Hyundai benefits from struggles of GM's South Korea unit

SEOUL (Reuters) - Troubles at General Motors GM.N are proving a chance for South Korea's Hyundai Motor Group, the world's number 5 automaker, to muscle in on GM Daewoo's lucrative small car export business, including to neighboring China.

General Motors’ lurch through the financial crisis has meant its Korean subsidiary, GM Daewoo Auto and Technology, has delayed the launch of new models, lost sales and struggled to convince its main banker to roll over loans.

“South Korean and Japanese makers are expected to take GM’s market share, but Korean makers have more small cars with cheaper prices,” said Koo Zayong, co-head of equity research at Nomura International Ltd in Seoul.

GM, criticized at home for focusing too much on producing gas guzzlers, relies heavily on its South Korean unit for the design, engineering and development of its offering of small cars, including the Chevrolet Aveo.

It bought a majority stake in failed Daewoo Motors in 2002 and the unit now accounts for about a quarter of GM’s total auto production.

PRODUCT DELAY, SALES FALL

GM Daewoo has postponed the launch of its T300, GM’s next generation small car, to January 2011 from next April, according to GM product development plans obtained by Reuters from an auto parts maker.

“With the lack of proper and timely investments in small cars at GM Daewoo, it will take much longer for GM to stabilize,” said Kang Sang-min, an auto analyst at Tong Yang Securities.

Sales by GM Daewoo, which exports more than 80 percent of its production, dropped 44.5 percent during the first four months from a year ago, despite a steep fall in the value of the Korean won.

That compares to more modest drops of 11.8 percent at Hyundai Motor Co 005380.KS, the maker of Elantra compact car, and 14.5 percent at affiliate Kia Motors Corp 000270.KS.

Hyundai says it plans to bite into as much of the market share of GM, and fellow ailing U.S. automaker Chrysler CBS.UL, as it can in the current environment.

“About 30 percent of customers of GM and Chrysler are expected to look for other brands ... and we will do our upmost to catch as many of them as possible,” Hyundai’s Chief Financial Officer Chung Tae-hwan said in April.

Hyundai is targeting a 5 percent market share in the United States this year, compared with 3 percent in 2008. By April, the average already stood at 4.3 percent.

A big focus is on China, which overtook the United States as the world’s largest car market in January.

There, Hyundai is aiming at 36 percent growth in sales this year to 400,000 vehicles. Its Chinese subsidiary sold 155,589 vehicles during the first four months, up 69 percent from a year earlier and making it the firm’s second biggest overseas market.

By contrast, GM Daewoo’s shipment of cars and vehicle kits there fell 3.2 percent in the period to 147,935, though parent GM saw 25 percent growth.

GM’S PROBLEMS

GM, facing a June 1 deadline to restructure its debt and reach a deal with its major union, could find itself forced to file for bankruptcy protection just weeks after Chrysler.

GM Daewoo is also struggling. It is asking for additional loans from banks, including state-run Korea Development Bank, after using up $2 billion in credit lines.

Officials at KDB, the No. 2 shareholder of GM Daewoo with a 28 percent stake, says it is considering raising its stake in the auto firm, while KDB and other local banks have agreed to roll over some short-term foreign currency contracts to boost GM Daewoo’s short-term liquidity.

“Securing long-term liquidity here in Korea could potentially change product plans in Korea and globally,” Jay Cooney, GM Daewoo’s Vice President for corporate affairs, told Reuters, enabling it to invest in new models to counter competition from Hyundai and others.

GM Daewoo is also asking the government for help. But government officials say privately there is little point in coming to the rescue unless the local firm has continued access to GM’s global distribution network and are waiting to see how the parent company’s fortunes turn.

U.S. FTA

There could be a political edge to the issue.

In the background is squabbling with the United States over access to South Korea’s vehicle market as part of a free trade agreement still waiting to be ratified by U.S. Congress.

President Barack Obama opposed the deal during his election campaign on the grounds the agreement’s auto and manufacturing provisions favored South Korea.

South Korean President Lee Myung-bak will meet Obama in Washington in mid-June.

South Korea, like many other governments around the world worried by the heavy loss of jobs in the economic downturn, has announced measures to help ailing makers of cars and auto parts.

The auto industry in South Korea provides about 1.6 million jobs and its exports accounted for 11.6 percent of total exports last year.

The administration of the President Lee, once a top executive in one of the Hyundai group of companies, has introduced measures such as tax cuts on car sales and aid for parts suppliers.

But, so far, it has not offered help to individual car makers such as GM Daewoo and SUV maker Ssangyong Motor Corp 003620.KS, which is struggling to avoid collapse.

($1=1241.0 Won)