tier suppliers could lead to closures. Moreover, the surge in interest rates has increased the burden of interest repayments and made financing difficult, further exacerbating management difficulties.

According to the Korea Automobile Industry Cooperative, the number of first-tier suppliers directly trading with automobile companies (Hyundai, Kia, GM Korea, Renault Samsung, Ssangyong, Tata Daewoo) at the end of 2020 was 744, a 9.7% decrease compared to the previous year. This is the largest decline since statistics began in 2013. While the number of large companies decreased by 3 to 266, small companies closed 77, reducing their number to 478. Jieun Maeng, senior researcher at the Mobility Industry Policy Office of the Korea Automotive Technology Institute, said, "Overall, small parts companies lacking technological capabilities are judged to have almost no profit (1.6%) generated through business activities," and diagnosed that "the possibility of exit is very high."

Researcher Eunyeong Lim of Samsung Securities predicted, "Due to economic uncertainty, the transition to electric vehicles, and the promotion of online sales, the finished car industry will not accumulate inventory as in the past," adding, "Parts companies will find it difficult to expect performance leverage from high production growth."