Hyundai-Kia Group: Declining profitability since 2013
New plants in China and Mexico to increase supply and mitigate won's appreciation
Hyundai Motor Company Group's shipment volume increased sharply by 1.07 million units year-on-year (y/y) in 2010, and by 855,000 units y/y in 2011. Since then, Hyundai shelved new plant construction plans in order to address quality control and other impending issues, focusing on internal improvement efforts.
Hyundai and Kia registered an increase in operating profit and maintained a high performance level that overwhelmed other global OEMs in 2012 with 10.0% and 7.5% operating profit margin, respectively.
However, the group faced a number of issues emerging from won's appreciation, tensions in labor-management disputes, overstatement of fuel efficiencies of their vehicles, and declining market shares in domestic sales resulting from rapid in-flow of imports. They were respectively a blow to the favorable business environment that has contributed to the group's rapid growth and high profitability in recent years. Won's appreciation, in particular, was the biggest blow that is now causing a sluggish growth in sales revenue and profits despite the increase in wholesale volume.
Both Hyundai and Kia ended the year 2013 with the first decline of operating profit since they shifted to the K-IFRS reporting system in 2010. This trend continued through January-June 2014. Between the two companies, the decline of profit margin is larger for Kia that has a higher export ratio from Korea (Hyundai and Kia are still enjoying high operating profit margin in January-June 2014 at 9.1% and 6.3%, respectively).
Hyundai-Kia Group's global production capacity at the end of 2014 will be approximately 8 million vehicles. Hyundai's new plant will start operations in Chongqing, China, starting in 2016 with annual capacity of 300,000 vehicles. In August 2014, Kia announced plans to build a new plant in Mexico with an annual capacity of 300,000 vehicles.
Hyundai-Kia Group aims to strengthen their supply capacities and mitigate the impact of won's appreciation by supplying from new plants in China and Mexico. However, many of the adverse situations are still casting shadows over them.
Related report: Hyundai Group revises policy of rapid growth and prioritizes quality (Aug. 2013)
Operating profit declining since 2013； revenue declining in 2014
Hyundai ended 2013 with 3.4% growth y/y in revenue and 1.5% decline y/y in operating profit. The company reported a slight decline in revenue at 0.3% and 5.8% decline in operating profit in January-June 2014. Hyundai reported 1.9% decline in revenue along with 13.3% operating profit decline in April-June 2014 during which the company suffered from won's high appreciation in particular. The market situation was worse for Kia that reported 0.8% slight growth in revenue along with 9.8% operating profit decline in 2013. Kia reported 0.9% decline in revenue and 17.8% decline in operating profit in January-June 2014. The situation even worsened for Kia, as it did for Hyundai, in April-June 2014 during which Kia reported 8.1% decline in revenue and 31.7% decline in operating profit.
According to Hyundai, the company's sluggish growth is due to won's appreciation, decrease in production resulting from strikes, and tough competition in home market. Hyundai plans to strengthen quality, fuel efficiency and other basic performances of its vehicles to win top-class competitiveness in those areas.
|2010||2011||2012||2013||2013 1H||2014 1H|
|Hyundai||Sales Revenue Operating Profit Margin (%)||66,985 5,918 8.8%||77,798 8,029 10.3%||84,470 8,441 10.0%||87,308 8,316 9.5%||44,551 4,275 9.6%||44,402 4,026 9.1%|
|Recurring Profit Equity Earnings Net Profit||7,492 1,682 6,001||10,447 2,404 8,105||11,610 2,582 9,061||11,697 3,057 8,994||5,939 1,413 4,611||5,620 1,351 4,378|
|Kia||Sales Revenue Operating Profit Margin (%)||35,827 2,490 7.0%||43,191 3,499 8.1%||47,243 3,522 7.5%||47,598 3,177 6.7%||24,197 1,831 7.6%||23,980 1,505 6.3%|
|Recurring Profit Equity Earnings Net Profit||3,323 982 2,698||4,722 1,337 3,519||5,164 1,414 3,865||4,829 1,320 3,817||2,440 617 1,965||2,385 788 1,900|
|Source: Consolidated statement of income from both companies|
|(Notes) 1.||In 2011, listed companies in Korea were required to shift from K-GAAP to K-IFRS accounting standard when filing their financial reports (above figures for 2010 have been converted into K-IFRS figures).|
|2.||The K-IFRS requires that all subsidiaries in which the parent company has more than 50% share are to be consolidated. Hyundai had 33.88% share in Kia as of December 31, 2013, and Kia is not fully consolidated in Hyundai's consolidated financial reports prepared based on the K-IFRS. An equity method is applied to Kia under which its equity profits are reflected in Hyundai's consolidated net profit.|
|3.||Kia's financial reports are also prepared based on the K-IFRS standard since 2010.|
Korean won becomes stronger to KRW 1,020 to USD in August
KRW's exchange rate to the dollar fluctuated between KRW 1,100 and 1,200 after 2010. The won has grown stronger especially since April 2014. The exchange rate soared to around KRW 1,020 to the dollar toward the end of August, far higher than what is considered fair by exporters in Korea (KRW 1,073 to the dollar, see Note). The won's high appreciation is reportedly due to Korea's huge current account surplus (5th highest in the world at KRW 82 trillion in 2013) and in-flow of foreign money resulting from the unprecedented monetary easing among advanced countries.
