Reduce risk by reducing extreme dependence on China
Diversification of supply sources leads to rise in supply prices
Cost of sales ratio is as important as price competitiveness in the US market
As the US Treasury Department revised the detailed rules of the Inflation Reduction Act (IRA), the uncertainty of Korean electric vehicles was resolved. However, battery parts by next year and reorganization of key mineral sources by 2025 remain as homework.
While there is a net effect of being able to prepare for supply chain risks by reducing extreme dependence on China, it is analyzed that while there is a net effect of supply chain diversification, an increase in parts prices and an increase in cost of sales will be inevitable.
Summarizing the coverage of the automobile and trade industries on the 4th, the amendment to the IRA enforcement rules in the United States is expected to have a positive effect on Korean electric vehicles. Right now, as uncertainty about the US eco-friendly car market has been resolved, manufacturers are now able to confirm and implement management strategies.
Previously, the US government defined the cathode and anode materials, which are the core of a battery, as one ‘part’. In the end, domestic automobile and battery companies that have been relying on Chinese products have been concerned that they will not receive tax benefits in the US.
However, with this bylaw revision, cathode and anode materials were recognized as ‘minerals’, or raw materials, rather than parts. For example, if key raw materials for batteries are imported from China and processed in Korea, they can receive subsidies in the US.
Even if core minerals used in batteries, such as lithium, nickel, manganese, graphite, and cobalt, are imported from countries with which the United States does not have a free trade agreement (FTA), if they are processed in Korea and create added value of 50% or more, they can receive tax credits. done.
However, right now, I took a breather, but there are still homework to be solved by 2025. This is because the IRA has nailed down that battery parts for electric vehicles must not be procured from ‘foreign concerned groups’ from 2024 and core minerals from 2025 to receive tax credits.
Right now, cheap Chinese core minerals can be processed and used in Korea, but from 2025, even this is highly likely to be blocked.
In the end, it is pointed out that it is necessary to diversify key mineral suppliers by reducing its extreme dependence on China and to activate domestic smelting technology.
In this process, the burden of cost increase was borne by the automobile industry. Distributing the supply to multiple sources will naturally increase the price.
Of course, this can be sufficiently offset by increasing sales by securing price competitiveness in the US electric vehicle market. However, there are also concerns that Europe and emerging countries, which are rapidly expanding the electric vehicle market along with the United States, may lose their ability to respond. This is because of the increase in cost of sales.
In fact, Hyundai Motor Company’s cost-to-sales ratio has been steadily declining over the past six years. Sales increased significantly as sales of luxury cars and SUVs increased, and their cost-of-sales ratio continued to trend downward, albeit slightly, due to their high added value.
According to the Financial Supervisory Service, Hyundai Motor’s cost of sales ratio, which was 81.7% in 2017, rose to 84.3% in 2018, the following year. However, around this time, the luxury car brand Genesis expanded its market by diversifying its vehicle types such as SUVs, which soon led to a clear increase in sales.
In 2019, Hyundai Motor’s annual sales (105.7464 trillion won) entered the 10 billion won range for the first time. As sales increased significantly, the cost of sales fell to 83.3%, down 1.0 percentage point from the previous year.
Last year, the first three years after that, sales increased by 34.8% to 142.5275 trillion won, but the cost of sales only increased by 19.3%. Thanks to this, we were able to keep our COGS-to-sales ratio at 80.1%.
An official from the Korea Automobile Manufacturers Association said, “Securing the price competitiveness of electric vehicles in the US market will be of greater benefit than the increase in cost of sales due to diversification of the supply chain.” Among the increase in the cost of sales for electric vehicles, it is the part that needs to be considered which is more profitable.”
Most of the people in the automobile industry have no objection that the revision of the IRA enforcement rules will have a greater net effect on Korean cars. Nevertheless, as the possibility of the electric vehicle market extending from the United States to Europe and emerging countries has increased, there are also voices that the cost ratio should be accompanied by concerns about this.
Cho Seong-dae, head of the Trade Support Center at the Korea International Trade Association, said, “It is fortunate that the IRA implementation guidelines of the Ministry of Finance have eased the burden on Korean companies.” It needs to be done,” he said.