Autos

Shelly Banjo is a Bloomberg Gadfly columnist covering industrial companies and conglomerates. She previously was a reporter at Quartz and the Wall Street Journal.

Hyundai Motor Co.'s week-long shutdown at its China plants may have had more to do with business brains than political brawn.

The South Korean carmaker said Wednesday that it resumed operations at its venture with state-owned BAIC Motor Corp., after an interruption prompted by its failure to pay a local supplier. Beijing Hyundai had to suspend production at four of five factories when a fuel-tank vendor refused to provide the parts.

That two giant car companies with $32 billion of cash between them couldn't afford to keep production going at a longtime partnership was always absurd. After all, when ventures struggle, parent companies typically join forces to inject cash and keep operations afloat.

It was natural, then, to see the halt as reflecting the widening ramifications from a dispute over South Korea's hosting of a U.S. missile defense system, which incensed Beijing and inspired a government-backed consumer boycott that's caused Hyundai's sales in China to plunge.

Could the plant suspension have meant the Chinese government was using BAIC to further express its anger with South Korea? Or could Hyundai have engineered the shutdown to send its own message: that punishing the Korean company would also exert a toll on one of China's largest automakers?

This time around, the story may have more to do with business than politics.

It's true that Beijing Hyundai's takings have nosedived: Hyundai's China sales fell 62 percent in the second quarter from the year before, while BAIC booked a 132 million yuan ($20 million) loss in the six months ended in June, mostly attributed to the shortfall at the venture.

Running On Fumes
Hyundai Motor's China sales dropped by 62 percent in the second quarter from a year earlier
Source: Bloomberg

But South Korean carmakers were already losing market share well before the boycott began. And now, the entire Chinese car market is slowing after a period when sales increased at crazy double-digit highs.

Lane Closures
Korean brands have been losing market share in China as SUVs made by local carmakers gain popularity
Source: CAIN, Bloomberg Intelligence
Note: Market share data calculated from rolling trailing 12-month unit sales.

So it's reasonable to expect Hyundai and BAIC to shutter production on a rolling basis and tell suppliers it wants to cut back on certain parts in order to keep inventory under control. 

The same thing happened in 2012 when a territorial dispute between Tokyo and Beijing sparked anti-Japan protests and throttled sales of Toyota Motor Corp. and Honda Motor Co. Back then, the companies decided to close factories and adjust production as Japanese car sales in China took about a year to recover. 

Shares in Hyundai pared losses after falling as much as 3.8 percent Wednesday, while BAIC slumped as much as 4.2 percent in Hong Kong, underscoring the potential damage to the Chinese partner.

Missing the Ride
Shares in Hyundai and BAIC Motor have underperformed the Korean and Hong Kong indexes in the last six months as tensions between Beijing and Seoul increase
Source: Bloomberg

While a production halt is bad news in the short term because it signals the companies expect the sales slump to persist, the silver lining is that the venture isn't burying its head in the sand.

By managing production and keeping a close eye on inventory, Beijing Hyundai will be better positioned to rebound once demand recovers.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Shelly Banjo in Hong Kong at sbanjo@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net