Hyundai Group revises policy of rapid growth and prioritizes quality
Group overstated fuel-consumption ratings and faced huge recalls in U.S.
The Hyundai Group (Hyundai Motor and Kia Motors) achieved remarkable growth over these past few years. However, in 2012, it suffered from a string of setbacks for lower production capacity as a result of pre-set strikes in Korea and labor agreements that limited per-employee work hours. Other negative factors include the high valuation of the won, overstated fuel-consumption ratings issue and large-scale product recalls in the U.S.
Having achieved rapid and remarkable growth these past few years, the Company's global plants were busy building products, running at high operating levels. For example, Hyundai Motor's global plants were operating at 107.4% in 2011 and 108.4% in 2012. However, this year, in line with reduced working hours at its plants in Korea, there has been a supply capacity shortage in the U.S. and other regions where market growth is expanding. In the U.S., the Group's market share between January and July 2013 dropped to 8.2% from 9.0% of the same period in the previous year.
On the other hand, the Hyundai Group is very cautious about enhancing the capabilities of its production facilities. The Group's production levels significantly and rapidly increased for the past several years. If the Group continues on its current roadmap for high-volume production levels, its parts suppliers' might not be able to keep up with demand and problems with quality might surface. As a result, the Group's plan for increases in production capacity from the second half of 2013 will be limited as follows; Raising the production capacity at its plant in Turkey from 100,000 units to 200,000 in 2013; and launching commercial production at Kia's third production plant in China in the second half of 2014. (Also, it has been reported that Hyundai will construct its fourth plant in China.)
Even if Hyundai Group ends up losing market share temporarily, its main priorities will be first to enhance quality, ensure customer satisfaction, and raise earnings at the Group and its dealers. It will raise its administrative/management efficiencies and prepare for its future growth.
As for the Hyundai Group's business results, Hyundai Motor's profit margin is around 10% and Kia's is around 8%, indicating a rather high level of profitability, even though increase of sales are falling (Kia's were down 0.6% for the first half of 2013).
At the end of this report, we've provided production forecast by country for the Hyundai Group compiled by LMC Automotive. Although the Hyundai Group's growth rate may taper off, it is still estimated that its production volume will reach 8.35 million units in 2016.
Also, we plan to write a separate report about the Group's operations in China, the country where the greatest amount of growth is expected to occur.
Related report: Hyundai Group plans to sell 7 million vehicles in 2012, up by 400K over 2011 (posted in April 2012)
Shipments increased by 260,000, but exports from Korea fell by 90,000 for 1st half of 2013
Over the past few years, the global sales volume of the Hyundai Group has grown remarkably. The sales volume increased by 1.08 million units year-on-year in 2010, by 860,000 units year-on-year in 2011, and by 530,000 units year-on-year in 2012, reaching an annual total of 7.13 million units sold in 2012. This put Hyundai in fifth place among the world's OEMs, ahead of Ford that sold 5.67 million units in 2012. The Group's level of quality has also improved quickly. (Please refer to the above-mentioned related report for further details.) However, due to new working conditions introduced in the Group's plants in Korea, which includes reduced working hours, a worldwide shortage has surfaced in its ability to supply products.
The volume of units shipped worldwide for the first half of 2013 rose from 3.578 million to 3.836 million units year-over-year, an increase of 258,000. On one hand, the number of units shipped from the plants in China, Brazil and the U.S. increased by 350,000. This increase was achieved through two plants, one in China and another in Brazil, which started production, and an addition of third shift in its plants in the U.S. On the other hand, the number of units exported from Korea fell by 89,000 units. This led to a decrease in sales volume by 8,000 units in the U.S.. The sales volume in other areas stayed at the same level or fell slightly.
