Perfect storm of complications has Hyundai Motor facing down a crisis

Posted on : 2017-07-23 10:37 KST Modified on : 2017-07-23 10:37 KST
To stay afloat, Hyundai must tackle falling demand in US and China, rising competition and changing auto industry paradigm
Cars waiting to be exported from the Hyundai Motor port in Ulsan
Cars waiting to be exported from the Hyundai Motor port in Ulsan

There are increasing concerns about the future of Hyundai Motor Company, the leading company in South Korea’s automotive industry. On top of plunging sales in the biggest global markets of China and the US, the company is plagued with problems, including chronic labor disputes and recalls resulting from product defects. As the paradigm of the automotive industry undergoes rapid change, a perfect storm of sluggish demand, stiffer competition and a pricy, inefficient industrial structure has brought Hyundai to a critical juncture, experts say.

Last year, South Korea surrendered the fifth place in the global ranking for the number of automobiles produced to India, and now even that sixth-place ranking is in danger, with Mexico on its heels. poor performance at Hyundai, a veteran automaker, is largely to blame for this disturbance in the automobile industry.

Last year marked the end of 18 straight years of growth at Hyundai, as sales fell for the first time since the Asian financial crisis. The yearly operating profit margin fell from 10.3% in 2011 to 5.5% last year, as the company dished out huge sums for marketing as competition intensified and sales stalled in major markets. Even worse is the fact that this has become a vicious cycle. The number of cars sold both in South Korea and overseas in the first half of this year (2,198,000) was down 8.2% from the same period last year. Sales were cut in half in China and slid 8.6% in the US and 6.5% in Europe.

Hyundai Motor sales and profits
Hyundai Motor sales and profits

With operations set to begin at the Hyundai factory in Chongqing (Hyundai’s fifth factory in China) at the end of next month, the company is facing a worsening dilemma. The problem is that there are no signs that the falling sales will stabilize or recover. Last month, sales by Hyundai Motor and Kia Motors in the Chinese market were down around 60% compared to the same period last year. This was the fourth month in a row that sales declined since the dispute over the deployment of the THAAD missile defense system escalated in March. Factory operations have fallen to 50% of capacity, and cracks are starting to form in the sales network that the company spent so much time establishing. “No matter how hard we try to bring out new cars tailored to the local market, our hands are tied,” said one source at the company.

But not all the blame can be placed on THAAD. An even bigger problem, experts say, is that Hyundai missed the timing for releasing new models while its products became less competitive. Rapidly growing local companies in China have undercut Hyundai and Kia by playing up their lower prices. “Another factor is that [Hyundai] waited too long to develop and release models customized to the local market in China and the US. They need a more methodical and concrete strategy for developing new models,” said Kim Pil-su, a professor of automotive engineering at Daerim University.

Other issues holding Hyundai back are a large-scale recall, controversy over quality and adversarial labor relations. Quite a few people also believe that the company brought on the crisis by focusing so much on quantitative growth that it misjudged market trends. “For a while, Hyundai was selling comparatively well when GM declared bankruptcy and Toyota was going through a major recall, but it was a mistake to regard that as competitiveness. They need to consider whether their emphasis on quantitative growth caused them to be remiss in developing new technology and vehicles for the future,” said Lee Hang-gu, a senior analyst for the Korea Institute for Industrial Economics and Trade (KIET).

On July 26, Hyundai will release its performance for the second quarter. Since there are several negative factors, financial analysts are projecting a greater than double-digit drop in operating profit year on year. And since the US government under President Donald Trump is moving into negotiations to revise the South Korea-US Free Trade Agreement (KORUS FTA), with a particular focus on South Korean automobiles and steel, Hyundai’s woes are gradually going from bad to worse. The fact that the company recently launched a task force to strengthen its competitiveness and brought in the directors of its overseas branches to brainstorm ways to turn the situation around also reflects the sense of crisis at the company.

“If they aren’t able to respond properly to the rapid changes to the paradigm of the automotive industry, they could fall behind within a couple of years. They need to invest more in improving their qualitative competitiveness than in quantitative growth,” Lee Hang-gu said.

By Hong Dae-seon, staff reporter

Please direct questions or comments to [english@hani.co.kr]

 

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