[At Risk Auto Parts Companies] Hit by Electric Vehicles and Rising Costs... No Future in Sight

High Dependence on Complete Vehicles... Profit Decline Continues Due to Production Slump
Raw Material Prices Not Reflected in Component Unit Costs... Sharp Rise in Labor and Transportation Costs

Hyundai Motor Ulsan Plant Ioniq 5 production line. The photo is unrelated to specific expressions in the article. [Image source=Yonhap News]

[Asia Economy Reporters Kiho Sung, Chulhyun Kim, Bokyung Kim] Auto parts companies in the Jeonbuk region are experiencing a severe management crisis due to a series of compounded adverse factors following the closure of the Korean GM Gunsan plant in 2018. They are unable to even consider investing in future vehicles. It is realistically difficult to shift their business structure from mainly internal combustion engine (ICE) auto parts to electric vehicle (EV) parts for the future, industry insiders lament. Lee Sung-gi, CEO of Kostec, an auto parts company in the region, said, "To switch to EV parts, manpower, capital, and demand channels are needed, but it is difficult to align all these," adding, "Even if we want to change, the reality is that there is no one to lead us."

The core auto parts industry is facing an existential crisis due to structural problems. Parts suppliers, which are highly dependent on automakers, suffer immediate profit declines when vehicle production slows. Although Hyundai and Kia posted record-breaking earnings this year, actual vehicle production has significantly decreased. This is because more expensive cars were sold, and demand sharply dropped due to supply chain disruptions. The conventional formula that parts suppliers benefit from automakers’ good performance has been broken.

Soaring raw material prices have further exacerbated management difficulties. Critically, the rapid shift to EVs, which require relatively fewer parts, has become a detrimental factor threatening survival. Another issue is that the number of companies capable of supplying EV or autonomous vehicle parts is limited.

Declining Orders↓ Raw Material, Labor, and Transportation Costs↑... Threatening Survival

According to the Korea Automobile Manufacturers Association (KAMA) on the 28th, vehicle production from January to June this year totaled 1,779,044 units, a 2% decrease from 1,814,626 units recorded in the first half of last year. Vehicle production, which exceeded 4.5 million units in 2015, fell below 4 million units starting in 2019. There are concerns that this year, following last year, production may even fall below 3.5 million units annually.

Raw material prices, which have been soaring since last year, dealt a critical blow. Parts suppliers, who effectively have no price negotiation power, are in a subordinate position receiving ‘appropriate margins’ from automakers. Small and medium-sized companies find it difficult to reflect soaring raw material costs in parts prices, so they have no choice but to bear losses. According to the Korea Automotive Technology Institute, prices of key automotive raw materials such as steel, aluminum, copper, and nickel have sharply increased compared to pre-COVID-19 levels. Last year, hot-rolled steel prices surged 211.1%, cold-rolled steel 176.9%, aluminum 42.2%, and copper 49.8%. Consequently, raw material costs per internal combustion engine vehicle rose 106% from $1,779 in March 2020 to $3,662 in May last year, while EV raw material costs increased 144% from $3,381 to $8,255 per vehicle.

Transportation and labor costs also rose sharply, increasing the burden on parts companies. Since 86% of auto parts are transported by sea, last year’s sea freight rates tripled compared to the previous year. Small and medium parts companies have weaker financial structures than large corporations, which can lead to a vicious cycle of ‘rising labor costs → reduced R&D investment → weakened corporate competitiveness.’

EV Blind Spots... Rapid Changes in the Automotive Ecosystem

Failure to respond timely to the transition to future vehicles is another factor shaking auto parts companies to their core. According to the Korea Automotive Technology Institute, of the approximately 30,000 parts used in internal combustion engines, only about 18,900 will be used in the EV era. All 6,900 parts that make up the engine will disappear, and parts in the drivetrain will reduce from 5,700 to 3,600. Electronic equipment parts will also decrease from 3,000 to 900.

However, not many parts companies have mature technology for future vehicles. A survey by the Korea Automotive Technology Institute found that only 2.3% (213 companies) of the approximately 9,300 domestic parts companies are prepared to produce parts related to future vehicles. Massive funding is required for R&D, but large-scale investments are unthinkable when survival is the immediate concern. According to KAMA, it takes an average of 13 months and about 1.49 billion KRW to plan and mass-produce future vehicle parts. However, last year, total facility investment by auto parts companies was 3.784 trillion KRW, a 9% decrease from the previous year.

Companies lament that it is realistically difficult to shift their business structure from mainly internal combustion engine parts to EV parts for the future. Although they know demand will gradually decline, they still supply ICE parts, making a sudden change difficult. Many parts companies are attempting change by participating in government R&D projects, but the budget allocated to regional parts companies is limited. Moreover, such efforts are mostly feasible only for companies of a certain scale; small enterprises cannot even attempt it. Lee Sung-gi, CEO of Kostec, said, "To switch to EV parts, manpower, capital, and demand channels are needed, but it is difficult to align all these," adding, "Even if we want to change, the reality is that there is no one to lead us."

Contractual Relationships with Automakers Also Pose Challenges

There are also voices that contractual relationships with automakers exacerbate management difficulties. A CEO of a small company that is a second-tier supplier to Hyundai and Kia said, "When signing contracts with automakers, we agree to reduce supply prices by 1% annually for three years," explaining, "This is because production facilities depreciate compared to the early stages of product development." For example, if the unit price per part is 1,500 KRW, the price is lowered by 1% each year for supply.

He added, "Automakers raise new car prices every year, but the trickle-down effect does not reach first- and second-tier suppliers," and lamented, "There is a severe shortage of funds for new facility investments such as EV parts." Another supplier CEO said, "It is also problematic that automakers do not reflect raw material price increases in supply contracts," adding, "We are suffering double hardships due to rising labor costs from minimum wage increases."

Small and medium parts companies emphasize that for Korea’s automotive industry to be competitive on the global stage, large corporations and the government must join forces to support SMEs in developing and testing materials, parts, and equipment, fostering win-win cooperation. A CEO of a small company supplying Hyundai as a second-tier partner said, "Currently, automakers adopt an attitude of purchasing and assembling domestically or internationally on their own," and insisted, "Efforts by automakers to localize automotive materials and parts are necessary."

Professor Kim Pil-soo of Daelim University’s Department of Future Automotive Engineering advised, "As raw material prices rise, parts companies’ survival becomes difficult, leading to reduced investment in future vehicle preparation, creating a vicious cycle," adding, "To endure the current situation and prepare for the future, government and industry support is essential to protect the automotive ecosystem."