Wholesales Volume of Hyundai Group
|2009||2010||2011||2012||2013 Plan||Jan.-Jun. 2012||Jan.-Jun. 2013|
|Hyundai||Korea Plant (thereof) Domestic (thereof) Export Overseas Plant||1,612 701 911 1,521||1,731 658 1,073 1,881||1,885 682 1,202 2,174||1,911 667 1,244 2,499||1,850 668 1,182 2,810||992 328 664 1,191||922 326 596 1,469|
|Kia||Korea Plant (thereof) Domestic (thereof) Export Overseas Plant||1,142 411 731 392||1,400 483 917 730||1,581 492 1,089 957||1,589 481 1,108 1,131||1,600 480 1,120 1,150||851 238 613 544||818 226 592 627|
|Hyundai Group||Korea Plant||2,754||3,131||3,466||3,500||3,450||1,843||1,740|
Source: Hyundai and Kia's Financial Results for 2012 and January-June 2013, Hyundai Motor Investor Presentation June 2013
Wholesales Volume by Plant
|2009||2010||2011||2012||2013 Plan||Jan.-Jun. 2012||Jan.-Jun. 2013|
|Hyundai||US China India Czech||195 570 560 116||300 703 603 200||338 740 616 251||361 856 641 303||388 970 633 300||175 373 326 162||207 511 332 155|
|Turkey Russia Brazil CHMC (Note)||80 1,521||75 0||91 138||86 225 27||519||43 112||45 113 78 28|
|Kia||US China Slovakia||0 241 150||167 333 230||272 433 252||358 481 292||360 500 290||173 221 149||192 276 159|
(Note) Sichuan Hyundai Motor Company(CHMC) is a joint venture between Hyundai Motor and Sichuan Nanjun Automobile Group, a commercial-vehicle OEM based in China. A new plant building is under construction, with the plant's commercial operations scheduled to begin from the latter half of 2014. The 2013 unit sales shown are for Sichuan Nanjun's existing models being built at the joint-venture company.
Group prioritizes quality over rapidly increasing production capacity
As you can see in the following table, the Group either already finished or is planning to increase its production capacity between 2012 and 2013. For its plans in the latter half of 2013 and after, it has already decided to add facilities at its plant in Turkey so as to increase the production capacity there from 100,000 units to 200,000. It also plans to build Kia's third production plant in China. The Group has not announced any more plans after these.
Hyundai Group reportedly has a policy not to speed up plans to increase production volumes to 8-million unit-range, due to various issues both inside and outside Korea, including quality problems. These issues will be reported in the latter half of this report. The Group also reportedly had plans to build its third production plant in India, which was rejected by the Group's management.
New plants and Capacity increase from 2012
|SoP||Annual Production Capacity|
|China||Hyundai||Third Plant||June 2012||Annual capacity of 300,000 units at first, 400,000 units in the future.|
|CHMC||2013||To produce 160,000 units of commercial vehicles|
|Fourth Plant||Yet-to-be announced||To construct a plant with annual capacity of 300,000 units and starts production as early as 2015.|
|Kia||Third Plant||Late 2014||Annual capacity of 200,000 units at first and 300,000 units in 2015.|
|US||Kia||Georgia plant||Early 2012||Increased capacity from 300,000 to 360,000 units.|
|Hyundai||Alabama plant||Fall 2012||Three shift system introduced. Annual capacity will be increased from 300,000 units in 2012 to 370,000 units in 2013.|
|Brazil||Hyundai||Piracicaba plant||November 2012||Started production of small hatchback with annual capacity of 150,000 units.|
|Russia||Hyundai||St. Petersburg plant||2012||Increased capacity from 150,000 to200,000 units.|
|Turkey||Hyundai||Bursa plant||End of 2013||To double capacity to 200,000 units and starts production of "i10".|
|Between 2012 and mid-2014, the Hyundai Group plans to build new plants and increase the capacity of its existing plant so as to boost its production capacity by 1.09 million units. (This does not include the capacity at Hyundai's fourth plant in China.)|
High valuation of won: Against yen, it's 30% higher
The low valuation of the Korean won (KRW) is one of the factors that have supported the Group's performance these past few years. The value of the won has been rising these past few years. In January 2013, it rose to KRW 1,060 to USD 1, compared to when it was relatively lower at around KRW 1,180 to USD 1 around May and June 2012. However, as of August this year, it has again dropped to around KRW 1,120 won to USD 1, which is the average rate over the past two to three years.
