The Korean leader in aluminum high-pressure die casting is expanding internationally and sees giga casting as the future of EV body structures and chassis.
The success of Korean conglomerates has had a positive trickle-down effect on domestic suppliers, providing them with growth momentum and core capabilities. However, in recent times, due to an increasingly saturated and competitive domestic landscape, it has become essential for enterprises to think globally to continue their growth trajectories. In order to achieve this goal, Korean companies will need to find their place in the global supply chain. How can Korean companies compete against Japanese and German superpowers? What is the role of Korean SMEs in the global supply chain?
Korean conglomerates like Samsung, Hyundai, and LG have demonstrated a strategic approach to attract international clients by not only exporting products but also establishing manufacturing facilities overseas, a move that has benefited Korean suppliers. This strategy has provided them with opportunities for growth and accelerated production processes. For instance, as Hyundai Group expands its presence abroad, forming clusters or supply chains, it creates avenues for SMEs and mid-sized companies that collaborate with Hyundai, along with Hyundai affiliates, to enhance their global competitiveness. However, engaging in international business poses challenges, and during periods of stagnation, major conglomerates have supported their partnering SMEs by providing administrative and legal assistance to sustain their operations overseas. Korean SMEs that successfully establish their global presence and can operate independently will not only penetrate new markets but also forge partnerships with competitors in other industries.
The phenomenon of offshoring by Korean MNCs has recently been accelerated, spurred on by trade policies such as the Inflation Reduction Act. For instance, we've witnessed LG Energy Solution moving to the US, establishing factories and bringing Korean expertise abroad. However, a lingering question persists: despite Korean SMEs venturing overseas and forming partnerships with Korean MNCs, they often find themselves primarily serving these MNCs and struggle to attract local customers. What is your perspective on this issue within your industry?
There have been numerous cases of Korean companies navigating unfamiliar terrain as they expand abroad. As an SME, we tend to follow the clients we are accustomed to working with. However, if these clients encounter difficulties in the overseas market or if we lose their confidence, it presents a significant challenge for us all. This challenge isn't unique to Korean companies; it's a universal aspect of doing business globally. The key lies in our ability to thoroughly understand and analyze the characteristics of local OEMs. We must be prepared for the worst-case scenario and remain agile in responding to any changes or challenges that arise. At Dongseo, we have encountered hurdles in devising strategies that are tailored to local conditions. Simply establishing a manufacturing base in a new location without having a local representative in charge presents its own set of challenges. We recognize the importance of establishing a strong local presence to effectively operate in international markets.
Policies such as the IRA have dual objectives: promoting the adoption of environmentally friendly cars and restricting access for certain Chinese suppliers to the global supply chain. Do you believe this will lead to increased EV manufacturing in the US and Europe? And what opportunities does this present for Korean companies to diversify their client base beyond domestic clients?
Absolutely, I see this as a significant opportunity for us. Every crisis brings with it opportunities for growth. When faced with restrictions or barriers, Koreans have a natural inclination to overcome them by any means necessary. Our strength lies in our agility and swift execution, which puts us in a favorable position to capitalize on these changes.
While the rivalry between Tesla and BYD is growing, with the Chinese contender recording higher vehicle deliveries than the world leader for the first time last quarter, the EV market growth is slowing down and not meeting OEMs' expectations. However, according to McKinsey analysis, the odds are still positive as electric vehicle penetration will reach 100% by 2035 in China and Europe, and 80% in the US during the same year. How do you anticipate the evolution of the EV market over the next three years? What challenges must EVs overcome to sustain growth and expansion?
In April of last year, the US administration publicly announced their intent to increase EV sales up to 67% by 2032, following a previous target of 50% by 2030. This rapid adjustment underscores the urgency. Global OEM makers failing to meet these mandates risk fines from the US Environmental Protection Agency due to insufficient carbon reduction efforts.
The primary obstacles impeding EV market growth are the high prices driven by battery and electrification costs. Tesla, for instance, characterizes its EVs as Software Defined vehicles, highlighting their technological complexity beyond traditional automobiles. Hyundai Motors is also embracing this paradigm shift.
In addition to pricing concerns, inadequate public charging infrastructure poses another significant challenge. In the US, charging EVs is notably inconvenient and challenging, except for Tesla EVs due to Tesla's established charging stations. In Korea, the government has mandated the installation of public charging infrastructure on ground floors within apartment complexes, prompted by safety concerns following instances of EV fires linked to basement charging.
Subsidies play a crucial role for Korean EV consumers; without them, contracts are often canceled. This issue extends beyond Korea and is a concern worldwide. Even the Biden administration has emphasized the importance of batteries and charging stations in achieving their 67% EV sales target. Establishing nationwide charging infrastructure incurs significant costs.
