A Brief History of Korean and ASEAN Automotive Spare Parts, Service Providers
By MITCH R. CONFESOR
MANILA, 15 February &#; Beyond the soft power of South Korea in popular culture and entertainment scenes, the Northeast Asian nation has proven its staying power in the automotive industry and its corresponding aftermarket sector. The following is a brief early history of South Korea&#;s rise in the automotive spare parts and services industry, based on a Cambridge paper on global automotive supply chain trends and perspectives. (F.Veloso, MIT )
Even before the Asian financial crisis, the Korean auto industry was already growing dramatically. That year, automobile production accounted for about 10% of total South Korean manufacturing production, as well as 3.7% of Gross Domestic Product (GDP), employing at least 358,000 workers. Between to , the Korean automobile industry grew five times as fast as the country&#;s GDP. When the crisis came, lumping demand at home and poor exports brought the capacity utilization rate of Korean automakers down to nearly 40%, while some autoparts makers had gone bankrupt, spurring a radical transformation of the entire sector.
As of October , South Korean manufacturers Hyundai and Kia kept dominating around seven-tenths of the local market in over two decades. The bestselling Korean vehicle of the past year is the sleek Hyundai Grandeur sedan, overtaking the previous topnotcher and mass-market friendly Hyundai Porter in .
Also within Korea, the Kia Carnival and the Kia Sportage were fourth and fifth, respectively, then the Hyundai Avante, the Kia Bongo, Kia Seltos, Kia Ray and the Genesis G80 closing out the Top 10. Compared to 20 years earlier, no Japanese or any other non-Korean car entered the Top 10 within the Korean market, reflecting strong customer loyalty for local brands.
Big 5 and the Bigger Mergers
Before the Asian crisis, South Korea had been home to five carmakers &#; Hyundai, Daewoo, Kia, Ssangyong and Samsung.
Together, they sold 1.7 million passenger cars in the domestic Korean market plus another 1.3 million vehicles overseas. As of the year , no independent automotive manufacturer or non-fully Korean original equipment manufacturer (OEM) remained in Korea as a manufacturing hub. With the drop in demand that drove domestic car sales down to less than 780,000 by , the crisis left local OEMs facing crushing debt loads and a massive overcapacity, aside from an ever more competitive global market.
As a result, a dramatic process of mergers began taking place. First to happen was in , when Hyundai bought Kia, then Daewoo took over Ssangyong, and in , Renault of France acquired Samsung, the first buyout of a local automobile producer by a foreign company. Then the Americans entered the local scene. Ford eventually got Daewoo/Ssangyong by while DaimlerChrysler formed an alliance with Hyundai where it got a 10% ownership stake.
As the leader in the local Korean market, Hyundai was aiming to develop quality small cars for global buyers. By the turn of the 21st century, Hyundai controlled about 45% of the domestic market while Kia had around 25%, both dominantly controlling 70% of the Korean auto industry.
Earlier in the second half of , Hyundai and Kia consolidated their research and development (R&D) organizations, even slashing the number of manufacturing platforms from 23 to seven. Under a then new agreement, DaimlerChrysler, Hyundai and even Mitsubishi from Japan would develop and produce a range of world-class, high quality small cars to compete in key global markets. Hyundai would also then spin off its commercial vehicle division as a 50-50 joint venture with DaimlerChrysler.
For their part, Renault and Samsung together with Nissan of Japan began pursuing a similar strategy, aiming to increase the volume of Samsung&#;s brand from a paltry 5,000 in to 400,000 by the year .
Economic Turnaround
Following the Asian crisis of /, the quick economic turnaround together with the start of new international ties and strong recovery in the rest of Asia, local automotive production and exports were on the rise.
With the important presence of Korea&#;s brands in Asia, pundits at the turn of the millennium saw the prospects for assembly growth over the next decades. In particular, they saw the Korean alignment with global players enabling more resources and upgraded technology. Within the first six months of , Korean production swelled another 24.5% growth. This was after a 41% increase in , where it reached 2.85 million vehicles. Of these, 1.5 million were exported, according to data from the Korea Auto Industries Corp. Association (KAICA).
By the turn of the 21st century, over a thousand components have begun supplying Korean automakers. More than 90% of this act of automotive aftermarket sourcing came locally from Korean spare parts suppliers, according to trade data from KAICA. Specifically, at least 1,339 Korean companies supplied automotive parts and accessories to seven (7) Korean motor vehicle manufacturers and two (2) major service companies affiliated with Hyundai and Kia.
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In particular, domestic production of Korean automotive parts and accessories was approximately $18.9 billion in , with 1.2 billion in exports. Because local players dominated the domestic OEM market, spare parts sourcing mostly came locally. Korean production accounted for roughly 94% of the automotive parts and accessories market. However, the Korean automobile industry still depended largely on foreign suppliers for important components and parts, such as transmissions as well as parts for engine, brakes and automotive body.
In fact, Korean OEMs and local component suppliers have been working since the s to improve their component quality and productivity in the local autoparts industry. By the turn of the century, Koreans as well as Taiwanese were at least leading among aftermarket suppliers in the region after Japan.
