“Neither the U.S. nor Korea”… K-Parts Makers Choose ‘Third-Country Laundering’ for Survival
“We will slap a 25% tariff.” With just one sentence from President Trump, the industrial complexes in Ulsan and Changwon froze. However, it’s not Hyundai or Kia packing their bags, but the 2nd and 3rd tier subcontractors quietly leaving. Their destination is not the U.S., but Vietnam. Why are they heading to Southeast Asia to evade Trump’s gaze?
The Tariff Detour: The Secret of the ‘Vietnam Label’
The second Trump administration has warned of a 25% tariff on Korean auto parts. For small and medium-sized parts manufacturers operating on margins of barely 5%, this is tantamount to a death sentence. Vietnam, however, strives to maintain friendly trade relations with the U.S. and has relatively lower tariff barriers or room for negotiation. Korean parts makers are attempting a detour strategy, so-called ‘origin laundering’, by sending semi-finished products to Vietnam for assembly and exporting them to the U.S. with a ‘Made in Vietnam’ label.
It is not just about tariffs. High labor costs in Korea and the rigid 52-hour workweek have been suffocating SMEs. Labor costs in Vietnam’s Haiphong Industrial Complex are one-fifth of those in Korea. A representative of one parts company said, “Even without the tariffs, we were already in the red in Korea. Trump just gave us a push.” Going to Vietnam is not a choice, but a last resort for survival.
Hyundai’s ‘De-Korea’ Strategy and Trickle-Down Effect Hyundai and Kia are also expanding their ASEAN production bases in Indonesia and Vietnam. When finished car manufacturers increase local production, suppliers have no choice but to follow. While factories in Ulsan are emptying, the lights in the Korean parts complex in Vietnam never go out. This signifies the acceleration of the ‘hollowing out’ of domestic manufacturing.
Vietnam Government’s Radical Incentives The Vietnamese government is offering unconventional benefits such as corporate tax exemptions and free land leases to attract Korean companies. Aiming to benefit from the U.S.-China conflict, Vietnam seeks to establish itself as a ‘Global Production Base’ beyond just ‘Post-China’. To Korean parts makers, Vietnam looks like a land of opportunity. At least for now.
However, simply doing final assembly in Vietnam does not guarantee origin recognition. Although ‘Value Added’ criteria must be met, it is unlikely that factories moved in haste are strictly adhering to them. Reports are pouring in that illegal transshipment, effectively ‘label swapping’, is being openly practiced.
Activation of the U.S. ‘Super 301’ Radar
The problem is that the U.S. is not blind. The U.S. Department of Commerce and the Office of the United States Trade Representative (USTR) have already defined detour exports via Vietnam and Mexico as ‘Transshipment’ and warned of precise strikes.
Trump’s Warning: “Tariff Bombs on Detour Exports Too”
President Trump recently warned via X (formerly Twitter), “We know all about the Korean and Chinese parts coming through Vietnam. We will slap 100% tariffs on them.” U.S. Customs and Border Protection (CBP) has drastically strengthened origin verification for cargo arriving from Vietnam.
Korean tire and battery parts makers already in Vietnam are in a panic as the U.S. Department of Commerce has launched anti-dumping investigations into Korean-owned Vietnamese entities. The fear that “even Vietnam factories are not safe zones” is spreading.
Dispatch of On-Site Investigation Teams The U.S. is dispatching investigation teams to Vietnam to cross-check actual factory production capacity against export volumes. If export volumes are abnormally high compared to factory size, it serves as evidence that finished goods were brought from Korea and only the packaging was changed. Caught companies face not only tariff bombs but also the fatal penalty of permanent expulsion from the U.S. market.
The Korean government is stuck between a rock and a hard place. Blocking companies’ detour exports would cause export performance to plummet, while leaving them alone risks U.S. trade retaliation. The Ministry of Trade, Industry and Energy repeats only the principled stance that it will “guide companies to comply with origin regulations.”
