Reuters - Headed for a
fourth straight annual profit decline, Hyundai Motor (005380.KS)
is trimming its cost fat; scaling back on business class flights and annual
family home trips for overseas employees, executives told Reuters.
The South
Korean automaker has been hit by its exposure to weak emerging markets, and a
product line-up that features more sedans than sport utility vehicles, just as
SUVs have become more popular across many global markets.
The
belt-tightening - which also includes cutting back on printing and fluorescent
light bulbs - aims to buy Hyundai time to prepare new models and a design
revamp.
"We're
trying to address a mismatch between the market trend and our product
line-up," said one Hyundai insider, referring to a need for more SUV
models. "That's a longer term plan. For now we're trying to save every
penny," he said, declining to be identified because the plans are not
public.
Since October,
Hyundai Motor Group executives have taken a 10 percent pay cut, the first such
move in seven years. The number of executives at Hyundai Motor alone has risen
by 44 percent in five years, to 293 last year.
The group has
also downgraded hotel rooms for executive travel, and is encouraging video
conferencing as a cheaper alternative to travel, insiders said.
"We're in
emergency management mode," said another insider, who didn't want to be
named as he is not authorized to speak to the media.
In a response
to Reuters for this article, Hyundai Motor said it is "making various cost-saving
efforts", with shrinking global demand and growing business uncertainty,
but did not elaborate.
Other costs,
such as low-margin supplier parts and labor at the heavily-unionized automaker,
are tougher to pare back, said Ko Tae-bong, analyst at Hi Investment &
Securities, noting Hyundai needs also to spend more on research and development
in self-driving and other new technologies.
While Hyundai
remains cash-rich, its costs as a proportion of revenue have risen for five
straight years, to 81 percent so far this year, regulatory filings show.
"Cutting
expenses are stopgap measures, and won't do much to improve its bottom
line," Ko said, calling them more "symbolic".
SALES DECLINE
Hyundai grew
quickly after the global financial crisis, with brisk sales of its Sonata and
Elantra sedans. It was the only major automaker to increase sales in the United
States in 2009.
But it has
struggled to maintain that momentum as rivals' sales of SUVs have boomed and
emerging market economies have weakened. Hyundai Motor shares have fallen 40
percent in the past three years, the worst performer among global automakers.
The
automaker's top U.S. executive has resigned, and the South Korea sales chief
and China head have been replaced.
Sales of
Hyundai cars, and those of its affiliate Kia Motors (000270.KS),
could drop to 8 million this year, a first decline since Hyundai bought its
smaller domestic rival in 1998, said Ko, the analyst.
For next year,
Hyundai-Kia Executive Vice President and research head Park Hong-jae, expects
sales to pick up again. "It was a difficult year this year. Things will
get better," he told reporters on Thursday, citing recovery in markets
such as Brazil and Russia.
Another
Hyundai source said the group has trimmed its preliminary 2017 sales target to
8.2 million vehicles, from 8.35 million forecast in mid-year.
MORE SUVS
While it looks
to manage its staff budget, Hyundai is beefing up its SUV offerings, freshening
up its Sonata sedan, and redirecting exports from slow-demand markets such as
the Middle East to the United States.
In the United
States, SUVs accounted for 28 percent of Hyundai's sales in January-November,
up from 23 percent a year earlier, according to Autodata Corp, but less than
half the industry average.
At its plant
in Montgomery, Alabama, Hyundai has replaced some Sonata production with its
popular Santa Fe SUV.
Next year,
Hyundai will look to plug a gap in its SUV offerings for developed markets by
making a sub-compact model - under the project name "OS" - in South
Korea for sale at home, in the United States and Europe, people inside the
company said. Hyundai makes sub-compact SUVs locally in China, India and
Russia.
"We need
that small SUV in the U.S, much sooner than later," Scott Fink, one of
Hyundai's biggest U.S. dealers, told Reuters.
In sedans,
Hyundai is pushing sales of bigger, higher-margin models like the Azera, or
Grandeur, and its Genesis luxury line. Its smaller sedans, including the
Elantra and Sonata, have lost ground to rivals like Honda Motor's (7267.T)
Civic, which one Hyundai executive said has "wowing design".
Hyundai is
working on a next generation of cars with "a different flair" to hit
the market from 2019, Luc Donckerwolke, senior vice president for design, told
Reuters on the sidelines of a recent event.
The biggest
holder of Hyundai Motor preferred shares, the Norway-based Skagen Kon-Tiki
fund, expects the automaker to get back on track over the next couple of years,
with new SUVs, recovering emerging market currencies and better plant
utilization.
Knut Harald
Nilsson, the fund's lead portfolio manager, reckons Hyundai's margins should
recover to above 7 percent over that period, from 6 percent earlier this year,
but are unlikely to return to the 10 percent levels of a few years ago
"anytime soon".
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