As Hyundai Motor Company and Kia pursue localization of parts sourcing to minimize the impact of U.S. tariffs, it appears that the domestic automotive parts industry will face significant setbacks. Small and medium-sized parts manufacturers are struggling with poor performance and lack the financial resources to expand into the U.S. market.
According to the industry on the 28th, Hyundai Motor Company announced during the conference call on its second-quarter earnings released on the 24th that it has formed a task force team (TFT) for diversifying parts sourcing and is reviewing optimal procurement plans for over 200 parts. The plan is to change parts sourcing in the short term and, in the medium to long term, to procure strategic parts locally in the U.S. Kia is also confirmed to be participating in this effort.
The Donald Trump administration in the U.S. imposes a 25% tariff on imported automobiles and parts, and Hyundai Motor Company has indicated that 20% of the total losses (828.2 billion won) in the second quarter stemmed from parts imports.
The localization of Hyundai Motor Company's parts supply chain is bound to inflict significant damage on the Korean parts industry. According to the National Highway Traffic Safety Administration (NHTSA), Korean finished car manufacturers source 36.2% of their total parts from Korea. The rest are procured from the U.S., Mexico, and Canada.
Lee Hang-gu, a research advisory committee member at the Korea Automotive Research Institute, noted, "While parts manufacturers need to expand local production abroad, the poor business performance has left them without the capacity to invest. Ultimately, restructuring among small and medium-sized parts manufacturers is inevitable, and the impact on regional economies will be substantial."
The performance of Korea's parts industry is significantly depressed. A survey by the Korea Automotive Research Institute found that the average operating profit margin of 213 parts manufacturers with annual sales over 10 billion won was only 3.62%. This is considerably lower than the average operating profit margin of 7.5% for 103 parts companies listed among the world's top 2,000 corporations by the European Union (EU). Their sales last year increased by just 0.18% compared to the previous year.
Kim Kyung-yu, a senior researcher at the Korea Institute for Industrial Economics & Trade (KIET), said, "Parts manufacturers require investment for the transition to electric vehicles, so additional investments for local plants in the U.S. are not easy."
There are also forecasts that parts manufacturers already operating in the U.S. may find local demand for Japanese cars and others as an opportunity. The Japanese automotive industry is also promoting localization of supply chains, including parts, as a response to tariffs. Korean parts manufacturers, which previously only supplied to Hyundai and Kia, can now explore supply opportunities with various other finished car manufacturers.
Researcher Kim said, "The gap between parts manufacturers may widen depending on how much they have invested in the U.S., potentially leading to increased polarization within the industry." There are about 40 parts suppliers partnered with Hyundai Motor Company operating in the U.S.
The localization of parts for Hyundai Motor Company and Kia is expected to take time. As decisions about where to source necessary parts are made from the design phase of the vehicle, it is difficult to immediately alter the supply chains of the cars currently in production. It is also a question whether they can find suppliers in the U.S. to replace Korean parts.
An automotive industry official remarked, "Excluding electric vehicles, U.S. finished car manufacturers also have a high reliance on imported parts, which can be interpreted as an indication that the parts ecosystem is not well established."