Even 20 years ago, Korean auto parts and components have earned quite a reputation for quality and competitiveness in the world market. Back then, the rest of the globe considered Korean suppliers as still behind world standards. Because the Korean automotive parts industry has been playing an importantly rising role in the development of automobiles, experts were encouraging further effort in research and development.
Rest of ASEAN
In the four largest Association of Southeast Asian Nations (ASEAN) markets of Indonesia, Malaysia, Thailand and the Philippines, following the - financial crisis, total vehicle sales recovered strongly in , totaling about 550,000 units. Earlier, sales in the ASEAN region dropped 63% from nearly 1.5 million units in to about 450,000 units in . Back in , experts forecast a 16% average annual growth to , with commercial vehicles leading at an average yearly growth of over 19%.
After both Thailand and Malaysia recovered strongly in the second half of , Vietnam later began experiencing strong growth in vehicle sales, particularly domestic sales. Aside from the financial crisis, Indonesia was the hardest hit in with political and social upheaval adding to the economic difficulties, but had quickly recovered.
In the first half of , Thai vehicle demand increased by 43% over the same period in . By the end of , Thai and Malaysian vehicle growth were up between 16% and 19% from . Meanwhile, total Indonesian vehicle sales rose by 455% in the first half of to just below 127,000 units from under 23,000 in the same period in . In those years, the Philippines faced strong political upheavals ending with the shift to a different presidential administration by January .
Back in , the top positions in the ASEAN automotive market were mostly Malaysian, with Japanese brands Toyota, Isuzu and Mitsubishi closely following. Malaysian models like those from the Proton brand then held the Top 3 positions, almost entirely due to their strong dominance of the car market in their home country.
Meanwhile, the Isuzu and Toyota Hilux pickup trucks, both built in Thailand, led the ASEAN commercial vehicle market then. The Toyota Kijang, the largest-volume vehicle in Indonesia, and the Daihatsu Terios followed next. Overall, apart from Malaysian manufacturers, only three non-Japanese cars &#; the German BMW 3-series, as well as the Korean models Kia Sephia and Hyundai Accent/Excel &#; were then in the Top 20 selling models in the ASEAN region.
In terms of market shares in , Malaysia&#;s own Proton had a commanding 26% lead, with Japanese topnotcher Toyota at 22% and Malaysian brand Perodua at 13% in the Top 3. Japanese brands Isuzu at 9%, Mitsubishi at 8%, Honda at 6% and Nissan at 5% followed next. These figures back then also reflected the slowness of European and American manufacturers in taking up the challenge to those from the ASEAN region, although the situation began to change slightly with increasing output in the Thai plants of Ford/Mazda and GM.
Laissez Faire Impacts
Also back then, Thailand was the country opening up faster than the rest and adopting a laissez-faire strategy, having dropped local equity participation and content requirements. Within ASEAN, Thailand was the first country in the region to open its doors to the world&#;s biggest automakers. Since the onset of , carmakers in Thailand were free of a requirement to buy at least 54% of their autoparts locally. They could then import from the lowest-cost, highest-quality and most-innovative aftermarket producers anywhere in the world.
The aim of the Thai government then was to make the country a regional export platform for all major OEMs, spurring local automotive industry growth. Yet by lifting local content requirements, auto multinationals like GM, DaimlerChrysler and BMW began obtaining parts globally, thereby buying even far less from domestic Thai suppliers.
On the downside, freeing the autoparts market and increasing aftermarket imports led to a large number of local emerging or less competitive firms facing a financial crunch and going to eventual bankruptcy, as they could no longer operate under protective governmental policies. And with the expertise, experience, brand acceptance and economies of scale that larger and more established players have already been enjoying, these smaller or less competitive players faced further depletion in market share.
A quarter of a century after the financial crisis, Asia Pacific already dominated the global automotive market size with a share of 28.5% in , delivering significant growth from onwards to . Advanced technology usage in the fabrication of auto aftermarket parts, a surge in consumer and passenger automobile production and sales, as well as the digitalization of automotive component delivery services have been among the factors that market experts have anticipated to spur automotive and aftermarket sales in the Asia Pacific region.
Replacement Parts Insights
In terms of market size by , the segment involving replacement parts began dominating the market with a share of around 48.3%. Among those leading the pack have been aftermarket replacement parts suppliers comprising various accessories suppliers for tires, lubricants, brakes and other component replacement parts. In particular, the tire segment had been the largest segment among replacement parts, and would remain the dominant segment on account of the low replacement cycle of tires in comparison with other component counterparts. Further, the industry value chain has involved service enablers such as repairing services providers and entertainment accessory service providers.
Various companies have been focusing on acquisitions for achieving a higher share in the market, combining the brand portfolio and providing comprehensive services along the value spectrum of the market. Regarding R&D, universities and research organizations have been increasingly working toward increasing the cost and operational efficiencies of many critical automotive components, with the aim of reducing their prices and eventually the price of the vehicle as the final end product.
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