Hyundai has hit the buffers in China this year, with sales down more than 21% in a market that is growing by 24%. Mark Bursa finds out what’s gone wrong, and how Hyundai plans to fix the problem.
Go deeper with GlobalData
The biggest surprise in the Chinese sales table this year has without a doubt been the performance of Hyundai. In 2005, Hyundai’s Chinese joint venture, Beijing Hyundai, soared to number two in the sales table behind Volkswagen. Combined Hyundai-Kia market share was more than 11%.
But this year, Hyundai sales have slumped while China has continued to grow. Total auto sales in China rose 24.46% the first nine months of 2007 to 6.46 million units, according to the China Association of Automobile Manufacturers (CAAM). In the period, sales of domestically-made passenger vehicles reached 4.58m units, up 23.84% from a year earlier.
Yet Hyundai has not capitalised on this growth. Indeed, this year it is the only major manufacturer to have experienced a fall in sales – and that fall has been severe, 21% during the first nine months of 2007 against 2006. This has forced the Korean manufacturer to revise downwards by 16% its China sales target for 2007 to 260,000 units from the previous 310,000. What’s gone wrong, and how can Hyundai reverse the slide?
It’s certainly been a turbulent year for Hyundai. As well as China, US sales have fallen in 2007. And even in Europe, where Kia’s Slovakian factory is now in production and Hyundai’s in the Czech Republic is under construction, sales for both brands have dropped. According to Acea, nine-month Hyundai sales in Europe slipped 10.8% to 207,883, while Kia fell 1.7% to 168,660.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataIndeed, the best news the company received in 2007 was the court ruling that chairman Chung Mong-koo was to have his three-year jail sentence for embezzlement and fraud suspended, leaving him free to run the company.
The Seoul High Court suspended the jail term for Chung Mong-koo for five years, citing his contribution to the national economy and the challenges that Hyundai faces in competitive global auto markets. Judge Lee Jae-hong said he simply couldn’t risk jailing Chung: “The Hyundai Motor Group plays a huge role in the country’s economy and Chung has an instrumental role. I don’t want to take a gamble on causing a crisis in the country’s economy,” he said.
At the root of Hyundai’s problems is the strength of the Korean currency, the Won, and the weakness of the US Dollar. Indeed, the Won is near its strongest versus the Dollar in almost a decade. Worryingly, the last time the Won reached such levels was during the Asia financial crisis 10 years ago – which pushed Kia and Daewoo into bankruptcy.
The strong currency puts added pressure on Hyundai’s overseas factories as they help the company reduce the impact of the strong Won. But the company’s US plant has fallen victim to the slowdown in the US economy. As in China, sales forecasts for 2007 have been downgraded, from 555,000 units to 475,000.
The currency issue will get worse, Hyundai believes. Currently the rate is around KRW907 to $1, but Hyundai expects the Won will strengthen to around KRW880 next year, forcing a renewed focus on cost-cutting. “The currency problem is the number one obstacle, the number one headwind for us,” Hyundai Motor CEO Kim Dong-Jin told the Bloomberg news agency. Hyundai plans to cut costs by 20% by 2009 through streamlining development and production, he said.
But currency woes alone still don’t account for the slump in China. In fact it looks like Hyundai has simply been out-fought in the most competitive market sectors – mid-sized and large cars – by its rivals, notably Toyota, which has really got its act together in China this year. “We did not prepare for the competitors’ penetration,” Kim Dong-Jin said.
Japanese companies have an inherent currency advantage against Korean firms: the Won has strengthened four times as much as the Japanese Yen in the past two years. Toyota was China’s fastest-growing brand in 2007 with sales growing at a rate of 72.6% against 2006 in the first nine months. Toyota has leapfrogged not just Hyundai-Kia, but also Honda in sales league table.
In particular, Toyota’s Camry is now in production in China at Toyota’s JV with Guangzhou Automobile, and is proving a hot seller, accounting for some 167,000 of Toyota’s combined estimated China sales of 430,000 this year.
Camry is pitched directly against the Hyundai Sonata, and has undoubtedly conquested sales, analysts believe. Likewise, Hyundai’s Elantra model has to compete in the fiercely contested medium sector, where it is up against strong rivals such as the Toyota Corolla and Honda Civic, as well as a resurgent Volkswagen and a strong GM.
As a result, Hyundai has had to cut prices by as much as 13% in China – extra pain to add to the currency problems. In September it slashed between 5,000 and 16,000 Yuan off the sticker prices of Accent, Elantra and Sonata models. But analysts believe such a move will simply escalate the price wars that are raging, especially in the mid-size sector. GM is considering cuts to the Buick Excelle, one of the Elantra’s main rivals. Clearly, price cutting won’t solve Hyundai’s woes in the long term.
The solution, the company believes, is major expansions in capacity and new models. Hyundai is building a new $1 billion plant in Beijing, which it hopes will double its capacity to 600,000 units. An unidentified Hyundai executive told Reuters: “As we plan to begin mass production in May next year, China’s sales would rise to 500,000 units in 2008 from this year’s 260,000.”
The Sonata and Elantra will be revised specifically for China next year, which should help, but even so this is a very ambitious plan. If Hyundai cannot meet its targets with one factory, how is it going to cope with twice the supply?
Some costs will be saved through increased local sourcing. Beijing Hyundai boosted its engine capacity to 500,000 units a year with the opening of a new 200,000-unit engine plant in August. And Kim Dong-Jin promises an “aggressive marketing push” in 2008. But realistically, sales are unlikely to recover until late in the year, and that 500,000 unit target looks very unrealistic.
Things aren’t a lot better at Kia’s Chinese operations. It was announced last month that
Kia had delayed the start of production at its second plant in China amid sluggish demand in the market. Kia has completed building the $600m plant at Yancheong in Jiangsu province, but Job One is to be delayed for “several months to add some facilities”, a company spokesman told the Korean Yonhap news agency. “No exact date has been set for commercial production,” he added.
Kia’s two Chinese partners, Dongfeng Motor Corp. and Jiangsu Yueda Co, are said to be upset at the delay according to the Seoul Economic Daily. The plant has an initial capacity of 300,000 vehicles and year one target was 200,000, rising to 430,000 units by 2010. The JV’s existing plant has just added the Sportage SUV to the range of vehicles it builds, which includes Rio, Cerato, Optima, and Carnival.
Kia Motors plans to introduce three models each year to Chinese market in the next couple of years, including a new SUV called Borrego SUV, a diesel version of the Sorento SUV. With SUV sales up more than 50% this year, targeting that sector makes sense.
It seems Hyundai has no option but to weather the storm. The company’s finances are in reasonable health – Hyundai Motor has posted a better-than-expected 45% rise in profit for the third quarter of 2007, on the back of strong domestic sales in Korea and the fact that the company avoided damaging strikes at its Korean plants for only the second year in the past two decades.
Full-year profits are expected to be up about 29% to $2bn, according to stock market forecasts. And analysts believe the Won’s appreciation against the Yen is showing signs of slowing at last, though the Dollar will remain weak. Expect more pain before Hyundai’s China revival kicks in.
Mark Bursa
‘Coolbear’
