SEOUL/BEIJING Feb 11 Two years ago, Hyundai
Motor Co's 75-year-old chairman Chung Mong-koo
called a halt to capacity expansion, worried the South Korean
group risked running into the kind of quality issues that dogged
Japanese rival Toyota Motor Corp when it grew too
aggressively in the 2000s.
Now, Hyundai and its affiliate Kia Motors Corp
are again looking to invest in new manufacturing capacity,
running feasibility studies in promising markets such as Mexico
and scouting for a site for a fourth plant in China, the world's
biggest autos market, said five people familiar with the group's
Chung's unofficial capacity freeze - aimed at giving
factories and parts suppliers a breather after rapid growth over
the past decade and pushing the focus on to improving quality -
remains in place, but some executives now feel more confident
about the quality of the group's vehicles. A decision on opening
a new Hyundai assembly plant in China could come before the end
of this year.
"We're poring over mid- to long-term capacity investment
plans now," said one high-ranking Hyundai group executive, who,
like the others familiar with the plans, didn't want to be
identified as they are not authorized to talk to the media.
The expansion freeze is making it tough for Hyundai to
squeeze additional capacity from existing plants. Together,
Hyundai and Kia last year utilized 105 percent of their
installed capacity, and a consultant familiar with Hyundai's
factory operations noted the group's U.S. plants, in Georgia and
Alabama, are running flat-out, with utilization rates at 125-130
percent on a two-shifts-a-day basis.
"That's just not a sustainable approach if it lasts a few
more years, even though the ban has been highly beneficial to
Hyundai's bottom line," said one of those familiar with the
company's plans. Hyundai Motor's operating margin was 9.5
percent last year, one of the auto industry's best. The
medium-term goal at rival Nissan Motor Co Ltd is 8
Chung's ban on expansion was "motivated by his effort to
keep Hyundai from making the mistakes Toyota made," one of the
people said, referring to a perception that the Japanese
automaker lost control of engineering and manufacturing quality
as it ramped up capacity to well above 8 million vehicles.
"Hyundai was growing way too fast and worried their
suppliers couldn't catch up," said another of those familiar
with the group's thinking.
While executives may cheer quality improvements, Hyundai/Kia
ranked third last year in the number of vehicle recalls in the
United States - 3.3 million. Only Toyota and Chrysler
Hyundai and Kia plan to sell 7.86 million vehicles globally
this year, up from 7.56 million in 2013, and the feasibility
studies could be a prelude to growing capacity to beyond 8
million vehicles a year. Hyundai has also looked at building a
third U.S. plant, but is cautious given the tough competition in
a crowded market.
The renewed interest in expanding capacity outside South
Korea could be seen as an obvious shift by an export-reliant
group to counter the effects of a stronger local currency
. Hyundai and Kia export about two-thirds of the vehicles
they sell globally from South Korea, a much higher proportion
than their Japanese rivals.
But, the sources said, it's more a response to higher labour
and other costs and sluggish growth prospects at home - factors
that have seen others, including General Motors Co, cut
back on South Korea as a manufacturing and export hub.
Politically, that's not something Hyundai would contemplate.
South Korea, with a population of about 50 million, had
sales of 1.5 million vehicles last year. The market is likely to
peak at around 1.6 million by 2016 and stay at that level
through 2020, according to research firm LMC Automotive.
"Investment opportunities are always under review. We will
respond to market situations accordingly," said Brian Sir, a
Seoul-based chief spokesman for Hyundai, adding the recent focus
on "qualitative growth" was only natural after years of rapid
To be sure, even while the capacity freeze has been in
place, Hyundai and Kia have quietly gone about incremental
increases, raising potential output to around 7.4 million
vehicles a year from a pre-freeze level of about 6.5 million
vehicles. That increase has come through ramping up plants
approved before the ban and by adding overnight shifts where
Hyundai and Kia hope to hit their sales target this year by
increasing overtime work, adding overnight shifts at overseas
factories and by starting production at Kia's third plant in
China, which was given the green light before the freeze.
In China, where annual auto sales could hit 35-38 million by
the end of the decade, Hyundai is checking out three inland
cities - Chongqing, Xian and Wuhan - as a potential site for a
new plant. If finalized, the fourth China plant would be
Hyundai's first major manufacturing capacity investment since
opening a car assembly plant in Brazil and its third China
plant, both in 2012 - additions that Hyundai had announced in
2008 and 2010, respectively.
"Let's be honest, China customers are not as discriminating
as in the rest of the world," said one of those familiar with
Hyundai's thinking. "It's easier to expand capacity there."
Any new investment in capacity may still be vetoed by Chung.