At first blush, South Korea wouldn't appear to be an ideal spot to set up shop in a business as competitive as auto parts. The country is squeezed between high-quality Japan and low-cost China, and its domestic market is justover 1 million cars a year-- less than a fifth of Japan's, and tiny when compared with China's potential. But appearances can be deceiving. In recent years, Korea has become a magnet for auto-component makers, with more than 200 foreign-owned manufacturers now operating in the country.

　　The list includes all the big names: Visteon (VC ) and Delphi (DPH ) of the U.S., Robert Bosch of Germany, Japan's Denso (DNZOY ) -- indeed, all but three of the top 30 global players. The reason for the rush into Korea? The 1997-98 Asian financial crisis made Korean assets cheap, so scores of midsize companies were snapped up by global giants. "The crisis pushed many parts makers to near-bankruptcy -- and foreign takeovers stabilized and helped improve their quality," says Cho Chuel, auto-industry specialist at the state-funded Korea Institute for Industrial Economics & Trade. And despite Japan's reputation for quality, manufacturing there is often too expensive for foreign operators to make a profit. China, meanwhile, is cheap -- a Chinese-made axle might cost half what a Korean one does -- but the country lacks Korea's design and engineering capabilities.

　　The Koreans, of course, have also gotten a boost from foreign parts makers. Hyundai was once the butt of jokes about its shoddy workmanship, but in the past two years it has become one of the global leaders in quality. That turnaround is due in part to a relentless focus on quality at Hyundai but also results from an increased availability of top-notch parts from foreign suppliers. Today, foreign-controlled companies supply a third of the parts Korean auto makers use, up from less than a fifth in the 1990s, Kim says.

　　The business is accelerating. Sales of Korean auto components are expected to surge to $36.4 billion this year, up from $34.2 billion last year and $27.1 billion in 2002, according to the Korea Auto Industries Cooperative Assn. (KAICA). Delphi has seven plants in Korea, making everything from air bags to fuel injectors; its sales in the country climbed 33% last year, to $1.5 billion, representing some 45% of its Asia-Pacific revenues. During a visit last year, Delphi Chairman J.T. Battenberg III forecast growth of up to 20% in Korean sales in 2005 and said he remained "optimistic and bullish" about Korea.

　　The boom, though, may not last long. Chinese rivals will soon close the engineering and design gap with Korea -- perhaps in as little as two or three years. "Already we are witnessing far greater investment in China by global parts suppliers than in Korea," says Chung Ha Seung, senior managing director at Korea Automotive Motor Corp. (KAMCO), a wholly owned subsidiary of Bosch that makes small motors for wipers, seat sliders, and power windows. That means the Koreans must keep innovating and introduce automation to stay competitive.