South Korea’s Reliance on China for Auto Parts Leads to Calls for Supply Chain Diversification

A worker with car batteries at a factory for Xinwangda Electric Vehicle Battery Co. Ltd, which makes lithium batteries for electric cars and other uses, in Nanjing in China's eastern Jiangsu Province, on March 12, 2021. (STR/AFP via Getty Images)

South Korea’s auto industry has become increasingly dependent on China for parts, leading to calls for supply chain diversification.

Cho Chul, an analyst with the Korea Institute for Industrial Economics and Trade (KIET), a government-funded think tank, recently highlighted how automobile parts imports from China have increased over the past two decades.

“China only accounted for 1.8 percent of [South Korea’s automobile parts imports] in 2000, but that share had jumped to 36.2 percent by the first four months of 2022. In contrast, Japan’s share of auto part imports has declined from 45.5 percent in 2000 to 11.1 percent in the first quarter of this year,” said Cho reported local media Hankyoreh.

Cho made his remarks at the Auto Industry Development Forum held in Seoul on June 14.

Required for Making Batteries

According to the Korea International Trade Association, the country’s auto industry depends on China for 83 percent of its anode materials, one of the four main battery components, and at least 60 percent dependence on the other three primary components: cathode materials, electrolytes, and separators.

Among the raw materials needed for making batteries, graphite is 100 percent sourced from China, manganese 93 percent, cobalt 82 percent, nickel 65 percent, lithium 59 percent, and similar issues with other materials.

“It’s worrisome that we’re becoming more dependent on China as we move into the era of electric vehicles. We need to diversify our supply chain by region while also strengthening the supply ecosystem at home,” Cho said.

China has remained the world’s largest automotive manufacturing country and automotive market since 2009, containing thousands of small and large auto parts factories and multinational carmakers.

Workers at a factory for Xinwangda Electric Vehicle Battery Co. Ltd, which makes lithium batteries for electric cars and other uses, in Nanjing in China's eastern Jiangsu Province, on March 12, 2021. (STR/AFP via Getty Images)

Production Halts Caused by Chinese Lockdowns

Such a high level of reliance on China has led to a series of production halts for South Korean automakers in recent months due to stringent lockdowns in the country.

In March and April, South Korean automakers faced a shortage of airbag control units (ACUs)—a device that detects accidents and triggers airbags—as parts from China were delayed.

Hyundai Motor reportedly left its assembly lines at its Ulsan plant partially idle for weeks from April 18 due to being unable to procure enough ACUs.

Gwangju Global Motors, which makes the Hyundai Casper, halted production from April 18 to 21 due to the ACU shortage. Meanwhile, GM Korea, the Korean unit of General Motors, adjusted production output at one of its Bupyeong plants as its Chinese suppliers failed to meet orders for the brake system parts in time.

GM Korea also reportedly ran out of many parts from China on top of the auto chip shortage. The company produced 60,408 vehicles during the first quarter, down 30 percent from the same period last year.

In March, Hyundai and Kia were unable to source wiring harnesses due to the lockdown in Shandong, which occurred before the Shanghai lockdown. The companies reportedly had to cut production for two to four weeks.

According to data from the Korea Automobile Manufacturers Association, Korean automakers import about 87 percent of their wiring harness from China.

75 Percent of Key Imports Came from China

A recent analysis published by the Federation of Korean Industries (FKI) showed that 75 percent of South Korea’s key imports came from China.

According to Hankyoreh, the study published on May 30 was carried out by Chonbuk National University professor Choi Nam-suk at the request of FKI.

The study analyzed South Korea’s import reliance on the United States, China, and Japan, which are responsible for 90 percent of the country’s imports. The category of “key imports” was assigned to 228 items that rank in the top 30 percent in import dollar value.

The study found that 172 out of 228 items (75.5 percent) came from China, 32 (14 percent) came from Japan, and 24 (10.5 percent) from the United States.

Some of the key imported goods from China include “electronics, machinery, computers, steel, organic and inorganic compounds, glass, medical products, and industrial raw materials such as non-ferrous metals,” the report says.

“Prominent examples of Chinese imports include manganese, which is critical for steel manufacturing; graphite, which is an essential electric vehicle battery anode material; and magnesium, which is important for lightweight automobile production.”

The report also identified 133 products with high volumes of transactions between companies, suggesting they may become global supply chain stability vulnerabilities. Among them, Chinese-made items accounted for 127 or 95.4 percent, including “tungsten oxide (used in semiconductors), calcium chloride, graphics cards, solar cell modules, and pesticide ingredients.”

A general view of the Busan Port, South Korea on Nov. 5, 2021. (Chung Sung-Jun/Getty Images)

Choi called on the government to establish an early warning management system for these critical commodities.

“Failure to manage supply and demand for key import items could result in supply crises erupting at any time, as witnessed with the urea water solution situation,” Choi said.

“An ongoing monitoring system will need to be established for the 228 items, along with measures such as import diversification.”

Last year, a shortage of urea supplied by China threatened to cripple economic activity in South Korea. Among other uses, urea is used to cut emissions in diesel vehicles and make fertilizer.

In mid-October, China reduced its urea exports due to a coal shortage, putting South Korea in a deep crisis as the country’s nearly 4 million diesel vehicles cannot operate without urea, sending its logistics industry into chaos.

The incident highlighted the resource-poor country’s heavy reliance on China for the essential items it needed to maintain business as usual. Since then, major South Korean industries have begun accelerating plans to build diversified production bases worldwide.