A automobile parts corporation in Ansan, Gyeonggi Province, is facing an emergency due to the recent tariff imposed by the United States. It is exporting parts to customers' vehicle manufacturing plants in the U.S., but since 4th, it has been paying tariffs of up to 25%.
This volume accounts for 15-20% of the company’s total sales. In other words, in the case of exports to the U.S., if a 100-won part is sold, 25 won must be paid in tariffs. Currently, A corporation’s operating profit margin is less than 4%. Now, in the case of exports to the U.S., it has become a structure where selling products does not generate profits. Selling 100 won results in a loss of 20 won.
Domestic automobile parts exporting corporations are facing a life-and-death crisis due to the tariff bomb from Trump. Currently, there are about 13,000 domestic automobile parts corporations, of which 7-8% export parts to overseas markets, including the U.S.
These corporations ambitiously ventured into the U.S., one of the largest automobile markets in the world. For as long as 25 years and as recently as last year, the U.S. has established itself as a key market for the domestic automobile parts industry.
However, due to the 25% tariff imposed by the U.S. since 4th, domestic automobile parts corporations are facing a profitability crisis where exporting products to the U.S. does not generate profits.
◇Operating profit margin 3%… U.S. tariff bomb ‘deteriorating profitability’
Last year, the average operating profit margin of domestic automobile parts companies exporting to the U.S. was estimated to be around 3%. There are concerns that if the U.S. tariff bomb continues for a long time, it could lead to a liquidity crisis.
According to the Korea Automobile Research Institute, the average operating profit margin of 213 domestic automobile parts companies is estimated to be around 3% in 2024. This includes large and medium-sized corporations such as Hyundai Mobis, SL Corporation, SAMBO MOTORS, and smaller companies like Gwangjin Sanggong.
In fact, SAMBO MOTORS, a medium-sized company manufacturing power transmission parts like plates and fuel supply pipes for the U.S. market, recorded an operating profit margin of 3.4% last year. Another medium-sized company, DY, which produces wiper systems, has an operating profit margin of only 1%. Hyo Rim Industry, a small enterprise manufacturing vehicle driving parts like disks and propeller shafts, has an operating profit margin of 2.3%.
If the operating profit margin is around 3%, as with A corporation mentioned earlier, paying a 25% tariff on exports to the U.S. could potentially drop the operating profit margin into the negative. Of course, each corporation has different management situations regarding export ratios to the U.S., local plant operations, etc., but experts share a common view that U.S. tariffs negatively impact the domestic automobile parts industry in any case.
Deteriorating profitability could be a factor that causes domestic automobile parts corporations to lose the power to respond to changes in future markets such as autonomous vehicles.
Sung Woo Myung-ho, a chair professor at Korea University’s Department of Automotive Convergence, noted, “We should not simply view the declining profitability of domestic automobile parts corporations in the key U.S. market as just a problem; it could lead to a decrease in future research and development investment, causing South Korean automobile parts corporations to fall behind in the future autonomous vehicle market competition.”
An official from an automobile parts corporation said, “We can endure for now, but if the U.S. tariff bomb continues for a long time, we cannot predict what will happen,” adding, “It could be small and medium-sized enterprises that first encounter problems.”
An official from a domestic corporation that has constructed an automobile parts factory in the U.S. for over 20 years said, “We have a factory in the U.S. and operate it stably, but now that U.S. tariffs are being imposed, we are closely monitoring the situation, as we cannot predict what will happen next.”
◇Restructuring in the automobile parts industry... R&D must be strengthened
Domestic automobile parts companies have no choice but to rely solely on finished vehicle manufacturers, their customers. As finished vehicles may raise prices due to the burden of increased U.S. tariffs, the profits must be returned to the parts manufacturers as well. Currently, many domestic automobile parts suppliers provide parts to Hyundai and Kia, both in Korea and the U.S. market.
An official in the automobile industry said, “As costs rise due to tariff increases, a system must be established to raise the prices of the parts supplied to the finished vehicles.”
He also mentioned, “Typically, supply contracts are set for a year or for a long-term of 2 to 3 years, but it is currently uncertain how to reflect the tariff increase.”
A winner-takes-all structure centered on large and medium-sized domestic automobile parts companies is anticipated.
Lee Hang-koo, a researcher at the Korea Automobile Research Institute, said, “A restructuring of the domestic automobile parts industry may occur soon. We need to take this crisis as an opportunity to strengthen overseas business as well as R&D so that the South Korean automobile parts industry can stand tall in the global market.”