Rapid Interest Rate Hikes... Auto Parts Companies Facing 'Critical Situation' Increase

Rising Raw Material Costs Add to Woes
Primary and Secondary Companies Face Over 20% Operating Losses

[Asia Economy Reporter Kiho Sung] The parts industry is facing increasing difficulties due to additional interest rate hikes and a downturn in the global automotive sector. While automakers can somewhat withstand the rate hikes because of large backorder volumes, parts suppliers are struggling even to pay interest, and analysts predict that more companies will reach their limits if high interest rates persist.

According to the automotive industry on the 17th, Jonggeun Jeon, president of the Korea Automotive Industry Association (professor at Hankuk University of Foreign Studies), revealed at the ‘2022 Autumn Automotive Parts Industry Development Strategy Seminar’ hosted by the Korea Automotive Parts Industry Promotion Foundation (KAP) that, based on interviews with 10 automotive parts companies and a survey of 281 companies, 24.8% of first-tier suppliers and 22.4% of second-tier suppliers recorded operating losses.

Companies complained about difficulties such as rising costs of raw materials, logistics, and labor, as well as declining sales and profits, but analysis shows a close connection to interest rate hikes. According to the Korea Automotive Research Institute, an analysis of parts suppliers’ business performance last year showed that 36.6% of companies had an interest coverage ratio below 1. The interest coverage ratio measures a company’s ability to cover financial costs; a ratio of 1.0 or less means the company’s operating profit for the year is insufficient even to cover interest payments.

Experts particularly note that as global car sales decline and interest rates rise, more consumers may give up on purchasing vehicles. Researcher Hanggu Lee of the Korea Automotive Research Institute pointed out, "It is problematic that parts suppliers have to pay more interest, but interest rate hikes inevitably dampen consumers’ willingness to buy. Especially in countries like the U.S., where most car purchases are made through installment plans, higher interest increases the burden, which can lead to consumers abandoning the purchase altogether."

In fact, the global automotive market has been hit hard by COVID-19 and semiconductor shortages. According to the Automotive Industry Association, global car sales in the first half of this year were 27.45 million units, a 7.5% decrease compared to 29.69 million units in the previous year.

Domestically, consumers opting for auto loans are also sharply decreasing. According to data submitted by the Financial Supervisory Service to the office of Min Byungdeok, a member of the National Assembly’s Political Affairs Committee from the Democratic Party, as of the end of July this year, the new auto loan amounts handled by the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) totaled 549.4 billion KRW, including 370.2 billion KRW for new cars and 179.2 billion KRW for used cars. If this trend continues, the total auto loan volume handled by commercial banks by year-end is expected to fall short of 1 trillion KRW. Considering that from 2019 to 2021, the five major banks handled around 2 trillion KRW annually in new auto loans, this represents a drop to less than half this year. Some banks have even stopped handling auto loans altogether.

Researcher Lee said, "Automakers can somewhat absorb the increases in raw material and interest costs through vehicle price hikes and favorable exchange rates. However, parts suppliers face a shrinking global automotive demand alongside rising interest rates, which will push more companies to their limits."

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