The Strategist

Hyundai Motor’s profit falls thanks to the US and China

04/27/2017 - 12:55

The South Korean authorities’ decision to host the US missile defense system THAAD has negatively affected the country’s largest carmaker Hyundai Motor. The company's sales fell immediately by 14% in China, which extremely negative reacted on such military cooperation between the US and South Korea.

On Wednesday, Hyundai Motor reported receiving a net profit of $ 1.2 billion. This result turned to be worse than last year's figure of 21%. This is the thirteenth consecutive quarter of the indicator’s deterioration. Nevertheless, the Korean manufacturer’s reporting was better than expectations of analysts polled by Thomson Reuters, so the market positively reacted to the news and pushed the company's securities up by 4.5%.

Such a serious drop in net profit occurred mainly thanks to China, which is the largest foreign market of the company. Sales of the South Korean concern’s cars fell sharply in connection with deployment of the US missile defense system THAAD in the territory of South Korea as Chinese authorities didn’t like this step.

"Following the results of March, our sales in China have been affected not by any internal factors, but by growing anti-Korean sentiments in the country, of which our competitors hastened to take advantage", said Koo Zayong, Hyundai’s Vice President at a conference call on announcement of the financial results for the first quarter. 

The Chinese authorities took a number of economic measures aimed against South Korea. So, almost all Chinese Hyundai discount centers were closed under the pretext of violating fire safety rules, and Chinese citizens stopped buying South Korean cars, turning to other foreign brands. As a result, Hyundai's sales in China declined by 14% this quarter. In addition, the authorities of the People's Republic of China in March ordered tourism companies to stop selling tours to the Republic of Korea. This was a serious blow to the South Korean tourism industry, since about half of the tourists coming to the country are Chinese.

As for Hyundai, the company is losing customers in another major foreign market, the US, because of the protectionist policy of the American authorities. On the other hand, the South Korean manufacturer has displayed good indicators in Brazil, India and Russia.
Like other foreign manufacturers, Korean firms in China work in joint ventures with local companies. Hyundai’s partner is BAIC Group, and Kia, owned by Hyundai Motor Group, cooperates with Dongfeng concern. In 2016, China sold 1 million 142 thousand Hyundai cars and 650 thousand - Kia.

Now, Kia cut number of shifts. Beijing Hyundai had to act the same, and three Beijing plants closed the second shift from the middle of March. According to analyst Myung-Hoon Lee from HMC Investment & Securities, one shift-work is an uncommon step for Hyundai concern. He believes that the anti-Korean sentiment in China will not end soon, citing the example of a territorial conflict with Japan in 2012, when Japanese automakers were forced to seriously reduce production in the Middle Kingdom. On the other hand, the current situation should not last long, because it seriously harms Chinese enterprises that supply parts for Kia and Hyundai’s conveyors.