🚨 Korean Automobiles' Price Competitiveness Plummets... Parts Suppliers Also Hit by Domino Effect
Today Korean Economic News | 2025.02.12
📌 Korean Automobiles' Price Competitiveness Plummets... Parts Suppliers Also Hit by Domino Effect
💬 Korean export companies are on edge as the Trump administration considers imposing tariffs on Korean automobiles, semiconductors, and pharmaceuticals. Following the imposition of tariffs on steel and aluminum, which are raw materials for automobiles, there are concerns that if additional tariffs are imposed on finished vehicles, demand in the US may slow due to price increases. As a result, parts suppliers are also likely to suffer sequential damage.
1️⃣ Easy to Understand
The Trump administration is showing movements to impose tariffs on Korean automobiles. I'll explain the impact this has on our economy and its ripple effects in simple terms.
Tariffs are a kind of tax imposed on products imported from foreign countries. If additional tariffs are imposed on Korean automobiles, the prices of Hyundai or Kia cars sold in the United States will inevitably rise. For example, if a 10% tariff is imposed on a Hyundai car that was previously sold for $30,000 in the US, the price will increase to $33,000.
What happens when prices rise like this? Since American consumers have to pay more for cars with the same performance, they are more likely to choose American-made or other countries' automobiles instead of Korean cars. As a result, sales of Korean automobiles in the US will decrease.
The problem doesn't end there. The raw materials for automobiles, steel and aluminum, are already scheduled to have a 25% tariff imposed, causing the production cost of automobiles itself to rise. If additional tariffs are added to finished vehicles, this means prices will increase doubly.
And this impact doesn't stop at automobile manufacturers. If Hyundai or Kia's exports to the US decrease, the numerous small and medium-sized partner companies that supply parts to them will also be hit by reduced orders. One automobile consists of about 20,000-30,000 parts, supplied by approximately 400-500 partner companies. If completed vehicle exports decrease by 10%, a chain effect occurs where the sales of all these partner companies also decrease.
The bigger problem is that this is not limited to the automobile industry. The Trump administration is considering additional tariffs on Korea's major export items such as semiconductors and pharmaceuticals, threatening core industries across our economy. Given the high export dependency of the Korean economy, the spread of such protectionist measures could deliver a significant shock to the entire economy.
2️⃣ Economic Terms
📕 Export Dependency
Export dependency is an indicator showing the proportion of exports in a national economy, with Korea having a relatively high export to GDP ratio.
- As of 2024, Korea's export dependency is about 40%, higher than the OECD average (28%).
- The higher the export dependency, the more vulnerable a country may be to the global trade environment and the spread of protectionism.
📕 Price Competitiveness
Price competitiveness refers to a product's ability to compete in terms of price in the market, affected by various factors such as cost, exchange rates, and tariffs.
- Tariff imposition directly increases the price of export products, weakening price competitiveness.
- Korean automobiles have competed in the US market with reasonable prices for their quality, but this advantage may be weakened by tariff imposition.
📕 Automotive Parts Suppliers
Automotive parts suppliers are companies that provide parts to automobile manufacturers, forming an important pillar of the Korean automotive industry.
- There are about 3,000 automotive parts suppliers in Korea, with approximately 400-500 being first-tier suppliers.
- Most parts suppliers are small and medium-sized enterprises, directly affected by export fluctuations of automobile manufacturers.
📕 Protectionism
Protectionism refers to a trade policy that restricts imports through measures such as imposing tariffs to protect domestic industries.
- The Trump administration's 'America First' stance has strong protectionist tendencies.
- Protectionism may protect domestic industries in the short term, but in the long term, it can lead to global trade contraction and reduced economic efficiency.
3️⃣ Principles and Economic Outlook
💡 Impact and Mechanism of Automobile Industry Tariff Imposition
The Trump administration's review of automobile tariffs is expected to have complex economic and industrial impacts beyond simple trade measures.
First, tariff imposition directly affects the price structure of Korean automobiles. Automobiles are products with complex value chains, and if additional tariffs are imposed on finished vehicles in a situation where 25% tariffs are already scheduled to be imposed on raw materials (steel and aluminum), a double cost increase occurs. When the average price of vehicles that Hyundai and Kia export to the US is around $30,000, a 10% tariff means an additional cost of $3,000 per vehicle. This becomes a factor that seriously weakens price competitiveness in the US market.
Second, price increases are likely to lead to reduced demand. According to automotive industry experts, a 10% price increase can bring about a 7-8% decrease in demand on average. Considering that Hyundai and Kia's market share in the US was about 10% in 2024, price increases due to tariffs could lead to a decline in market share along with a decrease in absolute sales volume. The impact is expected to be particularly large in the mid to low-price segments which are sensitive to price.
