June 19, 2014 12:00 am JST

Problems hit Hyundai at home and abroad

KENTARO OGURA and TAKASHI SUGIMOTO, Nikkei staff writers

SEOUL -- Hyundai Motor group of South Korea is beset with problems at home and abroad.

     The world's fifth-largest automaker has grown by introducing cars that compete against Japanese automakers Toyota Motor and Honda Motor. Word that its data on fuel economy is incorrect has spread from the U.S. to South Korea, causing the company a big headache.

     Adding to the company's woes, competitors are intensifying their offensive in the South Korean market, Hyundai's stronghold, in response to the strong won.

     In mid-March, Hyundai sent an apologetic email to South Korean media. It said that the company overstated the fuel efficiency of its new Sonata, the automaker's flagship sedan, which was recently fully redesigned for the first time in five years.

     When Hyundai unveiled the new Sonata, about two weeks earlier, it boasted mileage of 12.6km per liter based on in-house tests. But the government's authentication procedures found the car got a mileage of 12.1km per liter.

     Why was Hyundai so quick to apologize for the discrepancy? "It had to apologize because (the finding) came just after the Ministry of Land, Infrastructure and Transport announced the company's Santa Fe SUV had similar problems," an analyst said.

     Though the announcement was based on preliminary research, the actual fuel efficiency of the Santa Fe was nearly 8% lower than initially stated by Hyundai, exceeding the maximum error range of 5%. "The Ministry of Trade, Industry and Energy has asked the land ministry to deal with Hyundai leniently," said a South Korean government official.

     Some believe the investigation was lenient from the start. The trade ministry said there was no problem with Santa Fe's fuel efficiency rating. That oversight is likely to trigger criticism in an atmosphere already severe for the government due to April's Sewol ferry disaster.

     The trade ministry, which is responsible for industrial development, gives extra consideration to Hyundai because it leads the nation's auto industry. Sales at Hyundai account for more than 10% of South Korea's gross domestic product. The automaker sells well over 7 million cars worldwide, nearly twice as many as Honda.

     "Trouble for Hyundai will negatively affect employment, consumption and exports," said a senior government official. "The government does not want the (mileage) problem to severely damage Hyundai."

Invasion

European and other foreign automakers are trying to break into Hyundai's home market, adding to the company's woes. In the Seoul suburb of Incheon, German automaker BMW is building a large theme park with a driving center and a classic car showroom. BMW Korea CEO Kim Hyo-joon said the decision to set up the park in South Korea, and not in China or Japan, was "strategic."

     BMW is trying to capture the South Korean luxury car market. Some 150,000 imported cars were registered in South Korea last year. That is only half as many as Japan, but the market has potential for growth. BMW last year sold 1,920 7 Series luxury sedans in South Korea, roughly five times the number in Japan.

     Branding is not the only reason European cars are popular in South Korea. A free trade agreement between South Korea and the European Union came into effect in 2011, pushing down import duties. Furthermore, the won became stronger, making imported cars cheaper for South Korean consumers.

     Changes in overseas markets have also hurt Hyundai. Its sales are brisk in emerging markets, but the automaker has not regained consumer trust in North America since the fuel economy scandal. New car sales in the U.S. in 2013 were up 7.6% on the year overall. But total sales volume of Hyundai and its subsidiary Kia Motors was down 0.4% on the year.

     Hyundai also recently lost a key executive. News spread May 1 in the U.S. auto industry that John Krafcik, who stepped down as president and CEO of Hyundai Motor America at the end of last year, was joining an online car sales venture. He joined Hyundai in 2009 and nearly doubled the company's sales volume during his tenure.

     Another problem in the U.S. is Hyundai's lack of hit models. The automaker grew rapidly in the U.S., but kept the majority of production in South Korea. It has only two plants in the U.S. -- an assembly plant in the state of Alabama and a Kia Motors' plant in the state of Georgia. Hyundai has fallen behind Toyota and Honda in building a local production system, which has made it difficult for the company to respond to consumers quickly and get popular models to market.

     And even if Hyundai can develop cars at home, that may not be enough. Now that the won is stronger against the dollar, exports from South Korea are not as profitable. In fact, both Hyundai and Kia saw net profits for 2013 mark their first year-on-year decline since 2010, when the group started reporting consolidated earnings results.

     Hyundai's future hinges on the company's chairman and owner Chung Mong-koo. He rarely appears in the media, but a major South Korean newspaper reported this spring that Chung instructed senior company officials to focus on protecting the domestic market. "If we lose the domestic market, we will also flounder overseas," he is reported to have said.

     Perhaps the biggest risk for Hyundai, however, is internal. Its hard-line labor union has won concessions from management that the company must adhere to. There has been no streamlining at the company since at least the Asian currency crisis. This was not a problem when it was expanding. But there may come a time when Chung and his management team are forced to confront the union.

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