Supply of parts (EDITORIAL from the Korea Herald on Sept. 12)

High-quality parts and components make a good end product, be it a jetliner or a computer. Even a tiny part, if defective, may render the final product temporarily inoperable, downright worthless or even dangerous.

As such, it is imperative for manufacturers to secure a steady supply of good-quality components.

But it is not just quality that counts. Manufacturers have to be concerned about
the prices of parts and components as well. Depending on cost-benefit analyses,
they choose between in-house production, domestic outsourcing and imports.

In-house production may be suitable for newly designed parts and components,
especially during the product-development stage. Conglomerates tend to farm out
the manufacture of most of the parts and components they need to small and
medium-sized enterprises, each specializing in a limited number of items. Or they
make purchases from abroad.

Abuse of a dominant position, however, has been a cause for concern in relations
between large manufacturers and their domestic suppliers. Samsung, Hyundai, LG
and other Korean conglomerates of international renown have more often than not
been accused of twisting the arms of their suppliers for price cuts.

Against this backdrop, Hyundai-Kia Automotive Group publicly declared earlier in
the week that it would abstain from abusing its dominant position in its
relations with more than 2,000 suppliers. Among its promises are not passing the
burden of cutting costs on to suppliers and swiftly adjusting the prices of parts
and components in times of fluctuations in the prices of raw materials and
intermediate products in the world markets.

Hyundai-Kia also pledged to do away with oral contracts, in favor of legally
binding written contracts, and to pay for purchases in cash instead of issuing
promissory notes. It also said it would provide 10 billion won in grants for
those participating in its "green car" research projects and make
credit available on favorable terms.

Cooperation with suppliers, Hyundai-Kia says, is indispensable if it is to
succeed in its project to mass-produce eco-friendly cars and become one of the
top four automakers in the world in the near future. In addition to this
professed motive, Hyundai-Kia, like other leading Korean business conglomerates,
has been under pressure from the government to engage in fair trade with its
suppliers.

In July, eight companies of Samsung Group promised to the Fair Trade Commission
to use written contracts and make cash payments to their suppliers. Apparently,
it was not a coincidence the Samsung companies made the same promises as
Hyundai-Kia did later.

President Lee Myung-bak's administration has good reason to put pressure on
business conglomerates to engage in fair trade with their suppliers. First of
all, a healthier parts and components industry will help reduce the widening
trade deficit with Japan.

One estimate puts the 2008 bilateral trade deficit at $30 billion. If the past
trend holds firm, about 60 percent of that amount will come from the trade of
parts and components. The more Korea exports, the larger deficit it sustains in
its trade with Japan. The reason is the heavy use of Japanese-made parts and
components in Korean-assembled products.

Better still, a growing parts and components industry will hire more people at a
time when the Lee administration is being criticized for failing to create as
many jobs as it has promised. No wonder the administration is set to spend as
much as 24 billion won ($22 million) this year and another 35 billion won next
year to assist the industry's technology development.

No matter what the administration's intention may be, Hyundai-Kia, Samsung and
other conglomerates should abide by the Fair Trade Act in business transactions
with their suppliers. That is what they need to do to avoid sanctions. Moreover,
if quality improves as a result of fair trade, this should also benefit the
conglomerates.