[Reporter's notebook] South Korean automobile industry in crisis, in need of restructuring and new vision

Posted on : 2018-09-30 15:13 KST Modified on : 2019-10-19 20:29 KST
New trade minister meets with automobile part makers on first day of duty
A debate forum on the practices of automobile makers in their contracts with subcontractors and parts makers in Seoul on Apr. 30. (Park Jong-shik
A debate forum on the practices of automobile makers in their contracts with subcontractors and parts makers in Seoul on Apr. 30. (Park Jong-shik

On September 27, Sung Yun-mo, the newly inaugurated Minister of Trade, Industry and Energy, traveled to Cheonan to meet with automobile part manufacturers. It is the first time that a newly inaugurated minister has visited a production site on the first day of his duties, and this unprecedented move indicates that the automobile parts manufacturing industry is also in an unprecedented crisis.

Since last year, the secondary manufacturing vendors of Hyundai Motors and Kia Motors have, one by one, gone into receivership or workout (company improvement) programs. This year, the sense of crisis has spread to the larger primary vendors, whose sales are around one trillion won (around US$1 billion).

When the parts manufacturers collapse, the automobile manufacturers also suffer, and therefore it would not be exaggerating to suggest that the automobile industry as a whole is in crisis. The automobile industry is one of South Korea’s largest industries, following its shipbuilding industry, and if it crumbles then it will be difficult for the South Korean economy to avoid the full force of the impact. The domestic automobile industry employs 350,000.

If the family members and dependents of these employees are taken into account, it amounts to over 1,000,000 whose livelihoods depend on the industry. According to some experts, the so-called “hiring shock” of July-August earlier this year, in which the increase in the employees decreased sharply into the thousands, was likely due in large part to the slump of the automobile industry.

According to Minister Sung, “Due to the restructuring of GM Korea, the rapid growth of the future automotive industry, and the uncertainty surrounding the trade situation, the automobile industry is facing a very serious situation.”

The Ministry of Trade, Industry and Energy has been investigating the conditions of the automobile industry since the beginning of this month, as part of an attempt to establish countermeasures for the crisis.

Identifying cause of automobile industry crisis

To overcome this crisis, correctly identifying the cause is crucial. According to Professor Lee Hang-goo, a researcher at the Korea Institute for Industrial Economics and Trade, “the crisis of the automobile industry is like a disaster that was foretold.”

He added, “at the core of this disaster are unfair subcontracting practices like knocking down the unit prices of goods, and policies forbidding additional contracts with other large firms.” It is not news that no matter the efforts made by the secondary small and medium-sized parts businesses, they do not receive fair compensation from the automobile manufacturers and primary vendors.

Neither is it news that there is no margin for innovation if the secondary vendors are not fairly compensated. The small and medium-sized parts manufacturers are struggling amid low wages and low productivity, without the capacity or motivation to increase their competitiveness. The practice that forces a parts manufacturer into a subcontracting relationship with only one automobile manufacturer is no better than a modern-day slave contract.

Financial troubles of small and medium-sized parts manufacturers

The financial difficulties of the small and medium-sized parts manufacturers have reached their limit, since 2014 when the leading automobile manufacturing company, Hyundai Motor Group, stopped growing. This is also the reason that, since last year, secondary and other parts manufacturers have requested emergency aid or takeovers to the primary vendors or the automobile manufacturers themselves. But their requests were coldly refused.

According to Son Jeong-woo, former president of Taegwang Industrial, a secondary subcontractor with Hyundai Motors, “Hyundai Motors and primary subcontractors such as Seoyon E-hwa did not just fail to help, they accused us of threat and intimidation, of threatening to cut off their supply of parts, and reported us to the Prosecutors’ office, and took away our management rights.

The need for restructuring and new employment measures

Within the industry, there are many who are calling for the need for restructuring. in the United States, the automobile manufacturing industry produces 12 million units a year, with about 5,600 parts manufacturers. The South Korean automobile manufacturing industry produces 4 million units annually, and despite the fact that it’s a third of the size of the US industry, there are about 4,600 parts manufacturers, a number that does not differ greatly from that of the US.

It is crucial that restructuring is also accompanied by reemployment measures for the employees who will lose their jobs from the restructuring, and retraining programs to help the unemployed translate their skills to the professional skills needed for the production of future automobiles, such as electric vehicles and self-driving automobiles.

Abusive power of automobile conglomerates

But it is necessary to acknowledge the charge that this is but a partial solution, because as long as the unfair subcontracting practices continue, any measures will be like attempting to fill a leaking pot with water. Even if the government should pour trillions of won (billions of US$) of taxpayer money into the small and medium parts manufacturing industry, it is clear that this cash will only end up in the pockets of the large automobile manufacturing companies and their primary subcontractors, through their practice of forcibly keeping unit prices low.

The voluntary effort of the automobile manufacturers themselves is also of vital importance. The Hyundai Motor Group, which controls 70 percent of the domestic market in a monopsony, has also secured command of the parts industry. Hyundai Mobis and other Hyundai Motor Group subsidiaries have almost a 50 percent market share of the automobile parts manufacturing market.

According to a former Hyundai Motor Group executive, “The parts manufacturing subsidiaries of Hyundai and Kia Motors have had it easy thus far thanks to their relationship with Hyundai Motor Group.” He argued that “parts manufacturers who are not competitive must be restructured, and we must focus on efforts on enhancing the competitiveness of automobiles and in developing automobiles of the future.”

The situation also requires the savvy cooperation of the unions of the automobile manufacturing companies.

Ha Bu-young, the union chief of the Hyundai Motors union, in an interview with the Hankyoreh earlier this year in March, said, “The 30 years of fighting from the Hyundai Motors union has gotten some criticism for exacerbating the polarization of society,” before proposing a wage system that would punish the strong and help the weak, where the wages of those at large corporations would increase by a small amount, while the wages of those at small and medium-sized manufacturers, and those of the temporary workers would increase much more.

By Kwack Jung-soo, business correspondent

Please direct comments or questions to [english@hani.co.kr]

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