Auto Parts Industry Struggling with Triple Burden of Raw Material, Transportation, and Labor Costs

Companies with Interest Coverage Ratio Below 1 Reach Highest Level in 10 Years

[Asia Economy Reporter Han Jinju] Automotive parts companies are suffering from management difficulties as profitability declines due to rising raw material costs, transportation expenses, and labor costs.

According to the '2021 Management Performance Analysis of Automotive Parts Companies' conducted by the Korea Automotive Technology Institute on 1,296 automotive parts companies on the 26th, 36.6% of companies had an interest coverage ratio below 1. Although this is a decrease from the previous year (43.1%), it is the highest in 10 years considering the COVID-19 situation last year.

Although sales of automotive parts companies increased, profit margins were low, leading to management difficulties. Operating profit margins were 3.6% for large companies, 2.1% for mid-sized companies, and 1.6% for small and medium enterprises.

The Korea Automotive Technology Institute explained, "Due to the vertically integrated and consolidated structure between demand-monopolistic automakers and parts companies, small and medium parts companies lack bargaining power, making it difficult to adjust delivery prices in response to cost increases."

As automaker production volumes decreased, the delivery volumes for parts companies also declined, and the supply shortage for semiconductors, whose prices rose sharply and were supplied mainly to large companies first, worsened the supply difficulties for small and medium enterprises.

Transportation costs also rose sharply, increasing the burden on parts companies. Last year, maritime freight rates rose more than threefold compared to the previous year. Eighty-six percent of automotive parts are transported by sea.

A significant number of automotive parts companies are unable to bear the rising costs. According to the Korea Automotive Technology Institute, about 35% of companies had a cost increase rate higher than their sales growth rate.

The Korea Automotive Technology Institute stated, "Overall, small and medium parts companies with insufficient technological capabilities are judged to have almost no profit (1.6%) generated through business activities," adding, "They are likely to be at risk of exit, which will have negative effects on employment and the regional economy, so continuous monitoring is necessary."

As the number of companies struggling to survive increases, the transition to future vehicles in the parts industry is also facing a crisis. The total facility investment amount of automotive parts companies was 3.784 trillion KRW last year, a 9% decrease from the previous year.

In the case of small and medium enterprises, the proportion of labor costs is increasing, making it increasingly difficult to secure research personnel for future vehicles, which are becoming more advanced through electrification and intelligence.

The Korea Automotive Technology Institute stated, "We must proactively respond to the demand for future vehicle industry personnel and establish a stable future vehicle employment ecosystem through workforce restructuring."

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