While I'm not a market expert, I predicted three years ago that the EV market wouldn’t grow as rapidly as OEMs anticipated at the time. I also foresaw the establishment of Euro 7 regulations for ICEVs, which would spur the growth of hybrid vehicles—a prediction that has become reality. Without addressing exorbitant prices and charging infrastructure deficiencies, the EV market will likely plateau within the next two to three years, necessitating a shift towards hybrids.
When considering price reductions in the EV market, two primary factors come into play: manufacturing costs and market competition. We've observed the BYD-Tesla rivalry driving prices down, with both companies announcing discounted prices upon delivery. However, within the realm of competition, manufacturing presents a significant challenge. While EV startups in China benefit from substantial subsidies, many startups in the US encounter manufacturing hurdles. Due to prohibitive costs, they often seek external manufacturing partners. What challenges and opportunities does this dilemma pose for companies like yours within the EV sector?
The crux of the matter lies in the manufacturing costs of EVs, which are heavily influenced by the price of components. The introduction and commercialization of all-solid-state batteries could potentially address many of these challenges, yet the reasons for the delay in their commercialization remain unclear.
High prices of rare earth materials prompt us to explore alternatives, though encountering obstacles in this pursuit is not uncommon. Additionally, range per charge remains a significant barrier, particularly as battery performance can be compromised in low-temperature environments, leading to reduced mileage. Overcoming these challenges necessitates the development of technologies capable of optimizing battery conditions through temperature regulation.
In terms of competition, while Tesla faced fierce competition from BYD when entering the Chinese market, the rivalry between Hyundai and Toyota may prove more impactful. Toyota's reputation as a "hidden champion" suggests a deliberate strategy of maintaining a low profile until possessing matured technology, upon which they'll emerge as formidable contenders seemingly out of nowhere. This is a competition that warrants close attention.
Hyundai Motors' chairman has made it a priority to address EV challenges through technological innovation. While Hyundai may have entered the scene relatively late, their strides in developing hydrogen-powered electric vehicles are commendable. Their decision to focus on battery electric or electric-hydrogen models will undoubtedly impact the market, leaving competitors on edge in response to Hyundai's strategic moves.
For a considerable time, hydrogen technology was a major focus in the Japanese market, despite skepticism from Western counterparts who viewed EVs as the solution to automotive challenges. However, with EVs encountering issues such as charging times, logistics, and network infrastructure, hydrogen is once again emerging as a viable option. To what extent do you believe the competition between hydrogen and EVs is real? And how might this battle impact Western automotive manufacturers?
If we delve into history, we find that GM actually produced EVs in the past. However, due to battery and charging infrastructure limitations, they were forced to withdraw from selling these vehicles, leading to their eventual obscurity in public memory. At that time, electric-powered vehicles were primarily restricted to utility vehicles in parks, delivery carts, or golf carts. In the early 2000s, hydrogen gained prominence and received political support from the US administration as an alternative amidst growing environmental concerns. While hydrogen emerged as a contender, it was EVs that initially captured the market and achieved significant success.
The challenge with hydrogen lay in its production, handling, and logistical requirements, alongside concerns about safety and potential hazards. In contrast, EVs were perceived as safer due to the ubiquity of charging sockets, familiarizing people with their operation. The perceived social costs associated with establishing hydrogen facilities, logistics, and production outweighed the benefits, leading to a preference for EVs.
Despite efforts by individuals like the chairman of Hyundai Motors, who advocated for hydrogen at the Davos Forum and assumed leadership roles in hydrogen council committees, hydrogen has not garnered significant attention recently. Toyota's hydrogen EVs, for instance, have struggled in terms of sales.
The shift towards an electric-centric industry is strongly disrupting the automotive suppliers sector, as exemplified in Germany, where the number of tier one suppliers with more than 20 employees fell from just under 700 to roughly 615. For companies like yours, what are the challenges and opportunities in adapting the business model towards partially EVs and fully EVs?
This transition significantly impacts our industry, prompting serious contemplation. EVs necessitate fewer components compared to traditional ICEVs, altering the distribution of the proverbial pie among partners. Moreover, the stringent quality and performance requirements for EVs demand advanced technological capabilities, enabling only certain companies to secure orders and establish a firm foothold in the market.
While the overall number of partners or affiliates may not dramatically decrease from a technical standpoint, their proportions will undoubtedly shift. For instance, the number of partners specializing in powertrain components, especially for engine parts, is likely to decline. Conversely, partners involved in manufacturing EV parts may see benefits from these changes.
Considering the vehicle's hardware, which predominantly comprises aluminum components such as cylinder blocks, heads, transmission covers, chassis components, and body structures, attention will be focused here. Dongseo will benefit from this trend since we specialize in aluminum processing. Conversely, partners involved in interior parts manufacturing will increasingly emphasize intelligent systems, such as ECU. These days, controllers are embedded in systems using touchscreen functionalities. In the past, manual controls sufficed for functions like temperature regulation, but now, intelligence is integrated into these systems. Those capable of meeting these evolving standards will maintain competitiveness, while those unable to adapt will face significant challenges.
