Made In Korea: Axles, Wipers, And Brakes
At first blush, South Korea wouldn't appear to be an ideal spot to set up shop in a business as competitive as auto parts. The country is squeezed between high-quality Japan and low-cost China, and its domestic market is justover 1 million cars a year -- less than a fifth of Japan's, and tiny when compared with China's potential. But appearances can be deceiving. In recent years, Korea has become a magnet for auto-component makers, with more than 200 foreign-owned manufacturers now operating in the country.
The list includes all the big names: Visteon (VC ) and Delphi (DPH ) of the U.S., Robert Bosch of Germany, Japan's Denso (DNZOY ) -- indeed, all but three of the top 30 global players. The reason for the rush into Korea? The 1997-98 Asian financial crisis made Korean assets cheap, so scores of midsize companies were snapped up by global giants. "The crisis pushed many parts makers to near-bankruptcy -- and foreign takeovers stabilized and helped improve their quality," says Cho Chuel, auto-industry specialist at the state-funded Korea Institute for Industrial Economics & Trade. And despite Japan's reputation for quality, manufacturing there is often too expensive for foreign operators to make a profit. China, meanwhile, is cheap -- a Chinese-made axle might cost half what a Korean one does -- but the country lacks Korea's design and engineering capabilities. "You can find a balance between quality and costs in Korea," says Lee Dae Un, president of Delphi Korea.
Another key factor has been the success of Korea's auto makers. Hyundai Motor Co. and its affiliate Kia Motors Corp. together saw their sales increase by 12% last year, to 3.2 million vehicles -- three-quarters of them shipped overseas. Today the companies say they aim to increase sales to 5 million by 2010. And once-hapless Daewoo Motor -- rechristened GM Daewoo Auto & Technology Co. after General Motors Corp. (GM ) took it over in 2002 -- sold 900,000 cars last year, again the bulk of those abroad. "There are several low-cost alternative manufacturing sites around the world, but you don't have the likes of Hyundai in Thailand or Mexico," reckons Kim Ki Chan, professor of motor-industry economics at the Catholic University of Korea in Bucheon, just west of Seoul.
The Koreans, of course, have also gotten a boost from foreign parts makers. Hyundai was once the butt of jokes about its shoddy workmanship, but in the past two years it has become one of the global leaders in quality. That turnaround is due in part to a relentless focus on quality at Hyundai but also results from an increased availability of top-notch parts from foreign suppliers. Today, foreign-controlled companies supply a third of the parts Korean auto makers use, up from less than a fifth in the 1990s, Kim says.
The business is accelerating. Sales of Korean auto components are expected to surge to $36.4 billion this year, up from $34.2 billion last year and $27.1 billion in 2002, according to the Korea Auto Industries Cooperative Assn. (KAICA). Delphi has seven plants in Korea, making everything from air bags to fuel injectors; its sales in the country climbed 33% last year, to $1.5 billion, representing some 45% of its Asia-Pacific revenues. During a visit last year, Delphi Chairman J.T. Battenberg III forecast growth of up to 20% in Korean sales in 2005 and said he remained "optimistic and bullish" about Korea.
Exports are growing even faster. KAICA forecasts parts shipments abroad will climb to $7.2 billion in 2005, up from $5.9 billion last year. A lot of those parts are going to garages that service Korean-made cars, but more Korean component makers are selling directly to foreign auto manufacturers. GM, for example, bought $490 million worth of steering columns, headlights, wiper systems, and other parts from 50 Korean companies last year. Hyundai Mobis, the largest Korean player and an affiliate of Hyundai Motor, in July began supplying 300,000 steering columns a year to DaimlerChrysler, and in 2006 will start selling $170 million worth of complete chassis modules -- which include the frame, engine, transmission, brakes, steering, and suspension -- to the U.S-German auto maker annually. Halla Climate Control Corp., owned 70% by Visteon Corp., says it shipped more than $450 million worth of air-conditioner compressors to foreign vehicle makers last year, mainly Ford Motor Co. (F ) and DaimlerChrysler.
The foreigners have given many local players a new lease on life. For instance, Mando Corp., Korea's second-largest auto parts maker, declared bankruptcy in 1997 but was rescued two years later when JPMorgan Chase & Co. (JPM ) paid creditors $98.5 million for a 76% stake in the company. With prudent management under Morgan's watchful eye, Mando's sales have nearly doubled since 2000, to $1.42 billion last year, while profits jumped from $50 million to $129 million in the same time period. Last year, Mando began supplying state-of-the-art brake systems to Hyundai, and in the past two years has won $2.9 billion in contracts to provide brakes, steering units, and suspension systems to foreign auto makers, including the Detroit Big Three.
The boom, though, may not last long. Chinese rivals will soon close the engineering and design gap with Korea -- perhaps in as little as two or three years. "Already we are witnessing far greater investment in China by global parts suppliers than in Korea," says Chung Ha Seung, senior managing director at Korea Automotive Motor Corp. (KAMCO), a wholly owned subsidiary of Bosch that makes small motors for wipers, seat sliders, and power windows. That means the Koreans must keep innovating and introduce automation to stay competitive.
Korea's often-militant unions, meanwhile, could put the brakes on those efforts. In 2003, for instance, unions at KAMCO opposed full automation and the introduction of a three-shift system, prompting Bosch to move lines making motors for antilock brake systems from Korea to China, forcing a cut in KAMCO sales by about $18 million this year from $283 million last year, says Chung. "Unless Korea moves rapidly, it will soon be overtaken by China, and the relocation of plants will be inevitable," he frets.
For now, at least, many multinationals are pressing ahead with expansion in Korea. Bosch says it plans to invest $149 million during the next three years to build a plant in the central city of Daejeon to make diesel engine components, while Halla Climate earmarked some $90 million this year as part of its plan to boost compressor production capacity to 5.2 million units by 2006 from the current 4 million. And Delphi's plant that makes air-bag systems and seat belts in the town of Munmak, 80 km southeast of Seoul, plans to build a computer-simulated crash-test lab costing as much as $20 million to help it serve carmakers in China and elsewhere in Asia. "Delphi can use its Korean operations to help increase business in China," says Delphi's Lee. Maybe being stuck between Japan and China isn't so bad after all.
By Moon Ihlwan in Seoul