Scandal-embroiled Hyundai chairman Chung Mong-koo puts great importance on the Chinese car market but his grand plan for the country recently suffered a setback.

According to the Korea Herald, Hyundai's Chinese unit lost ground to archrival Toyota in June, a major defeat in almost three years.

Hyundai sold 18,227 vehicles in China in June, sliding from fifth to seventh in the rankings there, while Toyota's Chinese unit sold 20,014 vehicles during the same period, climbing  notches from 10th in May to fifth in June, the paper said.

The reversal came as a shock for Hyundai because it outsmarted its Japanese rival in June 2003 and had no trouble in maintaining its edge until June.

Hyundai entered the Chinese car market in October 2002 and set about manufacturing its flagship Sonata sedan just two months after its Chinese subsidiary was founded, the paper said.

Signs of trouble began to appear early this year when Toyota ratcheted up its marketing in China, introducing new models. Toyota launched the Camry, a strategic model that it hoped would beat the Sonata. Toyota also raised the stakes by introducing the Corolla sedan to stage a direct showdown with Hyundai's Avante.

Pricing played a role. In the United States, Toyota's Camry and Corolla are about 20% more expensive than Hyundai's Sonata and Avante. But the price gap is 10% in China, which resulted in reduced competitiveness for Hyundai.

The recent development has sent alarm bells throughout Hyundai. The Korean carmaker had set its annual sales target in China at around 300,000 units but it sold just 132,975 units in the first half of this year, meeting only 44% of the 2006 target.

Toyota sold 112,772 vehicles in China during the same period, which accounted for 54% of its annual sales target - a bullish trend that contrasts with Hyundai's performance.

According to the Korea Herald, Hyundai has several excuses for the sluggish sales. First and foremost is the bribery scandal that dealt a blow to the company's strategic planning. Second, it struggled with lost production and a delayed launch of the Avante due to the labour dispute over wage increases.

The issue now is whether Hyundai can maintain its position in China. It ranked fourth in 2005 while Toyota lagged far behind at 10th. This year, the rankings might change unfavourably for Hyundai if the current trend continues.

Hyundai had to delay the construction of the second factory in China for about one year due to problems over land purchase and engine technology transfer. Chung had asked his staff to finish completing the new factory by the end of 2007.

Now that Chung has returned to work and begun to take care of the company's day-to-day operations, he is expected to fuel more energy into Hyundai's China market.

In response to slower sales, Hyundai slashed prices for the Sonata, Avante and Tucson models by as much as 10% late in June. Thanks to the drastic measure, Hyundai sold 24,160 vehicles in July, recapturing the fourth slot in sales while Toyota was narrowly behind with sales of 19,262 units, the Korea Herald said.