Against the yen, the won has continued to drop steadily for the past 30 years and more. Beginning in 2013, however, the period of extremely high appreciation of the yen that continued until 2012 ended. The valuation of the won to the yen, which was around KRW 100 equal to JPY 6.8 in May/June 2012, has been continuing to rise around 30% these past two to three months, with KRW 100 equal to JPY 9. This has created a huge impact on the Group's business to compete with Japanese OEMs around the world. Hyundai Motor has reduced the portion of exports from Korean plant in order to minimize the impact that negative currency translation has on its business performance.
Hyundai's Portion of Export from Korean Plant and KRW/USD Exchange rate
|2008||2009||2010||2011||2012||Jan.-Jun. 2012||Jan.-Jun. 2013||2013 Plan|
|Portion of Export (Note)||40%||29%||30%||30%||28%||30%||25%||25%|
|KRW/USD Exchange rate||1,102.6||1,276.4||1,156.3||1,108.1||1,126.9||1,141.8||1,105.3||-|
Source: Hyundai Motor Investor Presentation June 2013 (Note) The portion of exports means: units exported from Korean plants/(total shipment from Korean plants + total shipments from plants outside Korea).
Labor issues in Korea: New labor conditions lower production capacity in Korea
A union leader with a strong confrontational attitude came onto the scene at Hyundai Motor's labor union in the fall of 2011, a time when public consensus was against huge corporations.
Between July and August 2012, Hyundai Motor's labor union demanded improved working conditions, conducting pre-set strikes. Hyundai compromised from fear of longstanding production decrease, agreeing to raise wages, limit the per-worker working hours, and end late-night/graveyard shifts. (It previously had operated under two 10-hour work shifts. It changed this to an 8-hour morning shift and a 9-hour evening shift which ends at 1:10AM.) The pre-set strikes, which were held for 28 days in total, reduced production by 82,000 units. In addition, the Company proposed that it would give 3,000 of the 6,800 part-time workers full-time status within 2013; however, the labor union has not agreed with this offer.
Further to this, from the beginning of March 2013, week-end production was stopped for about three months due to the 2013 wage negotiations. This was said to have lowered Hyundai Motor's production volume by 83,000 units.
To respond to the fall in production caused by the reduction in work hours, the Group will invest KRW 300 billion, to increase its production facilities and will work to enhance its production efficiencies as well. However, the actual benefits from these actions are still unknown. Hyundai Motor's largest Ulsan plant has an annual production capacity of 1.5 million units, but it is estimated that this level will drop by 234,000 units or by 15%. The total wholesale volume of Korean plants for the first half of 2013 by both Hyundai and Kia dropped by 100,000 year-over-year, from 184,000 to 174,000. ("wholesale volume of Korean plants" refers to the number shipped to the Korean domestic market as well as the number exported.)
Sales volume in Korea: Share of imported vehicles reached 10%
Total vehicles sales in the Korean market have remained in the range of about 1.55-1.60 million units since 2010. Under the free-trade agreement with Europe and the U.S. more vehicles are imported from those areas, with its share exceeding 10% in the Korean market for the first half of 2013. While Hyundai Group (Hyundai and Kia combined) still maintain a 70% market share, the share has been on a slightly downward trend in 2012 and for the first half of 2013. Hyundai Group invested the profits achieved from its overwhelming market share of Korean market to its business outside of the home country. Therefore, the heating up competition in the Korean market is said to have a huge effect on Hyundai Group.
