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South Korea’s auto parts manufacturing industry is accelerating. According to the Korea Automobile Industry Cooperative Association (KAICA), the sales of Korean auto parts will increase from US$27.1 billion in 2002 to US$34.2 billion in 2004 to US$36.4 billion this year. But can it always lead China?
Famous auto parts manufacturers have settled in South Korea
Analysts in the automotive industry point out that at first glance, South Korea is not an ideal place to set up factories for the highly competitive auto parts industry. The country’s parts and components manufacturing industry is being squeezed by high-quality Japanese manufacturers and low-cost Chinese manufacturers, and its domestic market has only 1 million cars per year—less than one-fifth of Japan’s production. And the development potential is much smaller than China. However, in recent years, South Korea has become a magnet attracting auto parts manufacturers - there are currently 200 foreign auto parts manufacturers operating in South Korea.
These foreign manufacturers include all the well-known auto parts companies: American Visteon Corporation and Delphi Corporation, Germany’s Robert Bosch Corporation, and Japan’s Denso Corporation—actually, the world’s 30 largest component manufacturers. 3 families did not come to Korea. Why do they enter the Korean market?
The Asian financial crisis in the late 1990s made South Korea’s assets cheaper. Many medium-sized companies were acquired by foreign companies. Korean auto industry analyst ChoChuel said: "The crisis has caused many parts manufacturers in South Korea to go bankrupt. The takeover of foreign companies has stabilized their operations and helped them improve product quality." In addition, despite the Japanese auto parts Quality is good, but foreign operators in Japan are too expensive to make money. It is cheaper to produce auto parts in China. For example, a Chinese-made axle may cost half as much as South Korea, but China lacks the design and engineering capabilities that Korea has. Li Dayun, president of Delphi Korea, said: "In Korea, we can find a balance between quality and cost."
Another key factor is the success of Korean automakers. Last year, the sales of Hyundai Motor Co. and Kia Motors Co. increased by 12% to 3.2 million vehicles, of which three-quarters were exported overseas. Now, the two companies said that their goal is to increase the sales of automobiles to 5 million by 2010. Daewoo Motor Co., which was once "bad luck", was renamed "GM Daewoo Automotive Technology Co., Ltd." after it was taken over by General Motors in 2002. It sold 900,000 cars (mostly exported abroad) last year. Hyundai Motor Co. has also established production bases in Thailand and Mexico where labour costs are lower.
Of course, Korean automakers have also been helped by foreign component manufacturers. Hyundai Motor Company's products have been laughed at because of poor quality. However, in the past two years, its vehicle quality has taken a leading position in the world. The reason for the increase in the quality of automobiles in Korea is partly due to the efforts of manufacturers, and it is also the result of the use of high-quality components from foreign suppliers. Currently, one-third of the parts used by Korean automakers are supplied by parts companies controlled by foreigners. In the 90s of the last century, this proportion was less than one-fifth.
Faster growth of component exports
According to the Korea Automobile Industry Cooperative Association (KAICA), the sales of Korean auto parts from US$27.1 billion in 2002 to US$34.2 billion in 2004 are expected to increase to US$36.4 billion this year. Delphi has seven factories in Korea that manufacture air bags, fuel pumps, and more. Last year, its sales in South Korea grew by 33% to reach US$1.5 billion, which is equivalent to about 45% of its revenue in Asia Pacific. JT Bartonberg, chairman of Delphi, predicts that sales in South Korea will increase by 20% in 2005 and said that he remains optimistic about the company's development prospects in South Korea.
South Korean auto parts exports have even increased faster. KAICA predicts that in 2005 Korea's auto parts exports will increase from $5.9 billion last year to $7.2 billion. Many of these components are used in Korean cars, but more Korean component manufacturers sell the products directly to foreign car manufacturers. For example, General Motors purchased 490 million U.S. dollars worth of products from 50 South Korean companies last year, including steering column, headlights, wiper systems, and other components.
Hyundai Mobis, a Hyundai Motor Company auto parts manufacturer, started supplying the 300,000 steering column to DaimlerChrysler in July last year, and will start selling complete chassis to DaimlerChrysler in 2006. Components - including frames, engines, transmissions, brakes, steering and suspension systems. Visteon’s South Korean company sold $450 million worth of air-conditioning compressors to Ford Motor Company and DaimlerChrysler last year.
Foreign investors have made many South Korean auto parts companies new. For example, Mando, South Korea’s second-largest automotive parts and components company, declared bankruptcy in 1997 but was rescued two years later. At that time, JP Morgan Chase paid $98.5 million to creditors and acquired 76% of Mando Corporation. Under the supervision of JPMorgan Chase, savvy management began. Since 2000, Mando's sales have almost doubled, reaching 1.42 billion U.S. dollars last year. In the same period, profits rose from $50 million to $129 million. Last year, Mando began to provide Hyundai Motor Company with advanced braking systems. In the past two years, it has signed contracts worth 2.9 billion U.S. dollars with foreign automakers, including the three major US car companies, to provide brakes, steering systems, and suspension systems.
There are still 2 to 3 years gap between China and South Korea However, analysts believe that the prosperity of Korean auto parts manufacturing industry may not be long. Chinese manufacturers will soon shorten the gap between engineering technology and design with Korean companies, perhaps as long as 2 to 3 years. Zheng Hecheng, a senior manager of Korea Automotive Motors Corporation (KAMCO), said: “We have seen foreign parts suppliers invest more in China than Korea.†This means that Korean auto parts manufacturers must maintain innovation and automation. To enhance competitiveness.
At the same time, South Korea’s tough trade unions may hinder efforts in this area. For example, in 2003, KAMCO’s labor unions opposed production of fully automated and “three shifts†systems, prompting Bosch to shift its production of “anti-lock braking system†engine production lines to China and forcing KAMCO to sell this year’s sales. Cut 18 million U.S. dollars on the basis of 283 million U.S. dollars last year. Zheng Hecheng said: "Unless South Korean companies move faster, they will soon be caught up by China and the repositioning of the factory will be inevitable."
At least for now, many multinational companies are still expanding their spare parts production in South Korea. Bosch said that in the next three years, it will invest 149 million U.S. dollars to build a factory in Daejeon, a key city in South Korea, to produce diesel engine compressors. This year, HallaClimate will invest 90 million U.S. dollars to boost its compressor production capacity from its current annual output of 4 million units to 5.2 million units in 2006.
In addition, Delphi (South Korea) Co., Ltd., which manufactures air bag systems and seat belts, plans to spend US$20 million to build a computer simulation crash laboratory to serve automobile manufacturers in China and other Asian countries. Delphi's president Li Dayun said: "Delphi can use the business in South Korea to help develop business in China." Perhaps sandwiched between Japan and China is not as bad as imagined.