The won is also becoming stronger to the Japanese yen. The exchange rate rose from KRW 100 to JPY 7 in December 2012 to JPY 8 in January 2013 and to JPY 10 after June 2014.
KRW/USD Exchange rate at Hyundai
Source: Hyundai Motor Investor Presentation June 2014 (Note) The exchange rate considered fair by exporting companies in Korea was KRW 1,073 to the dollar in average as of May 2014 (according to Nihon Keizai Shimbun dated June 22, 2014).
Time-limited strikes on base wages for overtime payment
In December 2013, Korea's supreme court reached a verdict that part of the bonus be included in the base wage that is used to calculate an employee's overtime payment.This court decision is the biggest issue in labor-management negotiations among all industries in Korea in 2014. Negotiations at Hyundai broke down and the labor union went into a time-limited strike at the end of August 2014 (the third year of strikes in a row).
In March 2013, Hyundai management agreed to discontinue late-night shifts. The work hours were shortened by 3 hours and the new work hours were set to from 6:30 a.m. to 1:10 a.m. of the following day.
The average salary among Hyundai's employees is said to be very high at KRW 94 million. Yet, it takes Hyundai 30 hours to produce a vehicle in Korea, which is nearly double the time required at plants overseas. It is said that Hyundai's plants in Korea are becoming less competitive because of these conditions.
Court decision and labor-management talks in Korea in 2014
|Overtime pay to be calculated on a larger base||In December 2013, the Korean supreme court reached a verdict regarding overtime payment for employees. Conventionally, overtime payment and holiday work allowance in Korea was calculated based on the base payment (base salary and managerial allowance). The court decision demands that the fixed portion of bonus that is unaffected by individual or the company's performance be added to the base payment as the new base of overtime pay calculation.|
|Many labor unions in Korea have taken legal actions about the range of normal pay and the court decision is expected to rule them. In some trial calculation, the labor cost will increase by KRW 2,500 billion a year across auto industries.|
|According to JETRO's Seoul office, many Japanese companies operating in Korea feel that the court decision has a great impact on their business and that they would have to review their payment systems accordingly.|
Labor-management negotiations in 2013
|Pay raise||In September 2013, Hyundai's labor and management agreed to a monthly raise of KRW 97,000.|
|Maintaining production at home||They also agreed to maintain a production volume in Korea at 1.74 million vehicles and put priority on plants in Korea when producing all-new models. The labor union demanded a minimum production quantity in Korea as they feared that Hyundai was increasing production in foreign countries.|
|This agreement will work as a constraint when Hyundai decides to reduce production in Korea and increase production capacities at overseas plants. It is said that the time required to produce a vehicle at Hyundai's plants is 15.4 hours in the U.S., 18.8 hours in China, and 30.5 hours in Korea.|
|Decreased production due to strikes||It is said that Hyundai's production quantity decreased by 130,000 units due to strikes in the spring and the summer in 2013. The low output is causing slow sales in the U.S. that has a high import ratio from Korea (36.1% for Hyundai-Kia Group in 2013).|
Source: Nihon Keizai Shimbun September 18, 2013/December 19, 2013/December 28, 2014, Nikkei Sangyo Shimbun July 15, 2014, JETRO press release January 6, 2014 (Notes) After talks in 2012, Hyundai's labor and management agreed to abolish late-night shifts starting in March 2013. The conventional work shifts (10 hours each in the daytime and at night including two extra-work hours) were replaced by 8-hour early shift and 9-hour late shift including one-hour extra-work time. Work hours are between 6:40 in the morning and 1:10 in the morning of the following day. As a result, the total work time was shortened by three hours. Kia's labor and management also agreed to adopt similar work schedules.
