SEOUL Nov 9 It takes twice as long on average -
over 28 hours - for Hyundai Motor Co to make a car
in South Korea than in the United States, even though its
domestic plants have far more workers for each production line.
Add in high wages, frequent industrial action and outdated
facilities, and Hyundai's hourly labour costs per worker in
South Korea, at 24,778 won ($22.26), are 16 percent higher than
at its U.S. factories, and triple what they are in China.
Its seven domestic plants have driven Hyundai to become the
world's fifth-largest auto manufacturer, but are now a legacy
asset that need to be addressed to sustain profit growth. It may
make more sense, economically, for the company to close a plant
it built 45 years ago - one of five in Ulsan - that is now its
oldest and costliest facility.
But Hyundai says it won't give up its Korean base - much as
Toyota Motor Corp rejects the idea of stopping
production in Japan - and says that fixing productivity issues
with its strong domestic union is a top priority.
"People ask us why we don't just produce overseas, given all
the labour troubles at home. But our home market is our root and
the base for our growth overseas. And there's a risk in building
cars overseas," said a Hyundai executive from the team that
manages its labour relations.
On Saturday, Hyundai's labour union elected Lee Kyung-hoon,
a moderate, as its new president, suggesting a period of
steadier industrial relations after the 46,000 strong union,
under more militant leadership, staged two strikes in two years.
Lee's previous stint as Hyundai's union boss, from late-2009 to
2011, was strike-free.
ECONOMIES OF SCALE
Despite the high legacy costs, Hyundai says it has more to
gain than lose in keeping its domestic factories open.
"Our Korean plants will continue to serve as a global
manufacturing base, and we plan to increase not just production
but also productivity and quality at our domestic plants," the
company said in an emailed statement to Reuters.
Beyond the obvious emotional ties, Hyundai manages an
extensive supply chain and profitable car line-up in Korea,
where it sells more of its high-margin large sedans than in any
Hyundai's production base in Ulsan - the world's largest
single car complex and the Korean city with the highest per
capita income - gives it significant economies of scale and
provides the backbone of its global expansion, knitting together
380 suppliers and 5,000 second- and third-tier suppliers around
"Korea has a good ecosystem of suppliers, and Hyundai thinks
it's better to raise wages than risk taking suppliers to new
markets overseas," said Lee Hyung-sil, an auto analyst at
Shinyoung Securities. "The time may come when Hyundai thinks
it's better to move production overseas. But not yet."
Hyundai, though, is increasingly reliant on overseas
production. The portion of vehicles it produces at home has
halved to 43 percent of its global output from a decade ago - as
it has opened facilities in the United States, China and Brazil.
Hyundai produced 4.4 million vehicles globally last year.
Hyundai's high cost, low productivity structure is hampering
margin expansion just as its near-70 percent domestic market
share, with affiliate Kia Motors Corp, comes under
threat from rising imports of cars made by foreign rivals such
as BMW and Volkswagen.
Rather than expanding capacity, Hyundai prefers to run its
factories at full throttle, even during weekends. Last year,
that helped meet record sales and made its 10 percent operating
margin the industry's second best - behind only BMW.
All of this means Hyundai relies heavily on its domestic
workers, who are often willing to keep plants running for 20
hours a day. In return, Hyundai has settled industrial disputes
with generous wage increases. Its Korean workers have seen their
pay more than double over the past decade to an average $88,600
- above peers at Toyota, and at Samsung Electronics Co
, another leading Korean manufacturer.
This high wage structure now haunts Hyundai and is weighing
down margins, as rising competition makes it harder to increase
new car prices and the Korean won currency firms against
the Japanese yen, hurting price competitiveness.
"Hyundai guaranteed high wages and job security, but failed
to get production efficiency and flexibility in return," said
Park Tae-ju, a professor at the Employment & Labor Training
Institute, who advised Hyundai on a new shift system.
Hunting for productivity solutions, Hyundai this year
introduced a new shift system that cut out overnight work and
trimmed daily production hours to 17 from 20, helping it produce
7 percent more cars an hour.
New union leader Lee has said he will look to further cut
the number of working hours to 16 by 2015, earlier than
previously planned, though he is likely to lock horns with
management over how to make up for reduced wages.
Hyundai is also considering a two-tier wage structure that
is already in use at General Motors Co and others.
Long-serving workers may face a wage ceiling.
(Editing by Ian Geoghegan)