Domestic sales in Korea
|2008||2009||2010||2011||2012||Jan.-Jun. 2012||Jan.-Jun. 2013|
|Hyundai Motor Kia Motors||570,962 316,432||702,678 412,752||659,565 484,512||684,157 493,003||667,777 482,060||328,115 239,138||325,087 226,404|
|Hyundai Group Total Market share||887,394 71.9%||1,115,430 76.2%||1,144,077 72.9%||1,177,160 73.9%||1,149,837 73.5%||567,253 74.5%||551,491 72.7%|
|Other OEMs in Korea Total Korea-made vehicles||267,089 1,154,483||278,570 1,394,000||321,349 1,465,426||297,477 1,474,637||261,020 1,410,857||127,855 695,108||125,416 676,907|
|Imports Market share||80,537 6.5%||69,002 4.7%||104,977 6.7%||117,592 7.4%||154,407 9.9%||66,391 8.7%||81,493 10.7%|
|Source: Korea Automobile Manufacturers Association|
|(Note) 1.||The Hyundai Group's market share means its share in the entire Korean domestic market that includes imported vehicles.|
|2.||The breakdown of vehicles imported between January and June 2013 by country is as follows: Germany: 37,971 units, U.S.: 15,650 units, Japan: 14,861 units, and the U.K.: 3,580 units. Japanese OEMs are taking advantage of the free-tree agreement between Korea and the U.S. and importing the U.S.-made Toyota Camry, Venza, and other vehicles.|
Hyundai's sales and operating profit by region
|Korea||North America||Asia||Europe||Other||Consolidation adjustments||Total (consolidated)|
|Source: Hyundai's 2011 Annual Report|
|(Note) 1.||The 2012 Annual Report does not disclose operating profit by region.|
|2.||The total consolidated operating profit for 2011 was corrected to KRW 8,029 (in billions),when the Group announced its 2012 financial results.|
U.S. Market: Group's Market Share Drops 0.8%, to 8.2% through July 2013
Hyundai Group's sales in the U.S. between January and July 2013 were 753,000 units, a slight decrease from the 755,000 units sold the year before. As a result, its market share dropped from 9.0% to 8.2%.
Hyundai's plant in Alabama builds the Sonata and Elantra, working in three shifts. Between January and July 2013, the number of U.S. -made Hyundai- and Kia-brand vehicles sold in the U.S. was 480,000, a 7.3% increase y/y. However, the number of imported Hyundai and Kia vehicles sold in the U.S., fell to 270,000, an 11.2% drop y/y.
However, according to reports published on June 10, 2013 in Automotive News and other sources, Hyundai Group's head office in Korea and its sales company in the U.S., were said to be aggressively emphasizing quality, customer satisfaction, and profitability, even at the expense of sacrificing some market share and curtailing sales incentives.
According to Hyundai Motor, the value of its incentive programs in 2012 in the U.S. amounted to USD 946 per vehicle. This is less compared to the USD 1,804 and USD 2,206 per vehicle offered by Toyota and Honda, respectively. Since April 2011, the Group has maintained its vehicle inventory turnover at less than 60 days.
Hyundai group's U.S. sales: Domestic(made in U.S.) versus Import (made in Korea)
|2009||2010||2011||2012||Jan.-Jul. 2012||Jan.-Jul. 2013|
|Total US Light Vehicle||10,431,509||11,589,844||12,779,007||14,492,398||8,426,339||9,134,810|
Source: Automotive News
U.S.: Overstated fuel efficiency and large-scale product recalls
In November, 2012, The U.S. Environmental Protection Agency (EPA) announced that 900,000 vehicles that had been sold by Hyundai and Kia combined, had overstated fuel efficiency. In response, the Hyundai Group showed its sincere apologies to both its customers and its dealers. The Group offered a comprehensive compensation program, which was viewed favorably by a majority of its customers, who remained relatively cool over the situation. Furthermore, 1.68 million Hyundai/Kia vehicles were subject to a recall for faulty brake-light switches.