Dongseo Machine & Tools, established in 1983, is a leading company in the precision machining and casting processing industry. Primarily focusing on the development of engine-centric components for internal combustion engine vehicles, the company is now involved in the development and production of products for environmentally friendly electric and hydrogen-powered vehicles, such as aluminum inverter cases, motor housings, and various covers. How would you define Dongseo Machine & Tools today?
While our core expertise remains rooted in precision machining and casting processing, what sets us apart today is our commitment to infusing intelligence into these processes. Our focus has evolved to encompass the integration of smart technologies within our operations, thereby enhancing efficiency and productivity. Through the implementation of smart factory initiatives, our overarching goal is to deliver high-quality casting processing and precision machinery, thereby bolstering our global competitiveness.
More than 70% of your revenue comes from engine parts. You have developed transmissions and cylinder heads for four and six cylinders in the inline, Lambda, and Theta series. And for electric vehicles, the company has developed motor housings, inverter cases, and various covers. Looking ahead to the next three years, how do you anticipate the evolution of your revenue stream and the growth of these systems within your company?
From a manufacturing perspective, since hybrid cars still utilize internal combustion engines (ICEVs), we anticipate the continued demand for components to meet our clients' quantity requirements in this area. However, as the automotive landscape continues to evolve, the trend will inevitably shift towards electric vehicles (EVs) from hybrids. Consequently, we must continue producing EV parts to align with this emerging market direction.
In terms of development, our goal over the next three to four years is to secure additional orders for EV components alongside body structure parts. The manufacturing of body structures presents unique challenges, as it requires more complex or larger-sized components compared to engine parts. Therefore, we are actively developing the necessary technologies for mass production in this area.
Ultimately, our aim is to transition from being solely a powertrain component manufacturer to a comprehensive entity that encompasses electrification. We aspire to become a leading manufacturer for EV body structures as well. This transformation is already underway as we adapt to the evolving automotive landscape.
Dongseo remains a leading provider of quality aluminum casting parts. I've observed impressive processes in how you integrate AI and simulations to enhance casting outcomes and elevate engineering capabilities in production. Given these advancements, could you elaborate on Dongseo's key advantages over competitors? How do you plan to compete against this growing number of players producing similar parts?
In the Japanese market, where the demand for electrified parts is still nascent, partners often require low-pressure casting, distancing them from high-pressure die casting methods. This creates an opportunity for us to capitalize on our cost-effectiveness and penetrate the Japanese market effectively. Conversely, in the European market dominated by companies like Nemak, which primarily provide parts through low-pressure, CPC-based processes, there remains a demand for high-pressure die casting. This presents a niche market for Dongseo to explore, particularly as Chinese competitors excel in high-pressure die casting but face supply chain limitations. Our expertise in high-pressure die casting positions us well to target this niche market effectively.
Since 2022, we have been meticulously analyzing and benchmarking various markets, including Italy, Germany, Slovakia, Japan, and China. Through this extensive evaluation, we have identified prevalent extrusion-based solutions in Europe, highlighting the pressing need for cost reduction and presenting numerous opportunities for us to explore.
Our primary targets encompass Japan, Southeast Asia, India, and specific regions of the US mainland, particularly those overseen by Tesla. Moreover, the head of Korean Volkswagen has actively advocated for the significance of giga casting during discussions at the headquarters, signaling potential opportunities for us in this regard.
Casting is crucial for achieving outcomes with minimal porosity and superior surface finish, thus reducing the need for treatments and enhancing part longevity while maintaining efficiency. Could you elaborate on your technology and the steps taken to establish an efficient process, thereby becoming a leader in high-pressure giga casting?
Quality Guard system
We place significant emphasis on adhering to a meticulous quality process while simultaneously prioritizing productivity and excellence in our product development endeavors. When OEMs provide us with their product configurations, we undertake a thorough analysis to determine the optimal casting methods. This process involves conducting multifaceted engineering simulations to determine the ideal casting speed and pressure. Importantly, simulation responsibilities extend beyond our team to encompass mold manufacturers and partnering OEMs, fostering a collaborative environment where results are cross-checked and validated.
During this stage, we identify areas prone to potential porosity or distortion and pinpoint any parts with issues or failures. Once identified, we implement solutions derived from these simulations into our real manufacturing processes. Our approach involves close collaboration among managers and frontline staff to identify and address challenges effectively. After producing samples that meet stringent standards and expectations, we engage in repeated trial processes to refine manufacturing techniques in real-world settings and prepare for mass production.
