Posted on : Nov.4,2018 13:43 KST
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Profits in automobile industry for past 10 years
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Many small parts makers in automobile industry on the verge of collapse
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Profits in automobile industry for past 10 years
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The threat of collapse facing small automobile parts companies stems from an unfair subcontracting transaction system rooted in “exclusive” dealings that amount to a modern form of slavery, a state-run think tank contended in a report submitted to the South Korean government.
The opinion comes amid a rush by the government to develop measures to address the crisis facing the domestic automobile industry.
On Oct. 29, the team of Korea Institute for Industrial Economics and Trade (KIET) senior research fellow Lee Hang-koo submitted a report on the “Current Status and Prospects of the Automobile Industry” to the Financial Services Commission and Ministry of Trade, Industry and Energy in connection with the government’s recent automobile industry countermeasure efforts. In its findings on average operating profit ratios for the automobile industry over the ten-year period from 2008 to 2017, the report notes that while Hyundai Motor registered a percentage of 8.14% and its nine parts affiliates averaged 8.17%, the roughly 350 partner companies involved in exclusive transactions with Hyundai Motor averaged 3.57% – less than half as much.
The study also noted that profitability has only declined for the partner companies, which maintained profit ratios above the 3% level through 2016 but saw them drop below that for the first time to 2.92% in 2017. The exclusive partner companies supply parts only to Hyundai Motor and do not engage in transactions with any other finished car companies.
According to the report, profitability has only worsened for partner companies this year. For the 100 mid-sized parts companies that submitted business reports to financial oversight authorities (not including Hyundai Motor affiliates), operating profit ratios for the first half of 2018 averaged 1.84% – down by almost half from 3.49% for the first half of 2017. While sales slipped by just 3.8% from the same period last year, operating profits fell by 49%, or nearly half. Thirty-one partner companies registered operating losses, all the way up from 19 last year.
Smaller companies bear the most abuse and losses
The report also noted that the crisis for small partner companies is more severe than the one facing mid-sized and large ones. The overall number of primary partner companies fell from 898 in 2013 to 851 in 2017, but while the number of large corporations acting as primary partners rose from 229 to 245, the number of small businesses sank from 669 to 606. In terms of operating profit ratios for Hyundai Motor’s exclusive partner companies, corporations averaged 3.7% between 2008 and 2017, compared to just 2.9% for small businesses.
The report identified unfair subcontracting practices based in exclusive transactions as the main reason for the large profitability gap between Hyundai Motor and its parts affiliates on one side and partner companies on the other, and for the more severe woes affecting small partner companies compared to mid-sized and large ones.
“The reason partner company profit ratios are fixed in the 3–4% range is because Hyundai Motor and other finished car companies set specific targets to manage their partner companies’ profit ratios,” explained Lee Hang-koo.
“The finished car companies essentially force irrational cost calculations on partner companies, and they engage in unfair practices such as not raising the price they pay for delivered items even as the cost of materials rises, or continuing to lower the amounts they pay even after establishing contracts at the lowest price,” he added.
”Exclusive” transactions effective a form of subordination
The report observes that when profit ratios are low, partner companies are forced to respond by freezing wages and lowering investment in R&D and the hiring of outstanding workers, which leads to decreased competitiveness and employment – a reason that industry observers view “exclusive” transactions as effectively a form of subordination.
The report also noted that of the 100 mid-sized and large partner companies, the 95 for which employment trends could be gauged showed a total workforce of 51,464 – down by 1,025, or 2%, from the year before. The 56 partner companies that cut positions far outnumbered the 33 that added them.
Lee stressed the need for “shared growth” measures for large and small businesses in overcoming the current automobile industry crisis.
“A large part of the reason that profit ratios for automobile partner companies rose all the way to the 5–6% range in 2010 is because of the Lee Myung-bak administration’s shared growth policies,” he observed.
By Kwack Jung-soo, business correspondent
Please direct comments or questions to [english@hani.co.kr]
