Automotive ... Hyundai-Kia: two become one? | Multiple countries | Passenger vehicles | Hyundai ... Hyundai Motor Group has outlined some ambitious investment plans even as sales growth at the Korean carmaker slows.

Burgess COMMENTARY

Peter Burgess

Automotive ... Hyundai-Kia: two become one? | Multiple countries | Passenger vehicles |
Hyundai ... Hyundai Motor Group has outlined some ambitious investment plans even as sales growth at the Korean carmaker slows.

It was only 16 years ago that Kia was rescued from bankruptcy by fellow Korean company Hyundai, which took a 34% stake in Kia in return for saving it. Since then the two brands have grown steadily alongside each other, especially in Europe, Russia, North America and China. In 2014, sales topped 8m, just two years after hitting the 7m mark, confirming the group in fifth place globally. Yet growth is slowing, and the group's attention is now firmly on raising margins and improving its models' much-criticised fuel efficiency.

Indeed, the group's latest investment plans, announced on January 6th, will see almost as much spent on research and development (R&D) as on expanding production capacity. In all, Hyundai-Kia plans to spend W80.7trn (US$73bn) over the next four years. Around 60% of this will go on expanding its plants, with the rest to be spent developing new models and, controversially, building a new Seoul headquarters. Moreover, the company is promising that three-quarter of the total will be spent at home in Korea, where the government is keen to use corporate investment to reboot sluggish economic growth.

More production capacity needed

The investment in production capacity follows two years of hiatus that has left most of the Hyundai and Kia plants around the world running at full or close to full capacity. According to plan outlined last week, Hyundai is planning to build two more plants in China, to add to its existing three facilities. One of the new plants should be in the north-east, in Hebei province, while the other will be in Chongqing, which should be used to spearhead the company's move into western China.

The new plants in China which will each add 300,000 units of annual capacity, although they will not come on stream until 2016 and 2017, respectively. In addition, Kia plans to expand its factory in Jiangsu from 300,000 to 450,000 units a year. Meanwhile, the head of Hyundai USA is pushing corporate planners to allocate more capacity in North America to meet strongly rising demand; it is possible that Hyundai could be allocated some of the capacity now being installed by Kia in a US$1bn investment in Monterey, Mexico.

Interestingly, apart from the Hyundai plant in Russia (which makes the Kia Rio alongside Hyundais), all other Hyundai and Kia plants make vehicles for just one of the brands, so for the two brands to be made alongside each other in Mexico would be unusual. Hyundai wants to add capacity for its Santa Fe and Tuscon SUVs, especially the latter, sales of which it claims it could double without spending any more on incentives or advertising.

Future plans will therefore entail an unusual degree of collaboration between the two as they try to improve their brand positioning and fend off lower-cost rivals. Nominally two separate brands, the two still report separate financial results. They also have their own design studios in Korea, the US and Europe and while there are common groups of engineers working behind the scenes, the designers are tasked with maintaining the two brands' distinctive looks.

However, Hyundai and Kia already rely on common technologies, with shared component production and purchasing logistics organisations. This is especially true when it comes to powertrain, but also applies across their supply chain, reducing development, purchasing and logistics costs. In Europe, for example, the Kia plant in Slovakia and Hyundai's Czech plant supply, respectively, engines and transmissions, for both brands, and are both served by more than a dozen Korean suppliers.

Visually, though, the two have kept apart. Hyundai tends to lead, especially when launching a new model in a given segment, but Kia's designers and corporate planners have tried hard to push Kia to the fore. The Kia brand received a major boost in 2006 when Peter Schreyer joined as chief designer from Volkswagen-Audi. So successful was Peter Schreyer that in 2013 he was appointed design chief at both brands. The senior people at Hyundai could not risk the junior partner becoming too successful, and future targets make it clear that Hyundai will remain the senior brand.

Sales still rising

Hyundai-Kia's rapid expansion to date was highlighted in its 2014 sales figures, announced by the group's chairman, Chung Mong-koo, on January 2nd. Last year, despite a slowdown in key emerging markets, the group's total sales were up by 5.8% to 8,005,152 units, putting it in fifth place globally. Of the total, 62% came from the Hyundai brand, but it is Kia that is growing faster, with 2014 sales up an impressive 7.3%.

The brands' strong sales volumes have been evident in their financial results. Hyundai has seen its global revenue rise from just under W67trn in 2010 to W87.3bn in 2013, while operating and net margins have risen steadily through the period and have both been over 9% for much of this time. First-half revenue, at W44trn, was down slightly but the company was still able to report steady margins.

Despite its faster sales growth, Kia reported lower revenue for 2013, at W48trn; its first-half turnover in 2014 was also down slightly at just under W24trn. Kia also generally reports lower margins than Hyundai. In 2013, it had a 6.7% operating margin, down from 7.5% in 2012; the first half of 2014 saw a further fall to 6.3%.

Altogether, though, Hyundai-Kia's financial results put those of some of more established American and European players to shame. Yet there is a slight downwards trend that is worrying managers and investors. Automotive markets are becoming tougher and competition more fierce, especially from emerging markets carmakers.

That is starting to affect even the Koreans' rapid expansion. In 2015, the group is hoping for combined sales of 8.2m, 5.05m for Hyundai and 3.15m for Kia. This implies 2.5% growth – a far cry from its previous performances, and the slowest for around nine year. Moreover, the strong Korean won and the brands' continued reliance on exports mean that profit margins will be even harder to sustain in future.

New product and technology strategy

The companies face other challenges, too, of which the most immediate is reputational. Hyundai-Kia's image took something of a battering when, in November, managers reached agreement with the US authorities over penalties to be paid for overstating fuel efficiency figures. The resulting US$350m fine is made up of a US$100m cash fine, US$50m to be spent on an independent fuel economy certification group and the forfeiture of US$200m worth of already banked greenhouse gas emissions credits.

On top of this, investors did not take kindly to Hyundai's announcement that it would spend US$10bn on expensive land in Seoul to build a new headquarters. Neither event seems likely to get in the way of the brands' continued growth, but to stabilise their share price, Hyundai and Kia both announced share buy-backs, worth around US$616m. Certainly the unease will place further pressure on the company's management.

The pressure to develop new models with improved emission ratings was only partly driven by the US fines. Investors, the trade press and consumers were not impressed by the new, 2014 Hyundai Genesis and Kia Soul models, which both have worse fuel efficiency ratings than their predecessors. Undaunted, the brands have announced they intended to increase their average fuel economy ratings by an impressive 25% by 2020, to meet emission regulations in Europe, South Korea and the US.

It will achieve that through several interlinked strategies. Under the bonnet, the company will replace more than two-thirds of its existing ten-engine line-up and expand the use of turbochargers. Body weight will be reduced by using more high-strength steel. And there will be no fewer than six plug-in hybrids, two fuel-cell vehicles and two battery-electric vehicles to add to the range. If that all happens, it should lay to rest any criticism of Hyundai-Kia's fuel efficiency.

Source: Industry Briefing