Overstated fuel efficiency for Hyundai models in Korea
In November 2012, Hyundai and Kia were accused of having overstated fuel efficiency of their vehicles sold in the U.S. market. Similar accusations were heard in 2014 about their vehicles sold in Korea.
In August 2014, Hyundai faced USD17.35 million penalty fined by NHTSA for a delay in reporting a faulty brake.
The 2014 J.D. Power Dependability Study was conducted in October to December 2013 counting the number of problems per 100 three-year old vehicles. It found 169 problems in Hyundai-brand vehicles. Hyundai came in 27th among 31 brands surveyed.
Overstated fuel efficiency found in 140,000 vehicles sold in Korea
|Santa Fe||With the onset of overstated fuel efficiency in the U.S., the Korean Ministry of Land, Infrastructure and Transport (MOLIT) conducted a survey regarding fuel efficiencies of Hyundai and Kia vehicles. In June 2014, the MOLIT officially announced that 8.3% overstatement of fuel efficiencies was found with the 2000cc diesel-fueled Santa Fe model (rear-wheel drive with automatic transmission) produced after May 2012.|
|Upon hearing the announcement, 1,500 people that had purchased the Santa Fe in July filed a collective lawsuit demanding a KRW 1.5 million compensation per vehicle. About 140,000 units of the applicable model had been sold. If all compensation demands are to be paid, they will add up to KRW 210 billion for Hyundai.|
|In August, Hyundai corrected the published fuel efficiency of the Santa Fe from 14.4km to 13.8km per liter and announced that the company would pay up to KRW 400,000 per owner. The compensation money was calculated based on the difference between the overstated efficiency and the corrected efficiency and the psychological damage to the purchaser assuming that the car is driven for five years.|
|All-new Sonata||In the all-new Sonata premiere held in March 2013, Hyundai had announced the internally measured fuel efficiency of the gasoline-fueled version was 12.6km per liter. It was then corrected to 12.1km per liter according to the government's test procedure. There was nothing illegal about making the change but it is said it damaged the company's image again.|
Source: Nihon Keizai Shimbun May 26, 2014/August 13, 2014, Nikkei Sangyo Shimbun July 16, 2014
Quality issues in the U.S.
|USD 17.35 million fined by NHTSA||In August 2014, the U.S. DOT's National Highway Traffic Safety Administration (NHTSA) fined USD 17.35 million to Hyundai. The fine was due to a delay in notifying NHTSA, and announcing to all concerned, about a faulty brake found in approximately 43,500 units of the 2009 to 2012 models of the Genesis. Hyundai had received the faulty report in 2012 by the brake part suppliers but did not announce recalls until October 2013. The U.S. law requires automakers to notify NHTSA within five days after receiving a report about fault.|
|The faulty brake was caused by rusty parts which could lead to total loss of braking function. The same parts were delivered to GM as well and GM had received the faulty report by the supplier at the same time as Hyundai. GM conducted recalls before Hyundai.|
Source: NHTSA Press Releases August 7, 2014, Automotive News August 11, 2014
|J.D. Power Dependability Study||The 2014 J.D. Power Dependability Study was conducted in October to December 2013 covering problems experienced by original owners of the 2011 models. The overall dependability was rated according to the number of problems experienced per 100 vehicles. The study found 169 problems in Hyundai-brand vehicles. Hyundai ranked 27th among 31 brands surveyed. Many of the problems were found in the Sonata and the Elantra that were released as all-new 2011 models. Kia ranked 19th with 151 problems. The auto industry's average was 133.|
|J.D. Power Initial Quality Study||The 2014 J.D. Power Initial Quality Study was conducted in February to May 2014 counting problems experienced by original owners of the 2014 models during the first 90 days of ownership. Both Hyundai and Kia were rated high with Hyundai ranking 4th with 94 problems and Kia ranking 7th with 106 problems among 32 brands surveyed. The Hyundai's 2014 models are rather old and problems had been corrected in most of the Hyundai vehicles by the time of the Study.|
Hyundai-Kia's market share falls below 70% at home due to increase in imported vehicles
The Hyundai-Kia Group has a high market share in Korea that exceeds 70% along with high margin percentage. The high share was said to be the source of funds behind the Group's brisk investment in foreign countries. However, their sales in 2013 at home decreased by 50,000 y/y to 1.09 million units with the share falling below the 70% mark to 69.8%. The declined sales were due mainly to the increase in imported vehicles that sold 191,000 units in 2013. The market share of imported vehicles rose above the 10% mark for the first time to 12.1%. The market share of imported vehicles rose to 14.4% in January-June 2014 with that of the Hyundai-Kia Group falling to 67.9%.
