[At-Risk Auto Parts Companies] 4 Out of 10 Say "Can't Even Pay Interest with Earnings"

1,296 Places with Interest Coverage Ratio Below 1 at 36.6%

Completed vehicles waiting for export Photo by Yonhap News

[Asia Economy Reporter Kiho Sung] Company A, a Tier 2 supplier located in Gyeongsan, Gyeongbuk, recently posted a job opening for production workers. Since last year, they have been operating with minimal staff, but recently two employees quit sequentially, leaving them severely understaffed. However, the wages were set at the minimum wage level (9,160 KRW), which is 30% lower than the previous year. This is due to severe management difficulties caused by soaring raw material prices and shrinking workloads. A company official stated, "For parts manufacturers and partners, it is difficult to reflect cost increases in unit prices, and workloads are steadily decreasing, making it hard to cope," adding, "With recent rapid interest rate hikes, it is even difficult to cover loan interest payments, so additional allowances or welfare benefits are out of the question."

It has been found that 4 out of 10 domestic automotive parts companies cannot even pay their interest expenses with their earnings. This is because raw material prices, transportation costs, and labor costs have risen significantly, while automobile sales demand has sharply declined and the rapid shift to electric vehicles has reduced profitability compared to before.

On the 28th, the Korea Automotive Technology Institute analyzed the management performance of 1,296 domestic automotive parts companies last year. The proportion of companies with an interest coverage ratio (operating profit/interest expense) below 1 was 36.6%.

An interest coverage ratio below 1 means that the cost of interest payments exceeds the money earned from operations. This implies a high risk of insolvency despite being profitable, as companies cannot even cover interest payments, let alone principal debt. During the COVID-19 pandemic in 2020, this proportion surged to 43.1%. Although it decreased compared to the previous year, considering the emergency situation during COVID-19, the Korea Automotive Technology Institute's analysis shows it is the highest level in the past decade. From 2011 to 2016, the interest coverage ratio was maintained at around 19-27%.

Automotive parts companies saw increased sales but significantly worsened profitability. Their sales revenue last year increased by 12.6% compared to the previous year. Although this was an improvement from -2.8% in the same period last year, the operating profit margin was 2.4%, similar to 2.2% in the previous year. Considering it was 5.5% in 2012, the operating profit margin has shrunk by half over the past 10 years.

The situation is particularly severe for small and medium-sized parts companies. The operating profit margin for large companies was 3.6%, exceeding the average. However, it deteriorated to 2.1% for mid-sized companies and 1.6% for small companies.

Jieun Maeng, Senior Researcher at the Mobility Industry Policy Office of the Korea Automotive Technology Institute, diagnosed, "The domestic automotive industry has a vertically integrated and consolidated structure between demand-monopolistic automakers and parts companies, resulting in weak bargaining power for small parts companies," adding, "It is not easy to adjust delivery prices to reflect cost increases."

As parts companies face threats to their survival, the transition to future vehicles is also facing red lights. Last year, parts companies’ facility investment amounted to 3.784 trillion KRW, a 9% decrease from the previous year. Especially for small companies, while the proportion of labor costs has increased, it is becoming increasingly difficult to secure research personnel for future vehicles, which are becoming more advanced through electrification and intelligence.

Research Fellow Hanggu Lee of the Research Strategy Headquarters at the Korea Automotive Technology Institute advised, "To maintain the industrial ecosystem, the burden on parts companies for new investments in preparation for future vehicles must be reduced," and added, "Measures to respond to industrial labor demand and restructuring of the workforce should be implemented to establish a stable employment ecosystem."