These are good days for South Korean car-parts manufacturers.
For one thing, global car makers are seeking alternative sources for components that are currently sourced in Japan, in the face of a surging yen.
Toyota Motor Corp., the world’s biggest car maker by sales, said this week that the rapid strengthening of the Japanese currency had prompted it to consider ramping up its imports of foreign car parts for use in its Japan-based assembly plants.
That has made South Korean suppliers very competitive. The strength of the yen against the won has made Korean parts 20-30 per cent cheaper compared with their Japanese rivals, say analysts. The won has weakened more than 40 per cent against the yen over the past three years, according to Bank of Korea data, and is currently trading at about 1,359 won per ¥100.
South Korea’s manufacturers have also improved the quality of their products, which has helped to catch the eye of car makers. The higher global profile of South Korean car makers such as Hyundai Motor Co. and the growing popularity of Hyundai’s quality cars abroad has also helped.
The result is a boom in orders. South Korea’s exports of auto parts rose 26 per cent to $11.1-billion (U.S.) in the first half of this year, according to the Korea International Trade Association. Exports for all of 2010 jumped 61 per cent as they recovered from a decline after the global financial crisis. The industry estimates exports of $23-billion for the whole of 2011.
“We are getting a lot of calls from global auto makers such as General Motors, BMW, Mercedes-Benz and Volkswagen about increasing our supplies,” says a spokesman for Hyundai Mobis, an affiliate of Hyundai Motor.
As well as growing interest from western car makers, South Korean parts suppliers say they are also for the first time securing big orders from Japanese car makers looking to cut costs and diversify their sources of supply.
Japanese car makers have traditionally sourced parts domestically, but they are turning to South Korean suppliers “as their local parts suppliers have some production problems in the wake of the quake and as they are increasingly pressured by the higher yen,” says Choi Moon-suk, an official at Korea Auto Industries Co-operative Association.
Lee Hang-koo of the Korea Institute for Industrial Economics & Trade says South Korean suppliers have long been “too dependent on domestic auto makers such as Hyundai and Kia Motors.”
A recently implemented trade pact with the European Union that scrapped a 4.5 per cent tariff for auto parts and an impending agreement with the U.S. could drive up orders further, say analysts. Global auto makers have typically procured parts from either local sources or Japanese suppliers.
Hyundai Mobis, South Korea’s biggest auto-parts maker by sales, won a combined $233-million order from Japan’s Mitsubishi Motors Corp. and Subaru in June to supply auto lamps, its first contract with a Japanese car maker. Mando, another leading car parts maker in Korea, says it secured a 41-billion won ($39-million) deal at the end of June to supply auto parts to Nissan Motor Co. Ltd. while Daewoo S&T signed a 10-billion won contract last month to supply car parts to Daihatsu Motor, Toyota’s compact-car making affiliate.
In an effort to drum up further interest in Japan, about 35 South Korean parts makers are planning an auto parts marketing expo this month at Toyota Motor’s headquarters in Nagoya.
Mitsubishi Motors said it does buy some South Korean auto parts but declined to comment further. Toyota, Nissan and Honda Motor Co. Ltd. also declined to comment on the sourcing of auto parts for domestically made cars.
The South Korean unit of Renault SA, the French car maker, has said it plans to source more components from local firms after its Japanese suppliers were hit by the March earthquake. “What we continue to do is … to localize as much as we can in Korea,” Jean-Marie Hurtiger, chief executive of Renault Samsung Motors, told reporters last month.
The dollar has dropped 38 per cent against the yen over the past three years, compared with the won’s 4.4 per cent loss against the greenback.
There is a theoretical argument for Japanese to buy South Korean parts for use in exported vehicle production, given the won’s slide against the yen, giving them some of the cost benefits of the weak won, says Kurt Sanger, an analyst at Deutsche Securities in Tokyo.
Kurt Sanger, an analyst at Deutsche Securities in Tokyo, says the currency effect is stronger than the disruption caused by the earthquake. “Connecting Korean parts imports with the earthquake is fallacious,” Mr. Sanger says. “The quest to make Japan profitable in a strong yen environment began in earnest over a year ago. It’s all about costs, not diversification.”
Mr. Sanger is also skeptical about the extent to which Japanese car makers would source auto parts specifically from South Korea, where they have no production bases, as opposed to Thailand and China, where they can buy in much bigger volumes.