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Subsidies accelerated as auto industry struggles at home and abroad

Mar 24,2020
The government announced Monday it will release the entirety of its annual 320 billion won ($253 million) auto parts subsidy for research and development early, as the coronavirus’s deadly spread through Europe and the United States is likely to hurt Korean automotive companies dependent on foreign customers and supply chains.

Announcing the fast-tracked payment schedule on Monday, Minister of Trade, Industry and Energy Sung Yun-mo said he had met with the heads of Korean automotive companies’ parts suppliers, who raised concerns over the worsening situation in the West. The subsidy is typically distributed throughout the year, but automakers and related companies are facing liquidity issues as cracks are appearing throughout the global economy.

“We expect a negative impact on [local] automotive and parts [suppliers’] exports to Europe and the United States as automotive plants [there] and dealerships are being suspended,” Minister Sung said.

Europe and the United States account for 69.1 percent of Korea’s automotive exports and 54.2 percent for parts exports.

Volkswagen last week began shutting down all of its European factories for two to three weeks. Other European automotive companies are also taking similar actions. Fiat Chrysler and PSA Group are shutting down a combined 23 plants through March 27, and Renault will shut down 12 plants through March 17.

“There are possibilities that several parts supplied from Europe could face difficulties,” Sung said. “In the government’s assessment of major components imported from Europe by automakers, there’s an inventory that could last for a month or two.”

The Korean automotive industry last month experienced difficulties when China initiated a lockdown in efforts to cut off the spread of the virus, in the process suspending auto parts plants that supply local automakers.

In particular, a supply chain disruption of wiring harnesses from China prompted the Korean government to request that Chinese authorities help reopen the parts supplying plants.

Minister Sung said because of the government’s diplomatic efforts aimed at the 40 wiring harness plants in China, 27 were able to reopen up to three days earlier than scheduled.

“[As such], the operation rate of Korean automotive plants have been able to normalize since March 1, from 57 percent in February,” Sung said.

But as most of Europe is now under a lockdown with a similar situation unfolding in the United States, worries have re-emerged.

With both demand and supply shrinking simultaneously, the minister said the government will do its best to help the local auto industry and parts suppliers survive during an unprecedented crisis.

In addition to front-loading the research and development spending, Minster Sung said the government will purchase vehicles used at public institutions earlier than usual.

The government purchases 3,000 to 5,000 vehicles every year for public agencies.

The government also plans to inject money directly into automotive parts companies already struggling with liquidity.

Sung said he specifically urged carmakers in Korea to work closely with smaller auto parts suppliers to help them weather the economic downturn.

“Through the supplementary budget [which passed last week], we were able to expand the primary collateralized bond obligations from the previous 700 billion won to 1.5 trillion won,” Sung.

The bond obligations help companies issue corporate bonds by raising their low credit scores.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]