50% High Tariffs Imposed on Key Components Like Electrical Steel
Price-Cutting Pressure Unavoidable Even If Costs Are Passed to Clients
Major Companies Respond by Expanding Localization Strategies
The U.S. government's decision to impose a 50% high tariff on steel and aluminum derivative products has put Korea's domestic power equipment industry, especially transformer manufacturers, on high alert. Despite enjoying an unprecedented boom driven by the expansion of AI data centers and the replacement of aging power grids in the U.S., the industry has not been able to avoid the impact of these tariffs. As transformer manufacturers are expected to accelerate their localization strategies to minimize the effects of the tariffs, concerns about the hollowing out of the domestic industry are also likely to grow.
According to the power industry on August 19, the 50% tariff on steel and aluminum derivative products, which took effect the previous day in the U.S., is projected to cost Korea's transformer industry several hundred billion won. The U.S. Department of Commerce has added oil-immersed transformers and related parts exceeding 10,000 kVA (kilovolt-ampere) in capacity to the list of products subject to high tariffs. The most problematic aspect is grain-oriented electrical steel, which is essential for transformer manufacturing. This material accounts for 30% to 40% of product costs, but due to the weak production base in the U.S., Korean companies are expected to face significant burdens.
According to the Korea International Trade Association, Korea exported $600 million (about 831 billion won) worth of oil-immersed transformers and related parts exceeding 10,000 kVA to the U.S. last year. Assuming a 30% share of electrical steel in product costs and applying a 50% tariff, it is estimated that additional costs will amount to approximately 124 billion to 125 billion won.
Major Korean transformer manufacturers with a high proportion of exports to North America are expected to face burdens ranging from several tens of billions to several hundred billion won. The industry expects that, given the recent increase in transformer exports due to expanded investment in North American power infrastructure, the burden from tariffs will only continue to grow.
HD Hyundai Electric recorded consolidated sales of 3.3223 trillion won last year, with North American sales estimated at around 1 trillion won. Considering that 60% of these products are produced in Korea and then exported, this amounts to about 630 billion won.
LS Electric, which exports all of its domestically produced transformers due to the absence of a local factory, recorded exports of 800 billion won, while Hyosung Heavy Industries exported 380 billion won worth of products from its Changwon plant to North America. Although this may change depending on this year's orders, sales fluctuations, and negotiations with clients over tariff burdens, the entire sales volume is effectively subject to the tariffs.
The tariffs will increase cash outflows, putting pressure on profitability, and if the additional costs cannot be fully passed on to customers, suppliers will face growing pressure to lower their delivery prices. Han Areum, a senior researcher at the Korea International Trade Association, said, "The impact will be significant given the high volume of exports. While the exact effect will depend on the material and component content of each product, the high proportion of steel means the burden will inevitably be substantial."
The North American transformer market is expected to more than double from 17 trillion won last year to 35 trillion won by 2034. With the simultaneous demand for data center expansion and power grid replacement, a supplier-dominated market has formed, where supply cannot keep up with demand. Nevertheless, the industry remains uneasy. A senior official at a transformer company said, "It is difficult to assess the impact until specific guidelines are released, but we will do our best to negotiate so that the additional costs can be passed on to our clients."
However, it appears inevitable that there will be pressure to lower prices in competition with global companies such as Siemens, which have already completed localization. HD Hyundai Electric, LS Electric, and Hyosung Heavy Industries are reportedly exploring countermeasures following the tariff announcement. The consensus is that localization will become increasingly important to respond to the market and offset the impact of the tariffs.
HD Hyundai Electric is operating its Ulsan and Alabama plants at full capacity and plans to complete an expansion of its U.S. plant, with an investment of 185 billion won, by the end of next year. The expanded plant is scheduled to begin operations in 2027. The company is also monitoring the local investment trends of global competitors and is considering further expansion.
Hyosung Heavy Industries has been expanding its Tennessee plant facilities since June last year. The company has invested $49 million (about 7 billion won) to increase its annual production capacity of extra high voltage transformers from fewer than 100 units to around 160 units. A company representative explained, "Most of our North American orders have already been shifted to local production. For products bound for the U.S., we plan to further increase the proportion of local production and source materials locally to minimize the impact of tariffs."
LS Electric, which does not have a local transformer plant, continues to export virtually all its products from Korea. Rather than building a new transformer plant, the company is expected to maintain its localization strategy focused on its main product lines, such as switchgear and low-voltage power equipment. The company plans to respond strategically by targeting the switchgear market, which is expected to grow more than the transformer market in the future.
An official from the power equipment industry said, "If high tariffs are imposed, profitability will inevitably worsen in proportion to the export ratio. There will be a tough tug-of-war in price negotiations with clients."
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