Blindsided by SUV boom,
Hyundai Motor trims costs, perks
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[December 26, 2016]
By Hyunjoo Jin
(Reuters) - Headed for a fourth straight annual profit decline, Hyundai
Motor is trimming its cost fat; scaling back on business class flights
and annual family home trips for overseas employees, executives told
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
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
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
The group has also downgraded hotel rooms for executive travel, and is
encouraging video conferencing as a cheaper alternative to travel,
"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
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".
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, could drop
to 8 million this year, a first decline since Hyundai bought its smaller
domestic rival in 1998, said Ko, the analyst.
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Hyundai Motor's sport utility vehicle (SUV) Tucson is seen at its
dealership in Seoul, South Korea, December 15, 2016. Picture taken
December 15, 2016. REUTERS/Kim Hong-Ji
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.
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
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 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
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".
(Reporting by Hyunjoo Jin; editing by Tony Munroe and Ian Geoghegan)
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