Auto Parts Firms Gear Up for Global Competitiveness

Currently, the number of companies in the country's auto parts industry stands at around 900, most of them small- and mid-sized firms with fewer than 300 employees. Despite the drastic expansion of the market since 1999, however, most of the South Korean firms remain paltry in size compared with those in advanced countries.

Moreover, most companies except for some large enterprises such as Hyundai Mobis have not yet realized the internationalization of their products since they are largely depending on orders they receive from domestic carmakers such as Hyundai Motor and its affiliate Kia Motors.

Under such circumstances, some leading auto parts companies have recently been making efforts to explore overseas markets. Exports have grown gradually in the past several years, though they were unusually focused on the North American market. Still, the export accounts for only a small part of the domestic production. So, it could be said that the export remains insignificant when compared with the size of the home market.

However, the local auto parts companies are now seeking some fundamental changes with efforts to advance onto the overseas markets in tandem with the domestic automakers global strategies in recent years.

In particular, a number of companies have so far paid much attention to the modulation of auto parts and acquirement of global distribution bases, which led to the drastic progress in technologies and visible achievements in global markets.

Moreover, South Korean firms were quick to catch up with their foreign rivals based on cooperation with other leading global players, although they lagged behind in the modulation of auto parts, a global trend in the industry.

If such endeavors of the local companies came to fruition in the end, the domestic auto parts industry will see a turning point, the home market will grow bigger in size and exports will also increase a lot.

While modulation and standardization have set a general trend in the global auto parts industry in the past decade, leading players have sought to enlarge themselves through mergers and acquisitions in preparation for economies of scale and global sourcing.

By 2008, the number of the world's firsthand auto parts companies is expected to fall to 150. Large players will take more aggressive approaches with expanded investment abroad in tandem with the global strategies of leading carmakers.

Global actors have also been trying to build a worldwide network for the swift and efficient distribution of auto parts, which is a prime part of the competitive power for automakers that produce finished goods.

So the weakest point of South Korean auto parts companies is that they are too petty in terms of size, production and sales. Ordinary income is unreasonably low and debt ratio is excessively high for most of the companies.

Other problems include a heavy reliance on domestic consumption and the weakness in core technologies. Given the total volume of automobile exports, South Korea's auto parts exports are noticeably lower than those of the United States and Japan.

Investment in research and development activities compared with sales is also showing a wide gap with that of the U.S. and Japan, which leads to a vicious cycle of having the local auto parts company more dependent on local automakers.

Besides, a number of foreign companies specializing in auto parts production have also been coming into the South Korean market in recent years. Covering most key parts from bearings to airbag systems, they have been eager to takeover leading domestic firms.

Since the 1997 financial crisis, when Kia Motors nearly failed, the domestic auto parts industry has been realigned thoroughly. Mergers and bankruptcies among automakers and, consequently, the integration of their platforms have also encouraged the auto parts firms to exert restructuring efforts continuously.

With the integration of platforms in the production lines of automakers, the auto parts industry has been restructured surrounding several large-scale companies such as Hyundai Mobis, which could provide an opportunity for the South Korean auto parts industry.

While the material cost accounts for some 70 percent of the total production cost of cars, a country's automobile industry cannot grow properly without a smooth development of auto parts industry.

Given such characteristics, South Korean auto parts companies are now required to make their utmost efforts to acquire independent technology, increase exports gradually, reform subordinate relations with automakers and merge with each other.

Most of all, the local companies should improve their technical expertise and ability to develop future technologies. Hyundai Mobis, for example, has been putting pushing the development of state-of-the-art technologies in partnership with other global leaders.

South Korean companies should also try to depart from the past practice of focusing on domestic consumption and give more weight to exports to meet the rising demand of auto parts around the world.

Some 10 leading auto parts companies, including Hyundai Mobis and Mando, have jointly been seeking to advance into the Chinese and U.S. markets under their globalization strategies.

For a cooperative partnership between auto parts companies and automakers, the past hierarchical and subordinate relationship should be replaced with a more horizontal and balanced one in the long run.

Heavy dependency of the auto parts firms on the giant automakers could result in losses in capability to develop technology due to the excessive reduction of time for delivery and curtailment of unit prices.

Last but not least, merger and acquisitions among auto parts firms or strategic alliances should be encouraged, as a large number of companies are small- and mid-sized ones that lack both R&D and production capabilities.

Government guidance and support will be significant in these processes because the facilities, manpower and know-how of the companies must be rearranged effectively so the competitive edge of the country's industry can be sharpened.

South Korea's auto parts industry, as mentioned above, has both inveterate weaknesses, such as their small scale and lack of high technologies, and the challenges from outside such as foreign rivals' advancement into the home market and development of technology.

In such a grim picture, the role of Hyundai Mobis, the country's largest auto parts firm which has led the industry with the goal of becoming one of the global top-10 companies, is quite noticeable.

Hyundai Mobis, in short, has so far focused its energy on the development of core technologies and exploration of overseas markets as well as the basic modulation and standardization of auto parts.

In 2004, the company surprised the world by contracting with Daimler Chrysler to supply complete chassis modules to one of the big three automakers in the United States after competition with other global leaders.

Hyundai Mobis is also helping other auto parts companies with its brand power and global network because small- and medium-sized companies, even if they have competitiveness in price and quality, have difficulties exploring overseas markets.

It is also noteworthy that Hyundai Mobis has been leading the restructuring of the local auto parts industry, which must realize the reduction of costs and improvement of productivity for future competitiveness.

In 2000, the company moved its container manufacturing plants overseas and acquired the after-sales parts business from Hyundai Motor and Kia Motors. In 2002, by ceding its plants and heavy machinery business to Rotem, Hyundai Mobis successfully completed its restructuring process into the nation's largest auto parts firm with after-sales parts sales, auto parts exports and module parts manufacture as its operating areas.

Now firmly established as an eminent specialized auto parts company, Hyundai Mobis is continuing its relentless efforts toward the development of the overall automotive industry as South Korea's representative auto parts company.