The surging import in Korea owes in part to the lowered import duties after the FTA was concluded with the U.S. and EU, and also to the won's appreciation.
Hyundai-Kia's sales in the Korean market
|2009||2010||2011||2012||2013||2013 1H||2014 1H|
|Hyundai Kia||702,678 412,752||659,565 484,512||684,157 493,003||667,777 482,060||640,865 458,000||325,611 226,404||346,486 218,764|
|1,115,430 76.2%||1,144,077 72.9%||1,177,160 73.9%||1,149,837 73.5%||1,098,865 69.8%||552,015 72.7%||565,250 67.9%|
|Other domestic OEMs||278,570||321,349||297,477||261,020||284,493||125,427||147,550|
|69,002 4.7%||104,977 6.7%||117,592 7.4%||154,407 9.9%||191,066 12.1%||81,492 10.7%||119,478 14.4%|
|Total sales in Korea||1,463,002||1,570,403||1,592,229||1,565,264||1,574,424||758,934||832,278|
|(Notes) 1.||Hyundai-Kia Group's market shares and those of imported vehicles are percentage to the vehicles including imported vehicles in Korea.|
|2.||Imported vehicles into Korea in January-June 2014 included 53,470 units from Germany, 24,041 units from Japan, 14,803 units from the U.S., and 4,211 units from the U.K. Japanese automakers are exporting the Toyota Camry, Venza and other models that are produced in the U.S. to Korea under the FTA concluded between Korea and the U.S.|
Slight decrease in U.S. sales in 2013 with market share falling from 8.7% to 8.1%
Hyundai-Kia Group's sales in the U.S. nearly doubled from 675,000 units in 2008 (with a market share of 5.1%) to 1.26 million units in 2012 (8.7% share). However, the Group's sales decreased by 4,644 units in 2013 with the share falling from 8.7% to 8.1%, while the industry volume in the U.S. increased by a million units during the year. The number of U.S.-made vehicles increased by 26,000 units but imports from Korea decreased by more than 30,000 units because of the restricted supply due to strikes. Hyundai's Santa Fe is produced at Kia's Georgia plant in the U.S. (106,000 units produced in 2013). As a result, imported vehicles account for more than 50% of Kia's sales.
According to Automotive News dated November 11, 2013, the Hyundai-Kia Group gained momentum during the past few years that were characterized by several incidents. Consumers grew more price-oriented during those years due to financial crisis. GM and Chrysler filed for bankruptcy and Japanese automakers faced severe supply shortages after the East Japan Great Earthquake. The Automotive News notes that Hyundai-Kia Group's sales decline in 2013 was caused in part by the recovery among competitors in terms of their product appeal and production.
To activate sales in the U.S., Hyundai-Kia are increasing their incentives from around USD 1,000 per vehicle in 2011-2012 to USD 1,377 in 2013 and to USD 1,836 in January-March 2014 (still lower than the industry's average of USD 2,722).
U.S.-made vehicles and imported vehicles in Hyundai-Kia's U.S. sales
|2010||2011||2012||2013||Jan.-Jul. 2013||Jan.-Jul. 2014|
|Light Vehicles in the US||11,589,844||12,779,007||14,493,092||15,582,136||9,148,292||9,604,694|
Source: Automotive News (Note) Hyundai has set its U.S. sales goal for 2014 at 745,000 units (with a market share of 4.7% assuming that 15.90 million vehicles are sold in the U.S.). Hyundai aspires to sell 800,000 units for 5% market share when the U.S. market recovers to 16 million units in a few years. The company is after a slow but steady increase in sales.
Shipment volume (wholesale basis)
Hyundai successively started production at its plants outside Korea. Its shipment volume (wholesale volume) increased by 2.934 million units (70%) in four years from 4.20 million units in 2008 to 7.13 million units in 2012. The company's shipment volume increased by 429,000 units to 7.56 million units in 2013.
Hyundai's production in Korea virtually remained unchanged at around 3.5 million units from 2011 to 2014 (planned) along with export volume of about 2.3 million units. Hyundai's production increase relies solely on operations at new plants overseas as the company has no plans to increase existing capacities in Korea in the near future.
The ratio of overseas production to global sales in January-June 2014 was 61.6% for Hyundai and 43.3% for Kia. Between the two, Kia is more vulnerable to won's appreciation, labor disputes and other adverse conditions as it has a higher ratio of domestic production.
