Small and Medium Manufacturing at Maximum Crisis, No Room to Retreat

On February 6th, the truck factory within Hyundai Motor Company's Jeonju plant went on shutdown and remains inactive with the lights off. Photo by Yonhap News

[Asia Economy Reporters Hyewon Moon and Heeyoon Kim] Company A, a manufacturer of machine tools such as drills, is facing its greatest crisis in 20 years since its founding. Although this company is small with sales under 5 billion KRW, it has long been recognized for its technological capabilities and has maintained stable sales as a secondary supplier to shipbuilding and heavy industries like Samsung Heavy Industries and Doosan Heavy Industries, with machine and steel processing factories that mainly use cutting tools as its major clients. Despite the continued downturn in traditional manufacturing sectors such as shipbuilding, heavy industry, and steel, the company overcame challenges with its excellent technology, but this year, the rapid decline in manufacturing output due to the COVID-19 pandemic brought difficulties.

Sales until May this year dropped about 30% compared to the same period last year, falling to half the level of the boom period. Eventually, the company approached its main bank, but since it had already borrowed up to the limit using its factory and other assets as collateral, it anxiously awaited head office approval.

The company’s representative, Mr. Yujunyoung (pseudonym), said, "We are trying to secure operating funds, but it is not easy," adding, "Although we have secured trust in our technology and quality management by obtaining certification as a specialized materials and parts company, we are not eligible for COVID-19 guarantee support, and in reality, loans are not granted based on technology alone."

Mr. Shin Hyunju, CEO of Howon, a first-tier supplier producing automotive body parts such as body modules and frames for Hyundai Motor Company, cited the inability to properly plan for the future in an uncertain situation as one of the biggest difficulties. Shin said, "We need to secure steady sales to operate the factory while stabilizing employment, but that is not the current situation," adding, "The burden of fixed costs is increasing, which is worrisome."

Based in Gwangju Metropolitan City, Howon is a solid company operating Howon Auto’s body module parts assembly plant, affiliates such as Howon Tech, and a factory in Turkey (Howon Automotive), but it is concerned about uncertainty.

Due to a significant drop in North American export volumes, the domestic factory’s operating rate recently fell by about 30%, and the situation in Turkey, where COVID-19 is widespread, is even worse, according to CEO Shin.

Shin said, "Although first-tier suppliers to large corporations have better bank loans and financial power compared to second- and third-tier suppliers, it is not easy," adding, "The government announces support measures, but the actual experience of business owners when visiting banks is quite different."

In industries such as automotive, the supply chain is a fragile gear-like structure where a problem at even a small supplier can affect the entire production process of the finished vehicle manufacturer.

According to a May survey by the Korea Automobile Manufacturers Association, the operating rate of domestic parts manufacturers’ factories was only in the 30% range. In the March survey, the operating rate was in the 60% range. It halved in just over two months, and the sales decline rate increased from 10-25% in March to 20-60% in May.

Mr. Ko Munsu, Executive Director of the Korea Automobile Industry Cooperative, said, "Companies that have been struggling since January this year have already seen their credit ratings drop significantly, making financing difficult," adding, "The industry’s biggest hope is that financial institutions would be more proactive in lending to them."

Researcher Choi Jongmin of the Small and Medium Business Research Institute said, "There is a risk that second- and third-tier suppliers who have suddenly lost their means of survival will shut down immediately, so it is necessary to consider a system that selectively provides loans to companies that were doing well but have recently deteriorated in the past few months."

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