Thirteen types of models (900,000 Units Total) were found to have overstated fuel efficiency
|In November 2012, the EPA announced that Hyundai Group overstated fuel efficiency of 900,000 Hyundai- and Kia-brand, 2011-2013 model-year vehicles. The overstatement covers eight models by Hyundai and five by Kia. According to the EPA, the fuel efficiency was overstated by 6 miles maximum per gallon, three percent in average from the data submitted by the company.|
|Since 2000, the EPA had discovered only two cases of incorrect fuel efficiency. Moreover, this is the first time it has uncovered such a huge-scale departure from the declared fuel efficiency. Among the 13 models with overstated MPG, six models indicated a rating of 40 miles per gallon in highway driving. Since 40 miles per gallon in highway driving is viewed as one of the standards for low fuel consumption, suspicions were raised that the Group intentionally provided incorrect ratings. However, the Hyundai Group denied such claims, stating that the incorrect rates were caused by procedural errors in testing operations at laboratories in Korea.|
|The Hyundai Group, in response to an order by the EPA, re-labeled its autos with new window stickers reflecting the corrected fuel efficiency. In addition, the Group calculated the maximum amount of money that customers were assumed to have paid, based on the difference in ratings indicated at the time they bought vehicles, and the corrected fuel efficiency. The Group then compensated the balance adding 15% on top of that. In addition, the company offered free car washes and other services. The majority of customers remained relatively calm over the situation, being rather satisfied with the compensation the Group gave in response.|
Source: EPA 2012.11.2
Recall of 1.6 million vehicles due to faulty brake-light switches
|The Hyundai Group announced in April 2013 that it would recall 1.68 million vehicles due to faulty brake-light switches. For instance, when drivers stepped on the brakes, the brake-lights would not go on. In other instances, when drivers stepped on the brakes, the cruise-control speed-setting would not disengage. And on vehicles with automatic transmissions, drivers may not get the parking-mode (P) gear setting to move. All of these issues may lead to serious accidents.|
|A total of 1.68 million vehicles were subject to the recall; 1.06 million Hyundai-brand vehicles including the 2011 Sonata, 2007-2009 Accent and Tucson, the 2007-2011 Elantra, and others; and 620,000 Kia-brand vehicles such as the 2010 Optima, 2007-2010 Rondo and Sportage. All of these vehicles were equipped with the same type of switch manufactured by a Korean parts supplier.|
Source: National Highway Traffic Safety Administration (NHTSA) 2013.4.1、Automotive News 2013.4.15
Profit margins remained high even though operating profits fell for 1st half of 2013
Since 2011, it became mandatory for companies listed on the Korean stock market to switch from reporting their consolidated financial results based on the K-GAAP Standard to the K-IFRS Standard. Hyundai owns 33.88% of the stock shares in Kia, thereby making Kia a Hyundai subsidiary based on the equity method of accounting. For the most part, the majority of operations outside Korea are accounted on a consolidated basis, while the operations in China are accounted based on the equity method.
Both Hyundai and Kia, which had continued to maintain a high level of earnings, found themselves posting lower profits in the fourth quarter of 2012 This was due to a shortage in production capacity resulting from changes in its labor agreements and the negative currency translation due to the high valuation of the won. (The companies did report higher operating profits over the entire year in 2012.)
Between January and June 2013, Hyundai Motor's operating profit fell by 7.7% and Kia's fell by 21.0% y/y. As for Kia, its financial results were affected by the production issues in Korea and the high proportion of vehicles built for export significantly. In spite of these temporary setbacks, Hyundai Motor and Kia had a 9.6% and 7.6% operating profit margin respectively. Furthermore, net profits remained high at both companies, especially after the figure was added based on the equity method from the profits made by affiliated companies including the Group's companies in China. Hyundai Motor's net profit was KRW 4.6 trillion and Kia's was KRW 2.0 trillion.
