ULSAN, South Korea -- Workers are scarce at a plant run by Oto Industry, where a few hundred roaring machines spin out shafts for automobile transmissions in this industrial city, home to Hyundai Motor's main factory.
Oto, which supplies most of the components to the country's biggest carmaker, Hyundai, its affiliate Kia Motors, and Fiat Chrysler, logged its best earnings performance in 2015. But its sales have dropped by about 20% a year since then, largely because of Hyundai's slump in China and the U.S.
The auto industry's shift to low- and zero-emission vehicles also has taken a toll. Oto's net profit fell by one-third last year to 6.2 billion won ($5.25 million at current rates), down from 9.4 billion won, according to credit ratings agency Nice.
"With automakers in trouble, their losses are spilling over to suppliers," Oto CEO Kim Sun-Hyun told Nikkei Asian Review. "Some of the secondary and tertiary suppliers are giving up their businesses, which in turn puts pressure on the first tier and on automakers."
South Korea's auto industry is losing steam as the global car market slows. Domestic production dropped 2.1% to 4 million vehicles in 2018, according to the Ministry of Trade, Industry and Energy. Auto exports fell by 3.2% to $244.9 billion during the same period.
Now the prospect of a crackdown in Japan on exports to the industry is adding to its woes. Tokyo could exclude South Korea from the so-called "White List" of preferred trading partners as early as next month. This would force Japanese suppliers to get approval from the government before exporting their products to Korean automakers -- a process that could take up to three months.
Hana Financial Investment said that exclusion from the list could hit the profits of Hyundai Motor and Kia Motors, which rely on Japanese auto parts. Some 7.7% of Hyundai's 504 suppliers are Japanese, while 6.6% of Kia's are from Japan, Hana said.
With pressures mounting, Lee Jin-gyu, a vice president at Oto, recently asked the country's chief financial regulator in charge of the government's financial support program for financial aid, noting the technological revolution under way from the internal combustion engine to electric vehicles.
"We need support from the government for the transition. We can overcome this crisis, if we can hold on for some more time," Lee said in a meeting with Choi Jong-koo, chairman of the Financial Services Commission.
Autos form part of the backbone of South Korean manufacturing. Automobiles and trailers accounted for 12.1% of all manufacturers' sales in 2015, ranking behind only electronic parts, computers, displays, and audio and telecom equipment, which as a whole accounted for 17.2%, according to government data.
But South Korea's status in the global market is declining. The country ranked seventh in auto production for the first quarter with 957,000 vehicles, down 0.6% from a year ago, the country's auto industry association said. Its gap with Mexico, which knocked South Korea down from sixth last year, widened to 722,000 from 448,000 during the quarter.
Analysts say this is not just a South Korean story, but a global trend of waning demand for cars. Global auto demand dropped 6.6% on the year to 37.4 million units for the first five months of 2019, according to NH Investment & Securities.
"The downturn is led by structural changes in the industry, such as the transition to EVs and the spread of car-sharing businesses," said Cho Soo-hong, an analyst at NH. "Therefore, we believe that it is highly likely that the low-demand trend will continue in the long term."
But experts say South Korean automakers are also responsible for their own troubles because they failed to make the early investments needed to adapt to changing market trends. While South Korea has two of the world's leading chipmakers, Samsung Electronics and SK Hynix, as well as electric vehicle battery making companies LG Chem and Samsung SDI, the nation's automakers have trailed global peers in autonomous driving and electric vehicles.
According to the Korea Institute for Industrial Economics and Trade, China claimed 34 of the biggest 162 investors in the auto industry in 2016. South Korea claimed just 12. Chinese companies invested a total of 5.4 billion euros (US$6.2 billion), while South Korean companies invested 4 billion euros.
Instead of focusing on the disruption to come, the country's carmakers frittered resources on non-essential spending during the boom times, say some analysts. "One domestic automaker made huge investments in nonproductive assets as its profit ratio hit a record high following the global financial crisis," said Yoon Ja-young, a researcher at the institute. "The company also focused on developing luxury sedans while the global demand was rising for SUVs."
Yoon was referring to Hyundai, which spent 10.6 trillion won to buy an 80,000-sq.-meter plot in Seoul's Gangnam district in 2014 for a new headquarters. The decision sent its stock price tumbling by more than one-third at the time, and shares have yet to fully recover.
The auto market slowdown in China, where carmakers have had strong government support to develop electric vehicles, will make catching up even more difficult. The Chinese market is expected to shrink further this year, weighing on Hyundai, Kia and other South Korean brands that rely heavily on the world's largest auto market. New-vehicle sales in China fell 13.5% on the year in the April-June quarter, a steeper decline than in the first three months of 2019, industry data shows. June's total marked the 12th straight monthly decline.
Korea Trade Insurance Corp. (KTIC), an export credit agency that focuses on promoting trade and overseas investment by South Korean companies, recommended recently that the country's automakers spur demand for their products in China by cutting their "low-end lineups" and boosting "brand value by offering more value-added models."
In the U.S., too, there may be challenges. The U.S. auto market has held up thanks to the strong local economy, but the risk of tariffs is clouding South Korean automakers' prospects there.
In May, President Donald Trump directed the Office of the U.S. Trade Representative to negotiate agreements to address national security threats facing the American automobile industry. If agreements are not reached in six months, the president can determine what actions need to be taken, according to the White House.
A person familiar with the negotiations would not rule out the possibility that there could be consequences for South Korea's auto industry.
"This is mainly about the EU [European Union], but I cannot say that Korea will be exempt," said the source, who requested anonymity.
In the meantime, South Korean carmakers have to step up their ability to innovate if the industry is to regain momentum, say analysts. "Domestic automakers should expand their investments in research and development to strengthen their ability to develop new models," said the report by KTIC.
Most importantly, they have to exploit South Korea's homegrown expertise to survive the technological revolution now shaking up the global automotive sector, KTIC argues. As one of the world's leading producers of semiconductors, the country dominated a crucial segment of the future supply chain.
"Autonomous driving requires expertise in many fields such as semiconductors, sensors, AI, telecommunication, IoT and info-entertainments," KTIC said. "To meet those demands, local automakers should strengthen their cooperation with companies which have expertise in them through alliances, technology partnerships, and mergers and acquisitions."