Strikes, quality drive slow Hyundai Motor's U.S. growth

SEOUL/DETROIT Tue Sep 4, 2012 10:52pm EDT

The company logo of Hyundai Motor on a Santa Fe sport utility vehicle and a woman's reflection is seen through the window of a Hyundai dealership in Seoul July 2, 2012. REUTERS/Kim Hong-Ji

The company logo of Hyundai Motor on a Santa Fe sport utility vehicle and a woman's reflection is seen through the window of a Hyundai dealership in Seoul July 2, 2012.

Credit: Reuters/Kim Hong-Ji

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SEOUL/DETROIT (Reuters) - Strike action in South Korea has left automaker Hyundai Motor (005380.KS) running out of cars to sell in the crucial U.S. market at a time when rivals such as Toyota Motor (7203.T) are clawing back lost market share.

The labor disputes, now resolved, at domestic plants that supply about half the cars Hyundai sells in the United States, threaten to upset the company's growth momentum, and have prompted some to wonder whether Hyundai made strategic mistakes with its measured expansion approach.

Hyundai was the only major carmaker to gain U.S. market share during the 2009 downturn, but it's now losing ground - its market share slid to 4.8 percent last month from 5.5 percent a year ago and 5.4 percent in July.

The Korean firm's U.S. sales rose only 4 percent in August from a year ago, lagging rivals as the market had its best August since before the global financial crisis.

In early trading on Wednesday, Hyundai Motor shares fell more than 4 percent - set for the biggest one-day drop in more than 3 months - to a near 6-week low, shaving more than $2 billion off its market value. The stock, valued at just above $51 billion as at Tuesday's close, has dropped 10 percent in 3 weeks, underperforming the benchmark KOSPI stock index .KS11, which is down 4 percent over that period.

"We've got all this momentum and if we give up some of that share now, it's going to be a lot harder to get back," said Adam Kraushaar, president of Lester Glenn Auto Group in Toms River, New Jersey, who sits on Hyundai's U.S. dealer council.

"We have an insanely low supply on the ground ... The unfortunate thing is from the time they say they're going to invest in a new plant, we don't see those cars for 24 months or more. They've got to hurry up."

At just 21 days, Hyundai has the lowest U.S. vehicle inventories among major carmakers - about half of Toyota's and a quarter of General Motors' (GM.N) - Hyundai said, citing data from Automotive News.

Hyundai's total sales fell 4.6 percent in August from a year ago, the first drop in more than three years.

Its labor union, which has demanded higher wages and shorter working hours, narrowly voted in favor of a wage deal late on Monday, after the first stoppages in four years cost Hyundai a record $1.5 billion in lost production and last month triggered a 30 percent drop in domestic sales.

Overseas sales are also likely to feel the impact this month as reduced shipments will keep inventories tight in key markets.

Hyundai has been grappling to keep up with demand in the United States because of limited production capacity at its sole U.S. factory in Alabama, which produces the Sonata sedan and the Elantra compact. Despite calls for further expansion, Hyundai has not built a second U.S. plant and instead introduced a third shift this month to churn out more cars from existing lines.

"I believe they're doing everything they can, but it's really just a Band-aid," Kraushaar said.

NO NEW PLANT

Hyundai Chairman Chung Mong-koo previously steered the automaker's rapid overseas expansion, mostly focusing on emerging markets, more than doubling global production to 4.07 million vehicles last year from 2002. Production outside South Korea jumped to 2.18 million vehicles last year, accounting for 54 percent of total output versus just 6.5 percent in 2002.

That growth has slowed more recently as Hyundai focused on improving quality, brand and consumer satisfaction - aware that Toyota's massive recall crisis in 2009/10 was partly a result of the Japanese firm having aggressively grown its capacity.

Chung decided some time ago to slow capacity expansion over the medium term, until 2015 or so, according to an individual close to Hyundai management.

"Chairman Chung feels many automakers around the world have made similar mistakes when they increased capacity aggressively and took an eye off quality," the person said. "He believes 8 million units a year is the threshold."

Still, dealers and analysts think Hyundai needs to do something.

"In 2014, if they want to maintain (sales) growth, they definitely need to do something," said Sanjeev Rana, an analyst at Deutsche Bank, adding he expects Hyundai to decide soon on a new plant, possibly in the United States.

Hyundai has started production at its third China plant this year, which will be followed by its Brazil factory in November. After that, there is no new plant in the pipeline.

"We want to go back to basics," Hyundai spokesman Brian Sir said in an emailed response to a Reuters query. "Building more plants to increase sales is not our ultimate goal. Our ultimate goal is to become the most loved brand. In this regard, we do not have any plans to build another plant in the U.S."

Chung, 74, visited the United States last month for "an urgent check" of the market, and again emphasized quality and better prices, the company said.

Some analysts said the economic uncertainty most likely made it easier for now to decide against building a new plant. Tight supply leads to higher sales prices and lower discounts, which translate into higher margins.

"Hindsight is always 20/20. Maybe they could've done more but we were all coming out of the global financial crisis ... and everybody was a bit more cautious," said Geoff Boyd, an analyst at CLSA.

LABOUR RISKS

Hyundai, which has run its Korean plants at nearly 24 hours a day for the past 45 years, has agreed to scrap overnight work and shorten work hours from March 2013.

Its domestic labor costs are already higher than those at its overseas plants, mostly in emerging markets such as India, Turkey, Czech Republic and Russia, analysts say.

"Hyundai won't be able to completely move capacity out of Korea," said Suh Sung-moon, an analyst at Korea Investment & Securities. "Instead, it has no choice but to boost its overseas capacity given labor problems at home ... and the appreciation of the won," Suh said.

Hyundai should raise the portion of its overseas production to the levels of Japanese carmakers at around 60-70 percent in the mid- to long-term, from 50 percent now, Suh added.

"If you're Hyundai management, you know that at some level you can be held hostage, so to speak, by your Korean unions," said Bob Martin, a former top Hyundai U.S. executive and now a senior consultant at product development firm The CARLAB.

"You want to mitigate that risk as much as possible and overseas production isn't typically impacted by labor disputes in Korea," said Martin, adding it's "just a matter of time when they have to expand" to cope with rising demand.

"Don't ever forget the ultimate mission, which is growing to be the largest automaker. I don't believe Hyundai has got a slow-growth plan long term," he said.

($1 = 1134.6250 Korean won)

(Additional reporting by Norihiko Shirouzu in BEIJING; Editing by Ian Geoghegan)

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