The Vietnamese government has also begun to feel U.S. pressure. With its trade surplus with the U.S. surging, Vietnam has become a target for designation as the next currency manipulator. The possibility cannot be ruled out that Vietnam, for its own national interest, might self-police or regulate Korean companies’ detour exports.
The Collapsing Domestic Auto Parts Ecosystem
The exodus of parts manufacturers is causing the collapse of the domestic industrial base. Regional economies in auto cities like Ulsan, Changwon, and Gunsan are reeling.
Industrial Complexes Turning into ‘Ghost Towns’
The operation rate of the Changwon National Industrial Complex has plummeted to the 60% range. Factory listings are flooding the market, but there are no buyers. Small businesses below the 2nd tier are on the brink of chain bankruptcy. Workers are losing jobs and being driven into substitute driving or delivery services.
As parts companies move to Vietnam, core manufacturing technologies are leaking with them. Once local Vietnamese personnel acquire the technology, they will soon grow into competitors threatening Korean companies. Just as China did, Vietnam is also aiming for the ‘technology straw’ effect.
Weakening R&D Capabilities When production bases move overseas, R&D capabilities inevitably weaken because feedback from the field is cut off. If the parts ecosystem, which served as the backbone of the Korean auto industry, collapses, the competitiveness of finished car manufacturers cannot be guaranteed either.
Companies trying to produce honestly in Korea are facing reverse discrimination. They have to bear the burden of high costs and tariffs entirely. Government support measures are minimal, and demands for unit price cuts from conglomerates persist. Self-deprecating voices say, “Patriotism leads to bankruptcy.”
This crisis is further amplified as it coincides with the transition to electric vehicles (EVs). Companies making engine parts are suffering a double whammy of shrinking work volumes and tariff barriers. Far from having investment capacity for the transition to future cars, they are desperate for immediate survival.
Is There No Third Way: Mexico vs. Direct U.S. Entry
If Vietnam is blocked, where is the alternative? Mexico and the U.S. mainland are mentioned, but each carries risks.
The Benefits and Traps of USMCA (Mexico)
Under the United States-Mexico-Canada Agreement (USMCA), Mexican products can receive duty-free benefits. Parts makers are flocking to the Monterrey area where Kia’s Mexico plant is located. However, Trump has threatened to “impose 100% tariffs on Mexican cars as well,” signaling a renegotiation of USMCA. Mexico also holds significant uncertainty.
The safest method is to build factories in the U.S. However, for small and medium-sized parts makers, the murderous labor and construction costs in the U.S., along with union issues, are insurmountable barriers. It is an impossible scenario without financial support from conglomerates or joint entry.
- Domestic U-turn via ‘Smart Factories’: The government is inducing companies to reshore through smart factory support. The idea is to increase domestic production competitiveness by reducing labor costs through robot automation. However, the initial investment cost is too high, and there is a limit to overcoming the tariff barrier itself.
- Export Diversification: Eyes must turn to the growing Indian market, the Middle East, and the ASEAN domestic market. However, replacing the massive U.S. market in the short term is difficult.
Mergers and acquisitions among parts makers are inevitable to realize economies of scale. Uncompetitive companies must be liquidated, and those with technological prowess must merge to size up to survive. The creation of a government-led restructuring fund is urgent.
The Rise of China and the Global Supply Chain War
While Korean parts makers falter, Chinese companies are rushing in to fill the void.
Low-Price Offensive of Chinese Parts
Chinese parts makers are encroaching on the global market with overwhelming price competitiveness. An increasing number of Chinese companies are building factories in Mexico and entering the U.S. laundered as ‘Mexican-made’. Korean companies are sandwiched in terms of both price and technology.
Pressure to De-Sinicize Battery Supply Chains Through the Inflation Reduction Act (IRA), the U.S. intends to exclude China from battery supply chains. This is both an opportunity and a crisis for Korean companies, as they carry the burden of reducing dependence on Chinese minerals. The cost of supply chain restructuring falls entirely on the companies.
