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[Editorial] Parts supply

April 3, 2011 - 19:13 By 최남현
A disruption in the supply of one key part or component of a product may halt operations at assembly lines. A case in point involves the microcontrollers Korean companies import from Japan.

Microcontrollers are systems, each with a processor, memory and peripherals, that are embedded in a wide range of home appliances and other sophisticated products. Samsung, LG, Daewoo and other Korean companies rely heavily on microcontroller imports from Japan to meet their needs.

As such, the suspension of operations at Toshiba and other microcontroller producers as a consequence of the March 11 earthquake is a cause of great concern to the Korean companies producing refrigerators, washing machines, air conditioners, microwave ovens and other home appliances.

Some of them will reportedly have to reduce or suspend their assembly operations if Japanese companies fail to resume microcontroller production anytime soon. They can hardly find substitutes comparable in price and quality anywhere else in the world.

Of course, some of them could develop the types of microcontrollers they need. But it would take time until commercial production started. Samsung and some others produce microcontrollers of their own development. But they still depend on imports for the manufacture of certain products.

Microcontrollers are just one kind of many parts and components Korea imports from Japan. Korea’s heavy reliance on Japanese-made parts and components is evidenced by trade figures.

Last year, Korea sustained a huge deficit of $36.2 billion in overall trade with Japan ― almost $100 million each day on average. It was the largest ever. What was surprising was not just the deficit but the portion of parts and components whose imports were expanding at an alarming rate.

The two-thirds of the deficit, or $24.3 billion, was from the trade of parts and components. This deficit more than doubled in a decade ― from $10.5 billion in 2001 50 $24.3 billion last year. It was a sobering reminder that Korea could hardly balance its trade with Japan unless it fostered its parts and components industry.

This is not to say Korea has not tried to promote import substitution. It has done. One outstanding example is the localization of auto parts and components. Hyundai and Kia say their auto production will not be affected by Japan’s earthquake. They rely mostly on in-house production and local sourcing for the supply of key parts and components.

But deep in trouble are Renault Samsung and GM Korea, which import parts and components from Japan. They have already cut back on operations. They have parts and components in stock, but they are adjusting their assembly schedule, reportedly because they are worried that their supply may not resume in the near future.

Many leading Korean manufacturers are just as concerned about the fallout from Japan’s earthquake disaster, with Hyundai and Kia being among the exceptions. They thought, mistakenly it turned out, that they did not have to push for in-house production or local sourcing when Japanese-made quality parts and components were easily available at reasonable prices. But the earthquake was a rude wake-up call for them.

Now the Korean government has a rare good occasion to address one of its chronic trade problems ― the fact that Korea’s overall trade deficit with Japan is snowballing as Korean conglomerates are expanding their exports. The widening trade deficit has remained one of the hardest nuts to crack despite the trillions of won it has spent on import substitution.

But the chances of solving this stubborn problem are high this time. The conglomerates may now help reduce the trade deficit by assisting their suppliers in developing parts and components. That should kill two birds with one stone, given that they are being pressured by the government to share profits with small and medium-size enterprises.