[Liquidity Crisis in Cars] Overseas Parts Network Collapse... First Shock Coming This Month

Domestic and Foreign Automakers and Parts Companies Shut Down Factories in the US and Europe... Overseas Parts Procurement Disruptions Intensify in April
Auto Parts Partners "First Liquidity Crunch Expected Around Mid-April"

[Asia Economy Reporters Kim Hyewon and Woo Suyeon] #Hyundai Kia Motors' first-tier parts supplier Company A halted its local production lines as the principal company suspended operations at its factories in the United States, Poland, and India. Ultimately, the shutdown of the European plant disrupted parts supply, forcing urgent procurement of parts via air freight from India to the Poland factory. While wages for employees are already insufficient, the expensive air cargo costs have further increased. A representative from Company A’s overseas subsidiary lamented, "If the COVID-19 situation eases by the second week of April, survival is possible, but if it prolongs from the third week through May, liquidity problems will become severe." Another parts supplier, Company B, expects sales to drop by more than 40% this month due to shutdowns at Hyundai Kia Motors’ local plants in Northern Europe and the United States. Although the Chinese factory is still operating, demand is insufficient, and the operating rate remains at only 20-30%, effectively drying up working capital.

According to the "COVID-19 Related Corporate Difficulty Support Center Automotive Company Trend Report" obtained from the Korea Automobile Manufacturers Association (KAMA) on the 2nd, domestic automakers and parts suppliers have faced a full-scale disruption in parts procurement from overseas markets this month, resulting in a sharp decline in sales and a need to overcome a primary liquidity crisis. In particular, since last month, as automakers in the U.S. and Europe entered consecutive shutdowns, parts suppliers’ sales decline rate in March already reached 20-30%, with concerns that the drop will deepen this month.

Production costs are also soaring due to disruptions in the global supply chain. Especially for companies operating overseas factories, additional air freight costs for rapid parts supply between overseas and domestic plants are expected to highlight liquidity problems seriously from mid-month onward.

The liquidity crisis facing the automotive industry is not limited to parts suppliers. SsangYong Motor, ranked fifth among domestic automakers, began staggered line shutdowns from today. Although they plan to operate lines flexibly depending on parts supply conditions, in reality, they are unable to run factories due to a lack of work.

With export routes blocked by the COVID-19 pandemic and the collapse of overseas local production ecosystems, domestic automakers have no choice but to rely on the domestic market. Last month, overseas sales of five domestic carmakers fell 21% year-on-year to 446,801 units, while domestic sales increased by about 10% to 150,000 units.

Voices from the automotive industry call for continuous government support to overcome the liquidity bottleneck based on the domestic market, which is backed by purchasing power. In the short term, liquidity support due to the sharp decline in overseas sales is urgent, but in the mid to long term, policies to promote domestic sales are desperately needed. To this end, KAMA has argued that public institutions should concentrate their purchasing power in the first half of this year, establish domestic market activation incentives such as reductions in automobile acquisition tax and extension of special excise tax cuts, and swiftly implement various measures including allowing special extended work permits for production flexibility.

Jung Manki, Chairman of KAMA, stated, "With the global spread of COVID-19 causing simultaneous production disruptions and demand contractions worldwide, the ecosystem of our automotive industry is also at risk of collapse." He added, "Concerns over the mass bankruptcy of small and medium suppliers have increased, and the cash flow of some automakers is also in a precarious state." He emphasized, "Above all, the government must actively implement support measures so that the domestic market can substitute for the sharp drop in demand by concentrating public institution purchasing power." He further urged, "Guidance at the field level must be strengthened to ensure that the 100 trillion won financial package for corporate liquidity supply is carried out without disruption."

This content was produced with the assistance of AI translation services.