The government is considering providing liquidity to local auto parts makers to help them overcome a cash crunch stemming from auto companies' output cuts, officials said Thursday.
The move comes as Hyundai Motor Co. (KSE:005380) and other car makers, stung by a sharp drop in domestic and overseas demand, have announced plans to reduce output, dealing a harsh blow to the auto parts industry.

Officials at the Ministry of Knowledge Economy said state money may be pooled into a fund created by industry leader Hyundai Motor and the state-run Industrial Bank of Korea (IBK) to help cash-strapped auto parts suppliers.

However, it was not immediately known how much money the government is considering injecting into the fund.

Hyundai has invested 20 billion won (US$14.7 million) into the fund with the bank footing another 80 billion won.

"Because it will be a business investment that reflects the purpose of the policy fund and not aimed at helping a particular company, it should not conflict with outstanding fair trade rules," a ministry official said.

Under World Trade Organization rules, direct subsidies designed to help the auto industry or individual companies is prohibited as an unfair practice and could trigger trade disputes.

The ministry, meanwhile, said that discussions are underway to exempt acquisition and corporate taxes if auto parts companies engage in mergers and acquisition deals.

Tax breaks could allow the creation of larger companies in the parts industry, vital for sustained growth.