Third, this impact spreads throughout the entire parts supply chain. One automobile consists of an average of 20,000-30,000 parts, supplied by various tiers of partner companies. A decrease in finished vehicle production directly leads to a reduction in supply volume for these parts suppliers. Particularly, parts suppliers with high dependency on specific automobile brands may suffer more serious damage. The sequential impact extends beyond large first-tier suppliers like Hyundai Mobis and Hyundai Wia to second and third-tier suppliers who provide parts to them.
Fourth, the impact of tariffs can be differentiated by vehicle type and production location. Hyundai and Kia produce some models in their Alabama and Georgia plants in the US, and these models may escape the tariff impact. On the other hand, premium brands like Genesis and special models still have a high proportion being produced in Korea and exported, so they may be greatly affected by tariffs. This means that the impact can vary according to a company's product portfolio and production strategy.
Considering these complex impacts, automobile tariff imposition is expected to act as an important policy variable that can bring significant changes to industrial structure and competitive environment beyond simple price increases. Especially given the characteristics of the automobile industry where global value chains are closely connected, such impacts are likely to spread widely across borders.
💡 Domino Crisis of Automotive Parts Suppliers and Impact on Industrial Ecosystem
The automobile industry forms an industrial ecosystem where numerous parts suppliers are organically connected centered around automobile manufacturers, and the shock from tariffs has ripple effects throughout this entire ecosystem.
First, the structural characteristics of Korea's automotive parts industry can amplify the crisis. Most of Korea's automotive parts suppliers are small and medium-sized enterprises with limited financial resources and crisis response capabilities. Also, many suppliers have high dependency on specific automobile brands. According to the Korea Automobile Industry Association, about 70% of first-tier suppliers have a sales dependency of over 50% on specific automobile manufacturers. This structural vulnerability can lead to sequential management crises for suppliers when finished vehicle exports decrease.
Second, the crisis of parts suppliers has a direct impact on employment and regional economies. Korea's automotive parts industry creates about 230,000 direct jobs, and its influence is even greater when related industries are included. Particularly, regional economies such as Ulsan, southern Gyeonggi, and Chungcheong regions, where Hyundai and Kia plants and their suppliers are concentrated, have high dependency on the automobile industry, making it highly likely that industry contraction will lead to regional economic recession.
Third, bankruptcy of marginal companies and industrial reorganization may accelerate. Parts suppliers who have already invested significant costs to adapt to industry changes such as electric vehicle transition and digitalization may find it difficult to bear the additional shock of export reduction. Particularly among second and third-tier suppliers lacking their own technological capabilities and overseas expansion capacity, management crises and bankruptcies may increase. This may lead to employment instability and industrial gaps in the short term, but in the long term, it could also be an opportunity for industrial restructuring and competitiveness enhancement.
Fourth, global supply chain reorganization and localization strategies are expected to accelerate. To avoid tariff risks, automobile manufacturers are likely to expand the proportion of US production and demand accompanying advancement of key parts suppliers. It is already known that Hyundai and Kia are considering additional plant establishment and investment expansion in the US. This can be an opportunity for large suppliers with financial resources and overseas expansion capabilities, but it may be an additional threat factor for domestic small and medium-sized suppliers.
Fifth, the importance of technological capability and diversification strategies will be further highlighted. Through this crisis, the vulnerability of suppliers with high dependency on specific automobile manufacturers or specific markets will be revealed. For survival and growth, various risk management strategies are needed such as securing independent technological competitiveness, diversifying transaction partners, and expanding business to non-automotive sectors. Particularly, companies with core parts development capabilities in future mobility fields such as eco-friendly vehicles and autonomous driving can find new opportunities even in the midst of crisis.
As such, the impact of automobile tariffs extends beyond finished vehicles to have ripple effects on a wide range of industrial ecosystems, and it can come as a greater shock especially to vulnerable small and medium-sized suppliers. This suggests that the issue requires policy attention and response in various aspects beyond simple corporate-level problems, including employment, regional economies, and industrial structure.
💡 Industry Crisis Response Strategies and Policy Directions
Multi-dimensional strategies at government, industry, and corporate levels are needed to respond to the spread of protectionism in the automobile industry.
First, trade diplomacy and policy support at the government level are needed. Above all, active trade negotiations with the US should be sought to seek tariff exemption or minimization. Legal responses based on the Korea-US FTA, negotiation strategies emphasizing investment expansion and job creation contribution in the US automobile sector, etc., can be considered. Parallel responses utilizing multilateral trade norms such as WTO complaints should also be pursued. Domestically, policies are needed to mitigate short-term shocks through emergency liquidity support for automotive parts suppliers, expansion of export insurance, and financial support programs.
