hankyoreh

An automobile factory’s production line

The factories of South Korean automakers including Hyundai Motor Company and Ssangyong Motor Company have had to suspend operations as they run out of Chinese-made wiring harnesses, placing thousands of their parts suppliers on the brink of temporary closure. These automakers’ vulnerable supply chain has caused a disruption in production that’s spreading throughout Korea’s entire automobile industry.

Hyundai Mobis, a key car parts affiliate for Hyundai Motor Company and Kia Motors, shut down its module factory on Feb. 5. Hankook Tire has reduced its production volume, while Kumho Tire is closing down some of its factories this weekend.

It’s not just chaebol affiliates, either; one after another, parts manufacturers both big and small have announced a halt to production this weekend. One company that supplies car bodies to Hyundai shut down some of its production lines on Feb. 6. Hyundai Motor’s plan to suspend production on all models on Feb. 7 is expected to affect other production lines starting next week.

Other companies find themselves in a similar situation, such as a manufacturer of cylinder head covers that pared back production on Feb. 5. “Unless the situation changes at the automakers, we’ll be forced to start shutting down our assembly lines one after another next week,” a parts company executive said.

Manufacturing a car involves the assembly of some 20,000 parts. Conveyor-based production lines consist of several processes, and the occurrence of a problem in any one of those processes brings the entire line to a halt.

Automakers employ the “just-in-time” approach to manufacturing, in which parts are delivered exactly when needed; this means that a shutdown at automakers’ factories, which we’re seeing now, leads to a chain reaction in which their parts suppliers have to halt their production lines as well.

This unique production process in the automobile industry explains why a shortage of Chinese-made wiring harnesses brought Hyundai and Ssangyong factories to a halt, which in turn is causing a shutdown at numerous South Korean parts manufacturers.

While automakers are belatedly attempting to diversify their parts supply chain, quality and prices aren’t meeting requirements, leading to projections that production will remain disrupted for the time being.

“Japanese companies aren’t facing a major impact because they’ve diversified parts acquisition across a global network that includes Southeast Asia, Europe, and the US. But South Korean companies focused solely on China and shortened their in-stock period because of China’s geographical closeness. The biggest blunder here was the failure of risk management,” said Lee Hang-gu, a senior analyst at the Korea Institute for Industrial Economics and Trade (KIET).

Parts suppliers that are affiliates of the country’s chaebols will likely survive a work shutdown for the time being. The problem is the smaller parts manufacturers that are tight on funds. If the situation is cleared up soon, the automotive industry should recover, but if it becomes protracted, there are concerns about snowballing losses.

“Companies can make up for a weeklong shutdown through overtime work, but if the shutdown drags on, their losses would be difficult to estimate,” said Lim Eun-yeong, an analyst with Samsung Securities, during a phone interview with the Hankyoreh.

Since the Chinese government is likely to recommend that local companies extend their shutdowns, there are calls for the industry to strap in for the long haul. A protracted work stoppage, some fear, could lead to a cascade of bankruptcies, starting at the smallest parts makers.

On Thursday, the Hyundai Motor Group announced that it would be freeing up more than 1 trillion won (US$842.98 million) in emergency funding to provide liquidity at its small and medium-sized parts suppliers. The gist of the plan is for some 350 companies that are primary suppliers to Hyundai Motor, Kia Motors, Hyundai Mobis and Hyundai Wia to be loaned 308 billion won (US$259.65 million) in interest-free management funding and to be paid 692 billion won (US$583.35 million) in advance for ordered parts.

“We’ll be working to ensure that the benefits of this funding will go to both our primary suppliers and also their subcontractors and sub-subcontractors,” said a spokesperson with the Hyundai Motor Group.

By Hong Dae-sun, staff reporter

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