[THE INVESTOR] Faced with the threat of hefty penalties and a possible deal-breaker, Korean automotive parts makers are struggling to keep wraps on potential supply talks with US-based electric car maker Tesla Motors.

Just recently, a major Seoul-based supplier was slapped with a US$1 million penalty by Tesla for breach of a non-disclosure agreement, while several others received verbal warnings for revealing information to the media here about a possible deal.

 

Officially, Tesla has yet to be supplied by any Korean firm. Some deals have been confirmed, but most are either rumors or information leaked by the suppliers themselves, who are anxious on publicity for ties with one of the coolest carmakers in the world.

“Such action can easily constitute a breach of non-disclosure clauses,” said one industry source close to the matter, declining to be identified.

For that reason, Tesla has been slapping fines on its potential Korean suppliers, or threatening to do so, even as it is in talks with some of them for supplying its cheapest model -- the US$35,000 family sedan Model 3 -- which will start shipping in 2017.

Tesla's Korea reach

The reason Tesla is looking toward Korea despite the constant breach of confidential information is because of the price competitiveness Korean suppliers offer.

For the upscale Model S and Model X, Tesla partnered with Japanese firms, but for the Model 3, it is looking to cut more costs.

“A battery pack makes up almost half the price of a Tesla car. In order to reduce the car price, the carmaker has no other option but to cut costs on parts,” said Kim Pil-soo, an automotive engineering professor at Daelim University.

“Korean firms offer quality parts at cheaper prices, while their Chinese rivals still lag behind in terms of technical sophistication.”

In fact, industry watchers say Korean companies’ supply prices could be 10 to 15 percent lower than those of Japanese or German firms, and may be on par with their cheaper Chinese rivals. 

Further, a deal with Tesla would be an opportunity, especially for lesser-known suppliers, to promote their brand globally, Kim added.

So far, only a couple of conglomerate-affiliated suppliers have been authorized to announce a deal with the US carmaker. LG Display is expected to supply 15-inch liquid-crystal displays to be used for a gigantic tablet-like information screen on the center console -- a signature feature for Tesla cars. Hankook Tire, the nation’s largest tire maker, will provide original equipment tires that are specially designed for full-electric vehicles.

Tesla is now finalizing its plans for entering the Korean market. Preorders for the Model S and Model X started online on Aug. 21.

The first showroom is expected to open in September at Shinsegae Group’s new shopping complex Starfield Hanam in Gyeonggi Province. The carmaker is mulling another showroom in Gangnam, the posh district of southern Seoul, in the coming months.

By Lee Ji-yoon, Shin Ji-hye 
(jylee@heraldcorp.com) (shinjh@heraldcorp.com)