Tucked between high-tech, high-priced Japan and developing, low-cost China, South Korea is emerging as a sweet spot for the global auto-parts industry. More than 200 foreign-owned manufacturers have set up shop, and the guest list reads like a who's who of car parts, from Visteon (VC) and Delphi (DPH) of the U.S. to Robert Bosch of Germany and Japan's Denso (DNZOY).
Why the influx now? The 1997-98 Asian financial crisis made Korean assets cheap, so global giants were able to snap up scores of struggling car-parts companies. The U.S. and European entrants brought along fresh capital and state-of-the-art manufacturing practices, helping to elevate local quality, says Cho Chuel, auto-industry specialist at the state-funded Korea Institute for Industrial Economics & Trade. To a growing list of customers in both Asia and the West, Korea's parts makers now offer higher quality than their Chinese counterparts at costs that are lower than in Japan. "You can find a balance between quality and costs in Korea," says Lee Dae Un, president of Delphi Korea.
The success of Korea's homegrown auto brands has also helped. Hyundai Motor Co. and affiliate Kia Motors Corp. together saw sales rise by 12% last year, to 3.2 million vehicles -- three-quarters of them shipped overseas. Other auto industry hot spots may be emerging, "but you don't have the likes of Hyundai in Thailand or Mexico," says Kim Ki Chan, professor of motor-industry economics at the Catholic University of Korea.
Korea's surging car brands owe something to foreign parts makers. Hyundai was once the butt of jokes about shoddy workmanship, but in recent years it has become a global leader in reliability, partly thanks to the increased availability of top-notch components from foreign suppliers. Today, foreign-controlled companies supply a third of the parts that Korean carmakers use, up from less than 20% in the 1990s, Kim says.
The "just right" formula for price and quality is proving lucrative. Sales of Korean-made auto components will rise 6.4%, to $36.4 billion, in 2005, up from $34.2 billion last year, according to the Korea Auto Industries Cooperative Assn. (KAICA). With seven plants in Korea making everything from air bags to fuel injectors, Delphi Corp.'s sales in the country climbed 33% last year, to $1.5 billion, representing some 45% of its Asia-Pacific revenues. Delphi anticipates a 20% surge this year.
Though most of these components are bolted into cars in Korea, a growing share go offshore. KAICA forecasts parts shipments abroad will climb to $7.2 billion this year, or nearly 20% of output, up from $5.9 billion, or 17%, last year. Many of those parts go to garages that service Korean-made cars, but more and more are headed to foreign car factories. General Motors Corp. (GM), for example, bought $490 million worth of steering columns, headlights, and other parts from 50 Korean companies last year. The U.S. giant plans to boost its Korean parts purchases by 25% this year.
Korea's parts makers appear to realize growth like this can't last forever. The biggest threat is China, which is moving quickly to close the gap in engineering quality and design innovation. "We're witnessing far greater investment in China by global parts suppliers," says Chung Ha Seung, senior managing director at Korea Automotive Motor Corp. (KAMCO), a wholly owned unit of Bosch that makes electric motors. Another question mark is Korea's powerful auto workers' union, which has struck to oppose investments in labor-cutting automation.
For now, though, many foreign players are planning to deepen their presence in Korea. Bosch plans to spend $149 million over the next three years to build a diesel engine parts plant. Halla Climate, 70%-owned by Visteon Corp., earmarked $90 million this year to increase compressor production capacity. And Delphi plans to invest up to $20 million to build a computer-simulated crash-test lab so it can better serve carmakers across Asia. Maybe being stuck between Japan and China isn't so bad after all.
By Moon Ihlwan in Seoul