"Preventing the Second Wiring Harness Crisis"... Financial Support for Low-Credit Auto Parts Companies

Full Effort to Defend Auto Industry Finances by Preventing Short-Term Liquidity Crisis
Priority Support for Special Guarantee, Preferential Interest Loans, and Credit-Vulnerable Companies
Loans Secured by Finished Carmakers' Accounts Receivable and Overseas Assets Also Opened
Shinhan, Woori, Kookmin, Nonghyup, Hana Banks Support 1-Year Maturity Extensions
Ministry of Industry Expects to Help Resolve Management Uncertainty in Parts Industry

[Image source=Yonhap News]

[Asia Economy Reporter Moon Chaeseok] The government has stepped up additional financial support for automotive parts suppliers to prevent a 'second Wiring Harness crisis.' As Hyundai Motor Group conducts an emergency inspection of its supply chain due to worsening management among its partners, the move aims to prevent the crisis of partner companies from spreading throughout the entire automotive industry.

On the 19th, the government announced it will provide financial support worth '2 trillion won + α,' focusing mainly on automotive parts companies with low credit ratings. Customized support will be given to low-credit-rated and mid-sized companies.

Source: Ministry of Trade, Industry and Energy

Earlier in February, to prevent a repeat of the case where a shutdown occurred at a finished car manufacturer due to a supply disruption of the core component wiring harness, it was determined that financial difficulties of partner companies must be resolved. Support is provided to ensure partner companies do not fall out of the industrial ecosystem.

Although the 'Wiring Harness crisis' was averted by normalizing operations at the Chinese factory within about a week, if domestic partner companies cease operations, major finished car manufacturers such as Hyundai Motor will be directly hit.

Yesterday, a second-tier partner company declared 'business abandonment,' causing disruptions in the delivery of finished vehicles like the Palisade and Tucson by Hyundai Motor. This is why the government is providing financial support to parts suppliers, separate from the finished car companies' supply chain restructuring.

According to the automotive industry, the current operating rate of parts companies is only 50-60%. According to NICE Credit Rating, as of April, 37.7% of first-tier suppliers to finished car manufacturers have corporate credit ratings of 'B' or below.

A government official explained, "Since early this year, with the spread of COVID-19 and a sharp decline in overseas demand, finished car manufacturers have faced production disruptions, leading to severe shortages of work for parts suppliers. Emergency liquidity reinforcement has been provided to first-tier parts suppliers, the backbone of the industry, and to mid- and low-credit-rated parts companies that have difficulty securing financing."

Source: Ministry of Trade, Industry and Energy

The key is to help automotive parts companies with low credit ratings raise large-scale funds in the short term from the financial market. Policies such as special guarantees, preferential interest loans, priority support for credit-vulnerable companies, overseas asset-backed loans, accounts receivable-backed loans, and maturity extension support from commercial banks have been poured in.

The 'Win-Win Special Guarantee Package Program,' jointly supported by the Korea Credit Guarantee Fund and the Korea Development Bank with 270 billion won, provides 100% full guarantees (KODIT) under a limit of up to 7 billion won, interest rate reductions, and simplified screening (KDB).

The 30 billion won 'Project Joint Guarantee' lowers the thresholds for sales and credit rating assessments of partner companies so that finished car manufacturers can efficiently supply funds directly to their partner companies.

The 350 billion won 'Win-Win Growth Fund,' to be prepared by the Korea Development Bank and Industrial Bank of Korea by the end of this month, targets small and medium-sized partner companies recommended by finished car manufacturers, prioritizing credit-vulnerable companies after bank screening.

Source: Ministry of Trade, Industry and Energy

Korea Asset Management Corporation (KAMCO) will establish a 300 billion won 'Prime Contractor Payment Receivables Secured Loan Fund (PDF)' by the end of this month. This is to open a path for first-tier partner companies, which find it difficult to raise funds in the market, to receive large-scale financial support by using accounts receivable as collateral.

Policy financial institutions will support accounts receivable-backed loans to partner companies through a loan-type private equity fund (PDF) where they take a subordinated position.

Mid-sized companies owning accounts receivable from finished car manufacturers are eligible. About 20 first-tier partner companies are expected to receive support.

In emergencies, parts companies will be helped to use overseas corporate assets as collateral for loans.

Previously, it was difficult to obtain domestic bank loans without a joint guarantee from the parent company (parts supplier), but now assets can be used as collateral through overseas subsidiaries of the Export-Import Bank in countries such as Vietnam and Indonesia.

The five major commercial banks?Shinhan, Woori, Kookmin, NongHyup, and Hana?will expand maturity extension support from small and medium enterprises and small business owners to mid-sized automotive parts companies. Existing loans of mid-sized automotive parts companies maturing by the end of this year will be extended for up to one year.

An official from the Ministry of Trade, Industry and Energy said, "This will help stabilize the industrial ecosystem and supply chain connecting 'finished car manufacturers and parts industry' and resolve management uncertainties in the parts industry through maturity extensions for mid-sized companies."

Source: Ministry of Trade, Industry and Energy

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