Korean Government to Provide Support for Auto Parts Industry

Almost empty finished car parking lot of Kia Motors’ Gwangju Plant

The Ministry of Trade, Industry and Energy is discussing financial support for auto parts manufacturers with automakers. The financial sector, the government and automakers are expected to come up with 10 billion won each and a total of approximately three trillion won is expected to be prepared from it based on guarantee provided by Korea Technology Finance Corp..

The plan is because auto parts manufacturers are taking a direct hit from automakers’ ongoing sluggish sales. According to the Korea Automobile Manufacturers Association, automakers’ local capacity utilization dropped to about 60 percent in the second week of this month in the wake of COVID-19 and this has led to a capacity utilization of less than 70 percent on the part of the manufacturers. Besides, the capacity utilization of some secondary subcontractors has plummeted to 30 percent or so. The average sales of primary and secondary subcontractors have dropped by 25 percent to 50 percent and by up to 60 percent compared to their normal sales, respectively.

It is said that the plan will cover low-credit rating companies guaranteed by automakers or meeting certain business requirements. This is because most auto parts manufacturers have failed to benefit from the government’s previous assistance programs. For example, the government’s primary collateralized bond obligations for low-credit rating companies are limited to a credit rating of at least BB and 94 percent of 3,365 local auto parts manufacturers currently have a credit rating of BB or less. In addition, although the government and the Bank of Korea are planning to purchase junk bonds, this program is limited to companies whose credit ratings fell due to COVID-19.

It is also said that the government is considering extending the 70 percent individual consumption tax cut applied to car buyers to the end of this year. Earlier, the government implemented the tax cut from 5 percent to 1.5 percent, within an upper limit of one million won, for those who buy a car between March and June.

The government is also considering investing its key industry stabilization fund in auto parts manufacturers hit hard by the pandemic. At present, the beneficiaries of the 40 trillion won fund are airlines and shipping companies. However, additional beneficiary designation is possible when the Financial Services Commission deems it necessary and the Ministry of Economy and Finance gives its consent.