Despite strong growth in overseas markets, Hyundai Motor and sister company Kia Motors are coming under mounting pressure from the prolonged recession in the domestic South Korean economy. The sharp decline in the domestic vehicle market in the last two years, related rises in marketing costs and high raw material and energy prices are taking their toll. Tony Pugliese reports.

Hyundai Motor Company (HMC) saw its non-consolidated net earnings decline in the first half of 2004 for the first time since the 1997-98 Asia financial crisis. Kia Motors’ earnings from its vehicle operations are also coming under similar pressure.

Earnings weakness despite overseas growth

While these developments are seen as short-term setbacks and may force the company to revise some of the more upbeat close-range forecasts made it made earlier in the year, the group continues to derive significant growth momentum from its overseas expansion programme. The Hyundai Automotive Group (HAG) is investing heavily at present in globalising its manufacturing operations in its bid to gain a significant share of the world’s mainstream regional vehicle markets. HAG comprises Kia Motors, Hyundai Motor and around two-dozen affiliated companies including chassis systems maker Mobis. Combined, these companies employ around 55,000 people worldwide.

Hyundai Motor – which the South Korean press often points out is now more than 50% foreign-owned – saw CBU sales volumes from domestic operations decline by 4.2% to 1,646,763 units in 2003. This was mainly due to a near 20% drop in domestic sales volumes to 635,269 vehicles. Non-consolidated revenues declined by 5.2% for the year to W24.97trn, from W26.34trn in 2002.

In the first six months of 2004, operating conditions deteriorated further at HMC and this was reflected in the lower operating profits, which fell by 6.7%, and net profits (-1.56%). The company did report a moderate rise in sales revenues for this period, of 5.7%, despite a 5.8% decline in volumes. This reflects an improved product mix as the company prioritised its marketing expenditure on high-end products and on gaining share in some difficult markets.

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HMC has been investing heavily in lifting the quality image of the brand in the more mainstream regional markets. Exports of the Santa Fe and Tucsan remained strong. Demand in the US declined, however, as competition from US and Japanese companies intensified, but this was offset by strong growth in Europe and other markets. Also, some of the negative currency translation from the weak US dollar was offset by the benefits of the stronger euro.

Hyundai Motor Company key performance indicators, 2001-04

Source: HMC.

Kia Motors also reported an increase in sales revenues in the first half of 2004, to W7,272bn, up 13.3% compared with a year earlier. Operating profits slumped by over 21% to W277.3bn, however. Overall CBU sales volumes from its South Korean operations rose by 9.7% to 480,158, though mainly due to a 37.8% rise in exports to 355,867 units. Sharp rises in sales volumes to Europe and North America more than offset a dismal performance at home, where it underperformed the market with a 30.8% decline in sales volumes to 124,291 units.

Domestic volumes remain depressed

At home, Kia Motors is coming under rising pressure from a re-invigorated Daewoo brand – now under GM control – as well as from Hyundai Motor itself. HMC has replaced some of its best-selling models in the last year, including the Santa Fe full-size SUV in the latter part of 2003 and more recently it introduced the Tucson compact SUV.

Kia’s performance in the conventional passenger car segment has held up reasonably well, thanks to its own recent passenger car replacement programme which included the introduction of the Cerato and the Morning (Picanto) models. Its sales have suffered mostly in the recreational vehicle segment and the company is hoping that the newly launched Sportage SUV will help reverse this decline.

Kia Motors’ domestic sales by model, 2003-04

Sources: industry sources.

Despite gaining overall market share at home, Hyundai’s performance in the passenger car segment has been weak. The launch in August 2004 of the NF Sonata, South Korea’s best-selling car model, should help it redress this weakness however. The company has set a domestic sales target for the new Sonata of 100,000 units for next year and a further 200,000 are expected to be sold overseas. It should become an even greater source of earnings next year. Overall, the domestic economy is showing little sign of recovery and consequently the car market is likely to struggle to make significant progress in the near term. But the recent acceleration in new model activity could stimulate additional buying.

One major area that both Hyundai and Kia need to focus on is developing and maintaining brand and product differentiation to minimise sales cannibalisation. Production has so far been kept largely separate and platform sharing been limited. The two brands are making a concerted effort to sponsor different types of motor sports and other types of marketing campaigns. But the two occupy similar market niches and have a similar image in most markets overseas, so market overlap will be difficult to reduce. Kia is trying to adopt a sportier, youth oriented image similar to that being created by Mazda, while Hyundai appears to be targeting a more premium niche.

Hyundai Motor Company Domestic sales by model, 2003-04

Source: HMC.

Overseas operations supporting overall performance

In stark contrast with their domestic performance, Hyundai and Kia have both made very good headway in expanding overseas in the last few years, both with exports and increasingly with local production operations. Combined CBU exports rose by 17% in the first six months of 2004 to 878,000 units, with Europe accounting for most of the increase. In 2003, a total of around 1.54m vehicles were exported and a further 501,000 vehicles were produced at the group’s main overseas production sites. This means that combined overseas sales amounted in excess of 2m units last year.

