Global Companies Falling Behind in Vehicle Electrification, What About Domestic SMEs?

The decision by MaleBear Air Conditioning (MaleBear), a second-tier supplier for Hyundai Motor Company and Kia, to withdraw from the Korean market is interpreted as an inevitable choice due to the transition to electrification. As demand for internal combustion engines decreases, global parts suppliers are also struggling to generate profits. Eight out of ten small domestic parts companies have yet to find a path to enter any field and have not even started transitioning to future vehicles.

According to the industry on the 12th, MaleBear has consistently posted losses since entering Korea in 2007. Except for an operating profit of about 200 million KRW in 2022, it recorded operating losses almost every year. The Male Group decided to invest in the Korean market early on, considering the possibility of supplying mid-sized automakers such as GM Changwon Plant and Renault Busan Plant.

However, after the COVID-19 pandemic hit in 2020, production volumes of the three mid-sized automakers sharply declined, and MaleBear’s main customers shifted to Hyundai Motor Company and Kia. As first-tier suppliers to Hyundai and Kia, it was difficult to secure new orders for air conditioning parts modules because strong competitors like Hanon Systems and Hyundai Wia were already established.

In this situation, the parent company’s performance also worsened. Recently, the German automotive industry has slowed down the pace of electrification transition. Accordingly, top-tier German parts suppliers such as Continental, Bosch, and ZF have announced restructuring plans. Future vehicle sectors such as electrification, autonomous driving, and software-defined vehicles (SDV) require astronomical R&D funding but are not easy to generate immediate profits. To transition to future vehicles, unnecessary personnel and businesses had to be decisively cut.

The German Male Group, MaleBear’s parent company, also recorded net losses for four years starting in 2019 and decided to sell off large-scale assets. It plans to close its South Carolina plant in the U.S. by the end of this year and sold its thermostat (temperature control device) business unit to a global investment firm. The closure of the Korean plant is part of this 'trimming fat' strategy.

Lee Hang-gu, president of the Korea Automotive Technology Institute, said, "Recently, as electrification investments in the automotive industry have generally been delayed, multinational parts companies are actively restructuring their business models. Even if these companies invest, they have no choice but to make comprehensive decisions considering incentive policies based on domestic-first principles."

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The withdrawal of global top-tier parts suppliers from Korea is seen as an example of the growing pains caused by the transition to electrification. The difficulties faced by domestic small and medium-sized parts companies, which are vulnerable to external shocks, go without saying.

A survey conducted by the Korea Mobility Automotive Industry Association targeting 350 domestic automotive parts companies found that 62% of companies responded that they are not coping with the transition to future vehicles. Among them, 84% of small companies, 58% of medium-sized companies, and 24% of mid-sized companies had no preparation for the transition to future vehicles, with smaller companies being less prepared. When asked about the difficulties in transitioning to future vehicles, the most common answer (30%) was "I don’t even know which field to enter."

An official from a third-tier parts company based in Gyeongnam said, "Small parts companies cannot arbitrarily decide on large-scale investments without fixed demand sources or product lines. Although demand for internal combustion engine main parts continues steadily, it is daunting to secure new demand sources looking 10 years ahead."

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