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[Editorial] Sputtering industry

Troubles in car industry raise alarm bells

The Korean auto industry, once the locomotive of the national economy, is in trouble. One prime example is that the auto parts industry has asked for a package of more than 3 trillion won ($2.65 billion) in government financial assistance.

The problems facing the car parts companies are so serious that some financial institutions are refusing rollovers and new loans to those in the “high-risk” group.

Indeed, some statistics manifest how serious the crisis is. Sales of the 89 listed car parts suppliers in the first quarter declined 8.6 percent on-year. Their average operating profit rate fell 2.8 percentage points to 0.9 percent. Altogether, operating profits of 42 firms are in the red. One company after another is turning to bankruptcy or court receivership.

Of course, the root cause to the crisis faced by car parts companies is the bad performance of major automakers like Hyundai Motor, Kia Motors, SsangYong Motor and GM Korea.

The controversy over GM Korea’s decision to spin off its research and engineering divisions is adding insult to injury to the local unit of the US automaker, which is estimated to face losses of 1 trillion won this year alone.

An alarm bell had already been rung over the recent performance of Korean automakers, who once lifted the country to become the fifth-largest car manufacturer in the world.

Their combined domestic output stood at 2.9 million units in the first nine months of this year, an 8.4 percent fall from the same period last year. Exports marked 1.76 million units, down 9.3 percent, and domestic sales stood at 1.12 million, a drop of 3.6 percent.

There are some factors cited as main reasons for difficulties faced by Korean automakers: a slowdown of sales in such major markets as the US and China, strengthening of the local currency and the weakening of currencies in emerging economies.

This time again, however, one cannot exclude their fundamental problem: competitiveness. In fact, low competitiveness stemming from high costs, including wages, and low productivity is ascribed as the causes of weakness of the Korean car industry, which has now fallen to the world’s eighth-largest automaker.

For instance, the ratio of wages to sales at Hyundai Motor stood at 15.2 percent in 2016, compared to Toyota of Japan with 7.8 percent and Volkswagen with 9.5 percent. It is also no secret that the productivity of Korean workers remains lower than international standards, including at plants operated by Korean companies overseas.

As seen in the labor protest touched off by the spinoff of the research corporation at GM Korea, Korea’s powerful unions is one of the biggest hurdles to improving competitiveness of Korean automakers. Recently, the government of President Moon Jae-in’s pro-labor policy, like the drastic increase of the legal minimum wage and reduction of the workweek, has added to the problems at the already struggling car industry.

The auto industry, along with such industries as chemicals, shipbuilding, steel and electronics, is a core national sector that has propelled the nation’s export-driven economy.

The car industry alone accounts for 11 percent of total exports and 13.9 percent of the output in the manufacturing sector, and the sector employs 12 percent of the total workforce in the manufacturing sector.

That the car industry employs about 400,000 workers, more than three times the number in the shipbuilding sector, alone shows how bad the situation could be if the crisis further deepens. All concerned parties, government, managements and unions, ought to make concerted efforts to get the industry out of trouble.