Kia’s recent growth in Europe has largely come from its new Picanto model and the Carnival MPV and the Sorento SUV have been dong well in most markets. For Hyundai, CBU export growth has been slowing after strong growth in previous years. The Santa Fe, Getz, Sonata and Avante are its main export models, with the Getz model in particular helping to drive sales in Europe.

Hyundai-Kia CBU exports by main market, 2003-04.

Source: Hyundai-Kia.

Overseas production expansion

The Hyundai Automotive Group’s programme of expanding capacity overseas is becoming increasingly aggressive and somewhat reminiscent of Daewoo before the 1997-87 Asia financial crisis. By 2010, the group plans to have just under 2.2m units in large-scale vehicle production capacity overseas, more than double 2004 levels. Most of the expansion will be in China and full-scale facilities are also being built in Europe and in the USA. Hyundai-Kia’s ultimate target is to become a top-five global vehicle manufacturer by 2010, with annual global sales of 5m vehicles compared with 3m at present. This should mean a doubling of its revenues from US$35bn currently. But already, its overseas growth in the last few years has been tremendous.

In order to achieve these targets, the group realises that it needs to become a significant player in most of the world’s mainstream regional markets. By the end of 2005, Hyundai will have an installed overseas annual capacity of 850,000 vehicles and this will rise to 1.15m units by 2010.

Focus on China, USA

Currently, Hyundai Motor’s two largest overseas assembly production facilities are in India and China and another full-scale facility is scheduled to come on stream in spring 2005 in Alabama, USA. The India facility primarily makes the Santro (Atoz) mini-car, which is also exported to Europe, Mexico and some markets in Asia. The unit also makes the Accent for the local market.

In China, Hyundai began with making the Sonata and added the Elantra in December 2003, by which time it had the capacity to build 150,000 cars per year. By 2005, capacity is expected to rise by 300,000 units and if strong demand growth continues, capacity will double again by 2008, to 600,000 units. Hyunda also has CKD assembly partners in other Asian countries, operating on a much smaller scale.

Kia focuses on China, Europe

Kia Motors’ largest facility is in Iran, which makes the Pride hatchback for sale locally. The company is currently moving the Rio production line from Sohari, South Korea to Iran, adding a further 100,000 in production capacity. In China, it makes the TianLiMa, based on the Spectra platform, but it plans to add aggressively to the current capacity of 130,000 units. By 2008, it plans to have 430,000 units of annual capacity in place with the capability to produce a full range of vehicles. In Europe, a full-scale plant is being built in Slovakia which we understand will make a compact car, probably the Cerato.

Hyundai-Kia’s main overseas production operations

Sources: Industry sources.

Ambitious targets

As the company grows, the globalisation of Hyundai-Kia’s production operations will become increasingly important. Firstly, it needs to reduce its exposure to foreign currency fluctuations. It also needs to diversify its operations away from South Korea, where labour costs are high and unions powerful and difficult to deal with. Most of its planned expansion is in low-cost countries, which should help it maintain a cost-advantage. Being a relative-newcomer will give it additional flexibility in its future development.

Producing high volume models in the largest regional markets will allow Hyundai-Kia to tailor its products to better suite local demand and help it gain market share as a result. The company is also hoping that a strong early presence in what is undoubtedly the most promising growth market in the world – China, will help it secure a strong position in the long term. It is bullish about this market, where it forecasts overall sales to reach 10m units by 2010.

Central to its expansion plans is Mobis – its chassis systems supplier which now also supplies fully assembled platforms – taking outsourcing a step further. Taking these operations off-line helps to simplify the vehicle assembly operations, giving the group greater flexibility in organising its production network. Mobis is establishing a network of supply facilities alongside all the full-scale overseas production plants. Hyundai-Kia is also supported by some strong domestic tier-1 suppliers that have made significant progress in improving quality and in operating overseas. Those lagging behind have been encouraged to partner with some of the most powerful overseas global suppliers.

Despite short term difficulties such as the depressed domestic market, Hyundai-Kia appears to generate significant cashflow and profits. Whether it has made adequate provision to fund the current business plan and to cover against risks such as extreme demand fluctuations remains to be seen.

While its light passenger vehicle strategy seems to be coming together, in commercial vehicles the opportunities are far less apparent. It recently broke off with DaimlerChrysler in its domestic truck joint venture and the German auto group has signalled its readiness to sell its 10.4% stake in Hyundai Motor over the next year, depending on the share price. Such a sale could see HMC return to majority domestic ownership. Apart from in the domestic market, Hyundai Motor has a limited presence in the medium and heavy commercial vehicle sector and it may do well to offload these operations altogether.

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