|2010||2010||2011||2012||Jan.-Jun. 2012||Jan.-Jun. 2013|
|Unconsolidated results (K-GAAP)||Consolidated results (K-IFRS)|
|Hyundai||Revenue Operating profit Margin (%)||36,769 3,227 8.8%||66,985 5,918 8.8%||77,798 8,029 10.3%||84,470 8,437 10.0%||42,105 4,631 11.0%||44,551 4,275 9.6%|
|Equity earnings Pre-tax profit Net profit||2,801 6,308 5,267||1,682 7,492 6,001||2,404 10,447 8,105||2,580 11,605 9,056||1,405 6,296 5,001||1,413 5,939 4,611|
|Kia||Revenue Operating profit Margin (%)||23,261 1,680 7.2%||35,827 2,490 7.0%||43,191 3,499 8.1%||47,243 3,522 7.5%||24,341 2,317 9.5%||24,197 1,831 7.6%|
|Equity earnings Pre-tax profit Net profit||1,106 2,776 2,254||982 3,323 2,698||1,337 4,722 3,519||1,414 5,164 3,865||666 3,074 2,298||617 2,440 1,965|
|Source: Hyundai and Kia's Financial results for 2012 and for January-June period of 2013|
|(Note) 1-1.||Under K-GAAP Standards, it was possible for companies to include the results of subsidiaries in their consolidated results, as long as the parent company had more than a 30% shareholding in and was the major shareholder of the subsidiary. Under the K-IFRS, however, the shareholding ratio was raised to more than 50%. As of the end of December 31, 2012, Hyundai had only a 33.88% shareholding in Kia.|
|1-2.||As a result of this, the Hyundai Motor's consolidated financial results based on the K-IFRS did not fully include the results from subsidiaries such as Kia Motor, Hyundai Hysco, and others These subsidiaries, along with those in China, were accounted for under the equity method of accounting, and their net profits were reflected in the consolidated net profits of Hyundai Motor.|
|2.||Kia Motor also announced its consolidated financial results based on the K-IFRS.|
|3.||Hyundai and Kia both reported increases in revenues and profits for the entire 2012 year as a whole. For the fourth quarter of 2012, the companies were still able to report higher sales, but due to the strong won, ended up reporting lower operating profits. For the quarter, Hyundai's fell 11.7% and Kia's fell 51.1%, which was a tremendous decrease.|
|4-1.||Between January and June 2013, Kia shipped 144.5 million units, which was an increase over the 139.5 million units shipped during the same period the previous year. However, in spite of this, Kia reported a 0.6% drop in sales, faced with a 3.1% higher valuation of the won. During the same-period the previous year, USD 1 was the equivalent of KRW 1.142, while this year, USD 1 is equal to KRW 1,107.|
|4-2.||For the same, January-through-June period, Hyundai Motor was also affected by the higher won. The rates were USD 1=KRW 1,142 the previous year, and USD 1=KRW 1,105 this year. In spite of this, Hyundai Motor was able to report higher sales.|
Production Forecast by LMC Automotive: Hyundai Group production forecasted to 8.35 million in 2016
|(LMC Automotive、June 2013)|
According to LMC Automotive's forecast in June 2013, Hyundai's light vehicle productions in 2013 will increase by 5.9% to 7.65 million units and reaches 8.35 million units in 2016.
Hyundai's China production supports the steady increase which shows a 15.9% growth y/y in 2013 to 1.54 million units. By 2016, the country's production is expected to increase to 2.0 million units, which is a significant growth of 30.0% compared to the volume of 2013. LMC automotive indicates, "The Hyundai Group is going strong in Asia Pacific on the back of rising demand in China and India, but both Hyundai and Kia continue to make inroads in North America and Europe."
Hyundai Group's Korean production volume is expected to hover around 3.5 million units until 2016.
The global research company points out "Hyundai and Kia are facing increasing wages at home that would impact their global competitiveness but both are unlikely to make any major production shifts out of Korea in the next few years. This is because global demand for some key models is expected to rise faster than their ability to expand oversea build."
Hyundai Group production forecast by country and by make (LMC Automotive)
|Czech Republic Sub-total計||200,135||251,146||303,035||302,902||276,413||259,337||274,721|
|Source: LMC Automotive "Global Automotive Production Forecast (June, 2013)"|
|(Note) 1.||Data indicates figures of only small-size vehicles, including passenger cars and light commercial vehicles with a gross vehicle weight of under 6 tons.|
|2.||All rights reserved. Reproduction of any data will require permission of LMC Automotive.|
|3.||For more detailed information or inquiries of forecast data, please contact LMC Automotive.|
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