Strike underscores oligopoly of auto parts makers

Posted on : 2011-05-26 13:56 KST Modified on : 2019-10-19 20:29 KST
Experts say relatively few parts makers compounds losses from suspended production
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By Hwang Ye-rang 

  

A single piston ring, priced at 1,351 won ($1.24), has sent shockwaves around the globe. As soon as 500 workers at Yoosung Enterprise Co., Ltd. (YPR), which manufactures the piston ring, went on strike, the production lines of Hyundai Motor and Kia Motor ground to a halt, plunging South Korea’s auto industry into a state of anxiety.

YPR resumed production on May 25, but regular operation at Hyundai and Kia is only expected to become possible around May 28-29. The weak structure of Hyundai and Kia, where the production system collapses at the severance of a single link in the component supply chain, has been exposed. This is the so-called “moral of the piston ring.”

It is not, in fact, the first time that car manufacturers have fallen into the piston ring trap. When Kobe was struck by an earthquake in 2007, production at the factory of Japan’s largest piston ring manufacturer, Riken, was suspended for two weeks. Toyota, which was 50 percent dependent on Riken, was hit so hard that it dispatched 200 employees to help Riken with its recovery operation. In 2003, when Germany metal worker union members blocked the entrance to a component factory manufacturing piston rings, delivery of components was continued by helicopter.

Despite the existence of such precedents, which allow the seriousness of these situations to be foreseen, Hyundai and Kia were unable to respond thoroughly to this crisis. It was at the beginning of May that YPR’s union began a slowdown and refusal of extra work. But Hyundai and Kia, which depend on YPR for 75 percent of their piston rings, maintained only the same three or four days’ worth of reserve supplies, eventually incurring partial setbacks to production.

“Piston rings are special in that, although cheap, their manufacturing requires advanced technology. Therefore, an oligopoly of just a few companies makes them,” says Park Sang-won, a researcher at Eugene Investment & Securities. “This blunder by automakers, who knew of this risk but were unable to prepare for it, is surprising.”

Hyundai and Kia faced a nerve-racking situation in June last year, when a general strike occurred at DAS, which delivers the majority of the car seats they use, leaving them with only four days of reserve supplies in their warehouses. There are currently around 180 components for which Hyundai and Kia are at least 50 percent dependent on just one or two subcontractors: these include seats (DAS), headlamps (SL), lower arm (CTR) and brake discs (Myunghwa).

“Hyundai and Kia have fallen into their own trap,” said an official at one automaker. “This happened because they have concentrated orders into companies that can reduce unit prices, thereby developing only one or two subcontractors.”

Some therefore point to diversification of component companies as an alternative. Objections to this, however, are also many.

No Hyeon-seung, head of Korea Auto Industries Coop. Association (KAICA)‘s Planning & Research Team, expressed concern, saying, “If component oligopolies are treated as a problem, this will totally undermine the direction of Korean automotive policy, which aims to enlarge and enhance the expertise of outstanding small and medium component manufacturers.”

Indeed, the situation is such that Korea has no more than three or four world-class auto component makers, despite having the fifth-largest auto industry in the world.

“We do not have many component makers with high levels of technical capability, so how could diversification be possible?” agrees Lee Hang-koo, head of the Leading Industries Team within the Center for Growth Engine Industries at Korea Institute for Industrial Economics & Trade. “Having to forfeit efficient component supply and reduced costs is another problem with diversification.”

Others point to the need to change a stock management system that brings in necessary supplies only as and when they are needed, based on Toyota’s “Just-in-Time” (JIT) production strategy. “The importance of crisis management through advance stock monitoring is becoming apparent,” says Jeong Hui-sik, a researcher at Korea Automotive Research Institute. “As we saw with the Japanese earthquake and the YPR incident, the rebuilding of a supply network that can ensure efficiency and risk management at the same time is set to become a new challenge for the global automotive industry.”

  

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