COVID-19 Shock Casts 'Dark Clouds' Over First Quarter Auto Parts Suppliers' Earnings

[Asia Economy Reporter Woo Su-yeon] Amid the shock of the novel coronavirus infection (COVID-19) causing a decline in factory operating rates of finished car manufacturers, dark clouds are also looming over the first-quarter performance of relatively large first-tier parts suppliers this year.

According to the industry on the 1st, Hyundai Mobis, the largest automotive parts company in Korea, recorded sales of 8.423 trillion won in the first quarter of this year, down 3.6% from the same period last year. Operating profit sharply dropped by about 27% year-on-year to 360.9 billion won.

Despite more than a 22% increase in sales of electrification parts, the module and core parts manufacturing division, the main business sector, was directly hit by the impact of COVID-19, resulting in a turnaround to a loss. In the first quarter of this year, Hyundai Mobis's module and core parts manufacturing division recorded sales of 6.5361 trillion won, down 5.7% year-on-year, and posted an operating loss of 88.9 billion won.

Performance in supplying global finished car manufacturers other than Hyundai Kia Motors also sharply declined due to the impact of COVID-19. As the order schedules of global finished car manufacturers were delayed, only about 380 million USD, which is about 14% of the annual plan, was achieved. A Hyundai Mobis official said, "The biggest impact was the 55% drop in sales in China during the first quarter, which was the early stage of the COVID-19 crisis, but as the situation expanded to the Americas and Europe, we are concerned that the second-quarter performance will be more severely affected."

Lee Jae-il, a researcher at Eugene Investment & Securities, analyzed, "Hyundai Mobis's A/S division has maintained stable high profits due to the nature of the business, but the global city lockdown in the first quarter has begun to impact even the A/S division's profits. Since more than half of Hyundai Mobis's A/S sales occur in advanced markets, a large-scale profit decline in the second quarter is inevitable."

[Image source=Yonhap News]

In the case of Mando, the second-largest automotive parts company in Korea, the first-quarter performance has not yet been announced, but the outlook is mostly bleak. According to the consensus of securities firms from FnGuide, Mando's sales in the first quarter of this year are expected to decrease by 11.9% year-on-year to 1.2467 trillion won, and operating profit is predicted to drop by 56.3% to about 14 billion won.

Im Eun-young, a researcher at Samsung Securities, said, "Although a turnaround to a loss will be avoided in the first quarter, costs related to the integration of the China factory and restructuring costs of the Korean factory are deferred to the second quarter, so a loss is expected. There is hope for a recovery in Chinese demand, but it is necessary to confirm the impact of restructuring costs and the sharp decline in demand in other overseas markets."

Hyundai Wia, another parts company affiliated with Hyundai Motor Group, was able to avoid a performance shock due to a one-time effect of the reversal of provisions for ordinary wages, but the situation remains unstable. Hyundai Wia's sales in the first quarter of this year decreased by 10.9% year-on-year to 1.6478 trillion won, while operating profit increased by 478% year-on-year to 84.5 billion won due to the impact of the reversal of ordinary wage provisions.

Moon Yong-kwon, a researcher at Shin Young Securities, said, "Excluding one-time profits, vehicle division sales have decreased year-on-year for four consecutive quarters, and operating profit has also decreased for two consecutive quarters. Due to the shutdown of major Hyundai Kia Motors factories in the second quarter, module and parts sales are also expected to decline together, making profit reduction inevitable."

Hanon Systems, which has a relatively low sales dependence on Hyundai Kia Motors, also appears to face inevitable profit declines due to the slowdown in global automotive market demand. According to securities consensus, Hanon Systems' sales in the first quarter of this year are expected to increase by 11% year-on-year to 1.5885 trillion won, but operating profit is predicted to decrease by 13% to 81 billion won. Recently, Hanon Systems has been paying attention to strengthening short-term liquidity management, such as increasing borrowing limits in preparation for the impact of COVID-19.

Jang Moon-soo, a researcher at Hyundai Motor Securities, said, "The continued sluggishness in China and the shutdowns of major customers such as Hyundai Motor Group and Ford will have an impact. Although the operation of domestic and Chinese finished car factories will normalize in the second quarter, it is necessary to watch the timing of recovery in the U.S. and Europe due to the decline in export demand from domestic factories."

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