Hyundai-Kia Group's shipment volume (wholesale basis)
|2010||2011||2012||2013||2014 Plan||2013 1H||2014 1H|
|Hyundai||Korea Plant domestic export||1,731 658 1,073||1,885 682 1,202||1,911 667 1,244||1,820 641 1,179||1,872 682 1,190||922 326 596||972 346 627|
|Kia||Korea Plants domestic export||1,400 483 917||1,581 492 1,089||1,589 481 1,108||1,598 458 1,140||1,660 480 1,180||818 226 592||877 219 658|
|Hyundai-Kia Group||Korea Plant domestic export||3,131 1,141 1,990||3,466 1,174 2,291||3,500 1,148 2,352||3,418 1,099 2,319||3,532 1,162 2,370||1,740 552 1,188||1,849 565 1,285|
Source: Consolidated results from both companies, Hyundai Motor Investor Presentation June 2014
Shipment volume from plants outside Korea
|2010||2011||2012||2013||2014 Plan||2013 1H||2014 1H|
|Hyundai||the US China India Czech||300 703 603 200||338 740 616 251||361 856 641 303||399 1,031 633 304||390 1,080 600 300||207 511 332 155||195 553 296 160|
|Turkey Russia Brazil CHMC (Note)||75 0||91 138||86 225 27||104 229 167 45||200 228 175 55||46 113 78 27||97 117 88 18|
|Kia||the US China Slovakia||167 333 230||272 433 252||358 481 292||370 547 313||360 630 310||192 276 159||186 311 173|
(Note) Sichuan Hyundai Motor Company (CHMC) is a joint-venture formed by Hyundai and Sichuan Nanjun Automobile Group, a local manufacturer of commercial vehicles. CHMC is building a new plant to start production in mid-2014. Unit sales in 2013 and January-June 2014 are those of Sichuan Nanjun's vehicles transferred to CHMC.
Building Chongqing plant in China and new plant in Mexico
Hyundai-Kia Group's global production capacity is estimated to be approximately 8 million vehicles at the end of 2014. Hyundai had shelved new plant constructions during the past years. In March 2014, the company announced it would build a fourth plant in Chongqing, China, and start production there in 2016. Hyundai's production capacity in China is 1.2 million units including CHMC's commercial vehicle production capacity. The total capacity will be increased to 1.51 million units in 2016 including 300,000 units at the new Chongqing plant and additional capacity at CHMC plants. The Group will have a total production capacity of 2.25 million units in China including 740,000 units by Kia.
While facing tough competitions in Korea and the U.S., Hyundai is struggling to become the third largest automaker in China after VW and GM.
In August 2014, Kia announced it would build a new plant in Mexico with an annual capacity of 300,000 vehicles. The new plant is expected to increase Kia's supply to the U.S. where it is losing shares due to supply shortages and Latin America. The plant is also expected to mitigate the impact of won's appreciation.
Sales Forecast by LMC Automotive: Hyundai Group sales to be 7.47 million units in 2017
|(LMC Automotive, Quarter 2, 2014)|
LMC Automotive forecasts that Hyundai Group's light vehicle sales in major 53 countries will be 7.47 million units in 2017, up by 14.8% from 2013.
For sales volume by country, the largest market in 2017 will be China at 1,974,921 units, up by 21.4% from 2013. The second will be USA at 1,421,854 units, up by 13.2%. The third will be Korea at 1,110,071 units, up by marginal 3.2% or 34,593 units.
The fourth will be India at 464,709 units, up by 22.3% from 2013. LMC comments that the continued expansion in China and India would be the biggest driver behind the Hyundai Group's improving performance in Asia-pacific region, the Hyundai Group's biggest global base.
Hyundai Group Light Vehicle Sales Forecast by country (53 countries in total)
|Hyundai Group total||5,794,014||6,232,278||6,504,988||6,631,566||6,878,067||7,101,522||7,464,649|
|South Africa sub-total||0||0||16,137||52,002||48,382||56,393||55,090|
|Czech Republic sub-total||20,772||23,786||22,627||20,236||20,068||23,490||25,265|
|Source: LMC Automotive "Global Automotive Sales Forecast (Quarter 2 2014)"|
|(Notes) 1.||Data indicates figures of only small-size vehicles, including passenger cars and light commercial vehicles with gross vehicle weight of under 6 tons.|
|2.||All rights reserved. Reproduction of any data will require permission of LMC Automotive.|
|3.||For more information or inquiries of forecast data, please contact LMC Automotive.|
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