High Pressure Die-Cast
While competitors in Japan specialize in LPDC or gravity die casting, our expertise lies in high-pressure casting. This presents unique challenges, particularly in understanding the internal dynamics of hot metal, which can be complex and largely invisible. High-pressure die casting presents a high barrier to entry for many businesses due to its sensitivity to factors such as weather and equipment conditions. However, despite these challenges, our commitment to innovation and excellence drives us to maintain leadership in this field.
One challenge in producing giga parts involves counteracting the cooling of the metal and increasing the viscosity by raising the temperature. This adjustment affects material properties and can impact heat treatment post-casting. Given your research and development efforts, how do you envision the evolution of high-pressure casting and its path to becoming more mainstream?
A viable direction forward entails embracing high-pressure casting due to its ability to enhance aluminum density and strength, allowing for thinner and larger components. Ultimately, high pressure is essential for achieving lightweight designs.
Many of your competitive advantages and technological advancements in high-pressure die casting and giga casting seem to be geared towards meeting the requirements of EVs in the future. Within the scope of your innovation, how much of your technical capabilities are currently allocated towards the growth of EVs, and how much is dedicated to traditional combustion engines? How applicable is your innovation to traditional combustion engine cars?
Currently, manufacturing gasoline engine parts isn't particularly challenging for us, given our capabilities in producing EV parts. The landscape of EV parts is more advanced and integrated compared to traditional gasoline parts. EV components are intricately integrated, unlike the assembled nature of gasoline engine parts, making them more complex. As we focus our research and development efforts on evolving technologies for EV components, we anticipate that our demonstrated capabilities in this area will naturally secure more orders for gasoline engine parts as well.
Consider giga casting, for instance, an ultra-high-pressure task that is significantly more challenging than manufacturing EV parts due to its larger size and scale. While we're in the initial stages of transitioning towards giga casting, our current equipment, with the largest one being 3500 tons, falls short of the requirements for giga casting, which necessitates more than 8000 tons. Therefore, we must push further to develop the necessary technologies for giga casting, including different controllers for heat management and coolant stream diversification to minimize deformation.
Upgrading the casting process to simplify it presents its own set of challenges, particularly in the development of raw materials. To address this barrier, we're actively working to establish a consortium involving government agencies for fiscal support, as well as forging partnerships with metal mold designing and manufacturing firms, and module manufacturing partners to create synergies.
We've also implemented AI-based quality control, leveraging AI to reduce anomalies and errors in the casting process, as it's inherently invisible. Without incorporating AI into giga casting, error prevention would be significantly more challenging.
We were early adopters of artificial intelligence in casting processing within our industry. Incorporating AI has provided numerous benefits, including enhanced maintenance, optimized equipment conditions, improved quality, and production optimization leading to cost reduction and energy consumption reduction to meet our carbon reduction targets. Given that casting processing consumes substantial electricity, reducing energy consumption in the production process has been a top priority for us.
To support your R&D and technological developments, it seems you have an international strategy in place targeting Europe, Japan, Southeast Asia, and India. Could you provide further details on your international strategy and the challenges you anticipate, as well as how you plan to overcome them to penetrate more European, Japanese, or American OEMs?
Since our company's inception, we have prioritized our partnership with Hyundai Motors. Consequently, we've been able to expand our business into China and Indonesia. While there have been signals from the European market, we have been cautiously reviewing our penetration strategy there. However, we recently identified Slovakia as a potential production hub, serving as a bridge to the European market.
Regarding the US mainland, the policies of the U.S. administration pose challenges for businesses like ours. Although we recognize the importance of eventually entering the US market, we are currently focusing more on the European market.
Our products don't necessarily need to be produced in Europe; we can export them from Korea. We are actively seeking export opportunities through participation in exhibitions. For example, in Japan, we attended an exhibition where we connected with Mitsubishi, resulting in an order for EV parts. Volkswagen Korea is expected to facilitate a connection with the headquarters by the middle of this year, which will further enhance our presence. We are also planning to attend German exhibitions.
Giga casting is essential for the future as electric vehicle components and body structures become increasingly integrated. However, high-pressure die casting poses a challenge and serves as a technological barrier for many industry peers. With our extensive experience in this field and the added value of AI, we believe we can be an attractive option for global OEMs. As giga casting emerges as the future for the integrated body structure and chassis of EVs, we are confident that we will outcompete our industry peers.
Looking ahead five years from now, what are your aspirations and goals for Dongseo Machine & Tools?
My personal ambitious goal within the next five years is to achieve mass production of the body structure parts we are currently developing, despite the significant challenges involved. This objective extends beyond a single vehicle model to encompass various vehicle lineups. Consequently, I anticipate heightened interest from other automakers in placing orders with our company.
Additionally, in terms of giga casting, I aim to see the development and mass production of cell to body prototypes within this timeframe. Given the pace at which our industry peers are advancing in technology for giga casting, it's imperative that we move swiftly and accelerate our efforts to remain competitive.
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