▲Kwon Eun-kyung, Research Director, Korea Automobile Mobility Industry Association (Photo provided by Korea Automobile Mobility Industry Association)


24 of the 80 companies surveyed saw their profit margins slow in the second half of the year.
Short-term challenges ranked first and second: raw material prices and labor shortages.

A survey of the business conditions of auto parts companies revealed that profit margin growth is slowing and they are facing difficulties due to high raw material and energy prices, labor shortages, and rising labor costs.

Kwon Eun-kyung, head of the Research and Development Department of the Korea Automobile Mobility Industry Association, said in a keynote speech at the 34th Automobile Industry Development Forum hosted by the Korea Automobile Manufacturers Association, “The results of the survey on the management conditions of parts companies conducted by KAMA showed that there is a large difference in perception regarding the management performance in the first half of the year and the sales conditions in the second half.” She continued, “Of the 80 responding companies, 44 companies (55.7%) said their sales increased compared to the previous year, but only 24 companies (30.4%) said their operating profit increased, showing that the increase in profit rates is slowing down.”

Looking at the survey results, △40% of companies responded that the sales conditions in the second half of the year will be similar to the first half, while △30% responded that the sales conditions in the second half of the year will be similar to the first half of the year. They responded that it would worsen compared to the first half of the year due to concerns over weakening profitability due to rising energy costs and decreased demand due to an economic slowdown.

In addition, the biggest short-term challenges were as follows: △ increased costs, such as high raw material and energy prices (27.4%), △ difficulties in managing human resources, such as labor shortages and rising labor costs (24.5%), △ burden of preparing for the transition to the future car industry (13.9%), △ decreased demand (12.2%), and △ worsening financial conditions (11.4%).

Director Kwon said, “As a result of additional questions about raw material prices, 58 out of 80 responding companies recognized that raw material prices are still high,” and expressed concern that “they selected the rise in raw material and energy prices as the main factor in the worsening financial situation, and that the future rise in energy prices, including electricity rates, will be a significant burden on parts companies.”

In the human resources management sector, although some of the labor shortage has been resolved recently due to factors such as the expansion of the quota for introducing foreign workers, the situation is still insufficient compared to before COVID-19. In addition, it is difficult to secure a stable supply of skilled workers due to frequent job changes and short stay periods, and the minimum wage increase has also raised wage levels, putting a burden on parts companies struggling with deteriorating profitability.

Among the 28 companies that cited worsening financial conditions as a challenge, 60% responded that conditions had worsened compared to the previous year, and it was revealed that the use of additional funds was mostly for working capital purposes (54.7%), such as raw material costs and interest expenses for business operations.

Mid- to long-term challenges include the deepening polarization of parts companies' ability to transition to future vehicles and the demand for supply chain risk management and decarbonization investments, which are putting pressure on business conditions.

The number of companies that have transitioned to future vehicles by company size is only △75.9% for mid-sized companies, △42% for medium-sized companies, and △15.9% for small companies. The small business size and lack of research capabilities of companies that have not transitioned are hindering the direction of transition.It was revealed that they were having difficulties setting up.

Director Kwon also said, "There are also responses that the disruption in parts supply due to supply chain risks following COVID-19 has expanded into issues of industrial competitiveness, such as establishing a supply chain centered on domestic industries, and that constant monitoring and response capabilities are necessary."

Director Kwon suggested the following measures to improve the short-term management conditions of parts companies: △ institutional improvements to ensure stable securing of foreign production personnel; △ expanding demand for short-term working capital due to accumulated debt and persistent high interest rates; and △ stimulating domestic demand to address the decline in demand.

The institutional improvement measures to secure a stable workforce of foreign workers include: △extension of the period of stay (basic period of 3 years), △increase in the number of foreign employees per company, △differentiation of minimum wage according to skill level, and △restriction on job transfer (first year).

Due to the continued accumulation of debt and high interest rates, the demand for short-term working capital has increased, so the government has proposed expanding policy financing support for small and medium-sized parts manufacturers with low collateral and low credit ratings. To stimulate domestic demand in response to the decline in demand, the government has proposed reintroducing the automobile acquisition tax reduction (from 0% to 30%).

Director Kwon also emphasized, “In order to enhance the mid- to long-term competitiveness of the parts industry during the transition to future vehicles, it is necessary to continue and expand investment incentives to expand the domestic future vehicle production base so that the parts industry can promote the transition to future vehicles and secure demand,” and concluded his presentation by saying, “It is also necessary to extend the deadline for temporary tax investment deductions and national strategic technology tax deductions, improve the tax investment deduction restrictions for electric vehicle factories in the metropolitan area, and increase the support limit and subsidy support ratio for local investment promotion national subsidies.”