Hyundai confident of avoiding potholes

By Song Jung-a

Published: April 14 2009 22:16 | Last updated: April 14 2009 22:16

Hyundai Motor, South Korea ’s biggest carmaker, is riding high in spite of the auto industry’s worst downturn in decades, aided by a weaker local currency and its strong presence in the more fuel-efficient compact car segment.

Shares in the carmaker rose more than 40 per cent in the first quarter, driven by resilient sales in major export markets such as the US and China, while Hyundai’s US and Japanese competitors struggle to cope with falling demand.

Hyundai officials, meanwhile, claim the global economic crisis has presented them with a “golden opportunity” to increase global market share.

“This is a great opportunity for us to make overseas consumers include Hyundai cars in their shopping list,” says Nam Myung-hyun, the company’s marketing strategy director.

But analysts caution that falling domestic sales – where Hyundai and its affiliate Kia Motors control more than 70 per cent of the market, could still damage Hyundai’s bottom line this year.

Hyundai, together with Kia, is the world’s fifth-largest automaker, controlling 5.5 per cent of the global market in 2007, according to Automotive News .

Hyundai expects its market share to have increased significantly last year, although data for 2008 has not yet been made available.

But in their domestic Korean market, Hyundai and Kia suffered an 18 per cent drop in domestic sales in the first three months of this year.

Others point to the carmaker’s success in the US and China .

In the US , for example, Hyundai is one of the few carmakers gaining market share.

In March alone, Hyundai increased market share to 4.7 per cent from 3.2 per cent a year ago, while first-quarter sales in the world’s biggest auto market rose 0.5 per cent.

The carmaker was helped by a strong marketing campaign that included an attractive offer to buy back cars from customers who lose their job within a year of purchase.

In China , Hyundai has seen sales jump almost 50 per cent in the first quarter on the back of Beijing ’s tax incentives for smaller car buyers.

But in spite of Hyundai’s successes in China and the US , the carmaker admitted in January that this year would be tough, after slowing demand led to a 28 per cent drop in fourth-quarter profits.

The company reported a net profit of Won243.6bn ($184m) in the fourth quarter of last year, compared with Won338bn a year ago.

The weaker results and outlook have sparked international credit rating agencies to downgrade their outlook on Hyundai.

Fitch expects Hyundai to post negative sales growth this year, with the company’s profits and credit profile set to deteriorate in coming months.

Kwon Jae-min at Standard & Poor’s says: “If global sales fall further and inventories rise, their profitability would deteriorate, making their debt ratio to operating cash flow worse.”

In an effort to tackle an expected further drop in demand, Hyundai has embarked on belt-tightening measures by cutting executives’ wages by 10 per cent and other general expenses by 20 per cent.

Analysts, however, remain sceptical about whether Hyundai can maintain its cost competitiveness when currency rates are no longer as favourable to the carmaker.

The won plunged 34 per cent against the dollar last year, while the yen gained 20 per cent during the same period, hitting Japanese companies such as Toyota and Honda.

But in the last month the Korean currency has rebounded about 10 per cent.

At a recent local motor show, Hyundai displayed its first hybrid car, the Elantra LPI Hybrid, which will go on sale in Korea in July.

It also plans to export the Sonata hybrid car to the US next year. But analysts say Hyundai still lags far behind its Japanese rivals such as Toyota in the field of hybrid cars.

In spite of the downturn, the carmaker insists it will not reduce spending on research and development, which currently stands at about $3bn annually, or five per cent of sales.

Hyundai spends about 20-30 per cent of that budget on environment-friendly models such as hybrid cars.

The company’s next challenge will be to become a leading global carmaker, which will prove much more difficult than its journey so far.