Half-idle pipe plant shows just how bad it is in auto sector

Industry

Published: 10 May. 2020, 18:01

Half-idle pipe plant shows just how bad it is in auto sector

A signboard at Korea Fuel-Tech Corporation's factory shows only three of the six production lines are in operation. [KIM YOUNG-JOO]

ANSEONG, Gyeonggi — Three of six production lines at Korea Fuel-Tech Corporation’s main factory were idle on April 29. Before the coronavirus outbreak hit, the plant, which is located in Anseong, Gyeonggi, and makes fuel tank pipes for automobiles, used to operate 22 hours a day.

Now, half of the equipment is going unused and is being cleaned, not because it's all that dirty, but because the employees at the factory needed something to do.

“The operation rate of the factory fell by 60 percent compared to our normal days, so the equipment sit idle more than they used to,” said Kim Hyun-ki, head of the factory. “Those who were responsible for managing the production line now spend their time cleaning the equipment.”

Korea Fuel-Tech Corporation is a supplier of filler neck fuel tank pipes for major automakers in Korea, such as Hyundai Motor, Kia Motors, Renault Samsung Motors and GM Korea.

Filler necks are bent metal pipes that connect to the fuel intake port used for gassing up and the fuel hose that leads to the gas tank.

“In March and April, we operated the factory just to pile up the inventory,” Kim said. “The inventory of filler necks has more than doubled recently to 120,000 units.”

In a corner of the plant sits a specially-designed production line making filler necks for Genesis vehicles for the U.S. market. Genesis is a Hyundai Motor luxury brand. The special line costs 4 billion won ($3.3 million) but is currently unused.

A 4 billion won production line specially built for Genesis model filler necks sits idle. [KIM YOUNG-JOO]

Korea Fuel-Tech Corporation achieved 400 billion won in sales last year, manufacturing filler necks and carbon canisters. The company has 10 percent of the global market for carbon canisters, ranking fourth. Carbon canisters decrease the amount of air pollution emitted and are especially important for vehicles bound for countries with high pollution standards.

The production line for carbon canisters, located five minutes from Fuel-Tech's main factory, has also been running a limited scheduled.

“Sales in March decreased by 15 to 20 percent year-on-year, and in April it dropped by 35 to 40 percent,” said Kim Jae-san, head of the auto components company.

Kim said the workers at the factory are only called in four days a week, but that may not even be possible in May.

Korea Fuel-Tech Corporation applied for a loan recently, expecting that it will face severe liquidity issues in May.

“We have finished the first two steps needed for a loan application and are ready to go to the third step,” Kim said. “I am just worried that the workers will feel unstable in a situation like this.”

Kim says that the situation for his company is not as bad as for others.

“Second- or third-tier auto suppliers with fewer than 30 employees will be suffering more,” Kim said. “I have been prepaying these second- or third-tier suppliers considering their situation.”

Lee Hang-ku, a senior researcher at the Korea Institute for Industrial Economics and Trade agrees with Kim.

“If a first-tier supplier suspends operation for one day, second- or third-tier suppliers need to cancel their operation for an even longer period of time,” Lee said. “They are not even voicing their struggles on concern that their workload will decrease even more.”

According to a survey of 96 auto suppliers by the Korea Automobile Manufacturers Association, 92.7 percent of them said their sales have decreased recently compared to last year. A total of 94 percent said they are having problems with liquidity.

A total of 69.5 percent said deteriorating sales due to a drop in demand is behind the liquidity crunch.

“Operating profit rates for first- and second-tier suppliers falls between 2 to 4 percent, but that for third- to fourth-tier suppliers is below 1 percent,” said Kim Pil-soo, an automotive engineering professor at Daelim University. “It means that if their business doesn’t perform well just for a single month, they are not able to pay their workers.”

In Korea, 350 first-tier vendors are registered with Hyundai Motor and Kia Motors. The figure exceeds 8,000 when including second- and third-tier suppliers.

The state government has been churning out support measures for automotive companies, but the hurdles are still high for the suppliers to get their hands on the funds.

“After Covid-19 broke out, our company applied for a loan from six financial companies, but we were rejected by every one except for Korea Development Bank,” said one employee in charge of finance at one of the first-tier auto suppliers.

“A credit rating of below double-B was the reason for the rejection. The loan we are processing at Korea Development Bank for 500 million won also falls largely short of the 3 billion won we need for the company’s operation. The interest rate was also 6 percent, which is higher than we expected.”

The Bank of Korea recently announced a plan to establish a special purpose vehicle for the purchase of 20 trillion won of corporate bonds. Details on how it would operate hasn’t been decided yet.

Korea Institute for Industrial Economics & Trade rolled out a survey on 356 auto suppliers recently on how much operation fund it needs for normal business. Recipients which were not affiliated to Hyundai Motor or Kia Motors answered that they need a minimum of 17 trillion won until the end of this year to operate normally.

“Loans expiring in July total 6 trillion won, and the operating funds suppliers need through the end of the year amounts to 11 trillion won,” said researcher Lee. “In addition to extending loans, a total of 10 trillion won needs to be injected in the auto components industry before summer in order for the industry to survive.”

The auto industry itself is in the red.

Sales at Hyundai Motor and Kia Motors halved in April. Hyundai Motor sold a total of 159,000 units in April, recording a 56.9 percent year-on-year drop. In Korea, its sales were 71,042 units, which is a 0.5 percent on-year drop, while in the overseas market, it sold 88,037 units for a 70.4 percent on-year drop.

Kia Motors sold 50,361 units in Korea, which is 19.9 percent more from a year ago, but in the overseas market it sold 83,855 units, which is a 54.9 percent year-on-year drop.

“The Korean auto industry put up a good fight in a very bad situation, but for Hyundai Motor and Kia Motors, which rely heavily on exports, it is hard to say that the worst is over. China, which went through the coronavirus pandemic earlier, is not experiencing a V-shape rebound, but a U-shape rebound.”

BY KIM YOUNG-JOO [jin.eunsoo@joongang.co.kr]