Second, joint response and ecosystem strengthening at the industry level are important. A system is needed to jointly respond to the crisis by strengthening win-win cooperation between automobile manufacturers and parts suppliers. This requires cooperation such as fair adjustment of supply prices, technology sharing, and joint exploration of overseas markets. Also, efforts are needed to enhance the competitiveness of the entire industry by building R&D infrastructure, testing and certification facilities, information sharing platforms, etc., that can be jointly utilized by companies in the industry.
Third, structural quality improvement and business strategy reestablishment at the corporate level are urgent. Automotive parts companies need to pursue diversification strategies to lower dependency on specific automobile manufacturers or markets. For this, they can explore expansion of supply to global automobile manufacturers, strengthening aftermarket business, and entry into new industry fields. Also, efforts are needed to strengthen essential competitiveness through digital transformation, eco-friendly technology development, and production efficiency.
Fourth, in the mid to long term, strategic transition is needed to respond to paradigm shifts in the automobile industry. In line with changing industry trends such as electric vehicles, autonomous driving, and mobility services, existing parts companies also need to pursue business model innovation and technological capability enhancement. Particularly important is securing capabilities in new growth areas such as software, electronics, and batteries, and human resource development and organizational culture innovation for this transition should also be pursued in parallel.
Fifth, localization and risk management strategies in preparation for global supply chain reorganization are important. The spread of protectionism will accelerate the reorganization of the global automotive industry's supply chain. Companies need to respond to these changes through securing production bases in major markets, diversifying procurement sources for core parts, and market-specific customized product strategies. Considering the importance of the US market in particular, various forms of localization strategies such as direct investment, joint ventures, and technology alliances should be actively considered.
Through these multi-layered response strategies, the Korean automobile industry can overcome the short-term threat of protectionism and further take it as an opportunity for quality improvement and competitiveness enhancement in response to the paradigm shift in the industry. Particularly, organic cooperation among various actors such as the government, large companies, small and medium-sized enterprises, and research institutions will be a key element for the success of this transition.
4️⃣ In Conclusion
The Trump administration's review of tariff imposition on Korean automobiles is a significant challenge factor that can affect the entire Korean automotive industry ecosystem beyond simple trade policy. Particularly in a situation where tariffs on steel and aluminum, which are raw materials for automobiles, are already scheduled, additional tariffs on finished vehicles act as a double burden, likely leading to weakened price competitiveness and decreased exports.
This crisis can bring about a domino effect spreading beyond automobile manufacturers to parts suppliers. Korea's automotive parts industry is an important manufacturing base with about 3,000 companies employing 230,000 people, and given that most suppliers are small and medium-sized enterprises, their shock absorption capacity is limited. Especially second and third-tier suppliers with high dependency on specific automobile brands and lacking independent technological capabilities may be exposed to greater risks.
In the short term, government-level trade negotiation efforts and financial support for companies are important. Through active dialogue with the US, tariff exemption or minimization should be sought, and shock should be mitigated through emergency liquidity support, export insurance expansion, etc., for companies in crisis. Also, building a system to jointly respond to the crisis by strengthening win-win cooperation between automobile manufacturers and parts suppliers is necessary.
In the mid to long term, this crisis should be taken as an opportunity for industrial quality improvement. Parts companies should actively pursue diversification strategies to lower dependency on specific automobile manufacturers or markets, digital transformation and eco-friendly technology development, and localization strategies in response to global supply chain reorganization. Particularly essential are business model innovation and technological capability enhancement in line with paradigm shifts in the automobile industry such as electric vehicles and autonomous driving.
Government policy also needs long-term perspective support for industrial competitiveness enhancement beyond short-term crisis management. The future growth foundation of the automobile industry should be built through expanded R&D investment, industrial infrastructure construction, global talent development, and regulatory rationalization. Also, complementary measures for employment stability and regional economic revitalization along with industrial restructuring should be considered.
In conclusion, the Korean automobile industry stands at a significant turning point amid the spread of protectionism in the global environment. Beyond overcoming short-term crises, a strategic approach is needed at this point to strengthen global competitiveness and prepare for the leap to the future mobility industry. Wisdom and cooperation to turn crisis into opportunity together among automobile manufacturers and parts suppliers, government and private sectors, are more important than ever. The history of success that the Korean automobile industry has achieved in the global market over the past decades suggests that it has the strength to wisely overcome this crisis as well and take a leap forward.