‘Nothing short of a death knell’: U.S. tariffs hit small auto firms harder

United States is Korea's largest auto parts importer, with it reaching a record $8.22 billion last year, or 36.5 percent of total shipments. [KOREA JOONGANG DAILY]

 
Park Woo-cheol, 42, who runs a plating company in the industrial city of Daegu for Hyundai Motor, now finds himself pounding the pavement — not because he must, but because a U.S. tariff has already slashed his company’s sales by more than half.
 
“For small business owners like me, this is nothing short of a death knell,” Park, who employs 13 workers at its plating plant largely for automobile wheels, lamented, his voice trembling with frustration. 
 
“When polices turn volatile, automakers like Hyundai and Kia simply freeze their order and take a wait-and-see approach.” 
 

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Park is never alone, as the 15 percent tariffs on automobiles and auto parts makers tend to take a harder toll on tens of thousands of other small- and medium-sized enterprises. Unlike big manufacturers that can offset some of the impact through U.S.-based production sites, smaller companies with operations rooted entirely in Korea have little room to maneuver.
 
Korea is home to roughly 20,000 auto parts manufacturers with more than 210,000 employees. Of them, some 88 percent are small businesses with annual revenues of less than 10 billion won ($7 million), or those called subcontractors, or second-, third- and even fourth-tier vendors.
 

Cars wait to be exported at a port in Pyeongtaek, Gyeonggi. [YONHAP]

 
Tariffs, the true cost: Job loss
For Shin Woo-taek, who operates a factory that manufactures frames for battery packs, Hyundai’s pursuit of parts localization is a nightmare unfolding in real time.
 
“If Hyundai opts to cease using Korean-made parts and sources everything locally from its U.S. plants, we’ll be left on the streets,” Shin said, adding that he still has “seven workers to pay salaries” in a plant in Cheongju, North Chungcheong.
 
“Can you imagine how many people in the provinces depend on Hyundai just to make a living? For the heads of those households, this is a fate worse than death.”
 
Hyundai said its second-quarter operating profit fell by 828.2 billion won due to tariffs, and 20 percent of the fall was driven by parts sourcing. It set up a task force to review optimal sourcing strategies for more than 200 components as part of a gradual shift toward procuring parts in the United States to avoid tariffs.
 
Some major companies are even turning to Chinese suppliers, aiming to save costs. 
 
“Even the plating work for Hanwha’s electrical components — coatings that block electric flow — was recently moved to China,” Park said.
 

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GM Korea's factory in Bupyeong District, Incheon [YONHAP]

Burden shift to parts suppliers
Even relatively large top-tier suppliers aren’t immune — they, too, are feeling the squeeze.
 
“For second- and third-tier vendors, failure to receive payment puts them at risk of bankruptcy. So, we are burdened with paying the promised amounts, even if it means suffering from bank interest and other financial repercussions,” said an executive from a local first-tier auto parts manufacturer who supplies Hyundai Motor. 
 
“The automakers, on the other hand, are adopting a wait-and-see approach, which means the full responsibility falls squarely on us.”
 
Hyundai Motor has about 350 top-tier vendors, including its own affiliate Hyundai Mobis, which amounts to 5,000 firms when including the second to fourth tiers of its supply chain.
 
GM Korea, the Korean operation of General Motors, has some 276 top-tier suppliers. Its total subcontractors number 3,000.
  
When tariffs rise, companies must either endure lower profit margins or raise prices — options that are often untenable for businesses with limited capital and virtually no bargaining power. The cost, in many cases, is passed down to them in full.
 
The operating profit margin of Korean auto parts makers was a mere 3.62 percent as of last year, according to a study by the Korea Automotive Technology Institute on 213 auto parts suppliers with annual revenue exceeding 10 billion won.
 
That’s significantly lower than the average operating profit margin of 7.5 percent among 103 parts suppliers ranked in the top 2,000 global companies by the European Union.
 
“Parts suppliers are hit by tariffs, bear the brunt of cost shifts from automakers and face a decline in demand, leading to a compounded impact,” said Park Tae-hyun, director at the automobile division at the Ministry of Trade, Industry and Energy.
 
 

Yoon Jin-sik, left, chairman of the Korea International Trade Association, inspects an auto parts maker's factory in Busan in May. [KOREA INTERNATIONAL TRADE ASSOCIATION]

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From boom to blow
The fallout from the new tariffs is already unfolding, with Korea particularly vulnerable due to its decades-long reliance on auto parts exports to the United States.
 
Korea’s auto parts exports to the United States reached a record $8.22 billion last year, with the United States accounting for 36.5 percent of total shipments — making it Korea’s largest export destination, according to data from the Korea International Trade Association.
 
But the impact on exports is already beginning to take shape. From January to May this year, shipments to the U.S. market fell by 6.1 percent.
 
Based on last year’s export volume, a 15 percent tariff could cost Korea’s auto parts industry an estimated $1.23 billion annually.
 
 

Export vehicles are parked at Pyeongtaek Port in Pyeongtaek, Gyeonggi, on July 31. [NEWS1]

 
Furthermore, the U.S. Commerce Department is reviewing a plan to expand the tariff-subject parts, which total 130 as of now. There are 322 product categories classified as automotive parts, according to the Harmonized Tariff Schedule used by the Office of the United States Trade Representative. If the list of tariffed items is expanded, duties could be imposed even on components not formally categorized as auto parts or those with only indirect links to the industry.
 
“Projected direct losses are anticipated to exceed 2 trillion won annually, with the broader indirect impact on sales likely to be even more substantial,” said Lee Taek-seong, chairman of the Korea Auto Industries Coop. Association.
 
“This marks a pivotal moment for preserving the integrity of the automotive supply ecosystem,” Lee added. “A bifurcated measure is essential — one that provides differentiated support tailored both to firms capable of localizing production and those for whom localization remains infeasible.”
 

BY SARAH CHEA [chea.sarah@joongang.co.kr]