The Japanese auto industry, revived by the popularity of hybrid cars, is expanding its market share based on solid parts supply chains. Added with the weak yen effect, Japan threatens Korea in price competitiveness as well.
Europe is raising non-tariff barriers through environmental regulations like the Carbon Border Adjustment Mechanism (CBAM). Korean parts makers are in a position where they even have to bear the cost of eco-friendly certification.
The era of free trade is over. Now, survival must be sought within blockaded economic zones. A national strategy on which bloc Korea will belong to and what role it will play within it is absent.
Political Risk and Management Uncertainty
Non-business political risks are shackling companies.
Rollercoaster Ride Depending on U.S. Election Results
Policies flip like a palm depending on U.S. election results. Companies cannot make long-term investments. Uncertainty itself is the biggest cost.
Korean politics is buried in strife, ignoring the difficulties of companies. Deregulation or labor reform is on the back burner. Business leaders complain, “Politics is holding the economy back.”
Union Risk and Hardline Struggles The strike risk of hardline unions like the Hyundai Motor Union remains. Parts makers have to repeat operation and shutdown depending on the strikes of finished car unions. This is one of the reasons they want to leave Korea, where stable production is not guaranteed.
Many small and medium-sized parts makers face succession issues due to the aging of founders. Due to the excessive burden of inheritance tax, cases of giving up family succession and selling or closing the company are increasing.
Geopolitical risks such as worsening inter-Korean relations and the Taiwan Strait crisis are also factors that make investment in Korea hesitant. Foreign investors are withdrawing funds, saying “Korea is dangerous.”
Survival Equation in the Future Car Era
Ultimately, the only way to survive is technological innovation. A bold transition from internal combustion engine parts to future car parts is needed.
Transition to Software-Defined Vehicles (SDV)
Software is becoming more important than hardware in automobiles. Parts makers must also move away from simple processing and acquire software capabilities. Portfolios must be diversified into electronic parts, sensors, and autonomous driving modules.
High value-added technologies with high entry barriers, such as lightweight materials and high heat-resistant parts, must be developed. A ‘Super Gap’ in technology that China cannot follow must be created.
- Global Sales Channel Expansion: Dependence on Hyundai Motor must be reduced, and channels to global automakers like Tesla, BMW, and Volkswagen must be opened. If the technology is there, opportunities are open.
- Industry-Academia-Research Cooperation Ecosystem: Universities, research institutes, and companies must cooperate to secure original technologies. The government must concentrate funding support on such R&D cooperation.
Innovation DNA must be transfused by cooperating with startups that have flexible thinking. Existing rigid organizational cultures cannot respond to the rapidly changing market.
Sandwiched Status, Must Build Independent Survival Power
Small and medium-sized parts makers are in a dilemma, saying, “We don’t have the money to build factories in the U.S., and if we stay in Korea, we get hit with tariff bombs.” The collapse of the Korean parts ecosystem, which failed to build its own competitiveness while looking only at conglomerates (Hyundai Motor), is proceeding silently in the jungles of Vietnam.
Trump Risk is a Constant
In the Trump 2.0 era, protectionism is not a temporary phenomenon but the ‘New Normal’. Tricks to avoid tariffs no longer work. A technological moat that can breakthrough with a frontal attack must be built.
Urgent Need for Government Trade Diplomacy
This is a problem individual companies cannot solve. The government must step up to negotiate with the U.S. to obtain exceptions for Korean parts or secure a quota system. Wisdom is needed to translate diplomatic rhetoric emphasizing “blood alliance” into practical economic benefits.
Crisis into Opportunity: Golden Time for Constitutional Improvement
The current crisis must be used as an opportunity to restructure the parts industry. Companies must be reborn as global parts makers with independent brands, breaking away from simple subcontracting structures. It will be painful, like cutting bone, but if we don’t change now, there is no future for the Korean auto industry.
2026, The Survivor List
In 2026, where will the containers leaving Ulsan Port be headed? And will what they contain be the pride of ‘Made in Korea’, or the traces of a tearful struggle laundering nationality for survival? Time is not on our side.
