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Following the news that South Korea will provide US$830m from state fund to support auto parts suppliers;
Animesh Kumar, Director of Automotive Consulting at GlobalData, a leading research and consulting company, offers his view:
“Auto components is the third industry to receive support from state funds after shipping and the airline industry. Companies with minimum debt of US$412m (KRW500bn) and payroll of 300 will be eligible for the state relief fund. The trade ministry has also announced Special Debt Guarantee Program of over US$250m (KRW300bn) to aid small and mid-sized auto parts companies.
“The decision to offer stimulus to the auto parts suppliers comes as a much needed boost to the industry, which is marred by supply chain disruptions and sharp decline in overseas demand. OEMs and component manufacturers have both been working at a reduced capacity since March. Earlier, it was due to the country practising social distancing and restricted movements and later in order to strategically curb oversupply amid declining overseas demand.
“Passenger vehicle exports from South Korea have been significantly impacted by the demand slump created by COVID-19, especially in Europe and the US, which are key export markets for the local manufacturers. OEMs cutting down production has led to a domino effect on domestic as well as export demand for components. According to Ministry of Trade, Industry & Energy, auto parts exports from South Korea declined by 66.7% year-on-year in May 2020, followed by a decline of 49.6% in April. Several production plants in major export regions either continue to remain shut or have not returned to the pre-COVID levels.
“Auto parts and components industry is the backbone of South Korea’s domestic auto markets as well overall auto exports from the region. Any help to the component suppliers will play a key role in keeping the automotive value chain robust. If component suppliers find it difficult to overcome working capital issues and decide to fold, it would delay the recovery further. Hence, it is important that key automotive manufacturing hubs across the globe also extend similar support to the suppliers.”