Online Extra: For Hyundai, China Is a Highway

It's counting on booming Chinese production capacity and sales to help it race into the ranks of the world's top carmakers

For many South Korean companies, China is a threat. Many jobs and businesses have been lost to rapidly emerging rivals across the Yellow Sea, and Koreans fear many more will follow. But Hyundai Motor, Korea's largest carmaker, has never viewed the giant neighbor as a peril. Rather, it believes China is a stepping stone to the world's big leagues in autos.

Indeed, few other companies have more ambitious plans than Hyundai in China. It's a late comer, opening its first joint venture at the end of 2002. But it has vowed to pour in $1.1 billion by 2008 to increase its annual production capacity there to 600,000 from 50,000 last year. "China will have to serve as a major engine for us to emerge as a truly global force," says Harry Choi, senior executive vice-president in charge of Hyundai's global marketing.

Initial signs are encouraging. In the first year of Chinese operations, Hyundai's joint venture, which is equally owned by Beijing Automotive Industry Holding, earned $240 million, although all the profits will be reinvested for expansion. "The venture reported a profit margin of more than 25%, the highest among all auto companies in China," figures Cho Yong Jun, auto analyst at Daewoo Securities in Seoul, who regularly visits China for research.


  The fat profit led to the revision of Hyundai's already ambitious growth plan. "Originally, we wanted to have a second assembly plant by 2010, but that was advanced by two years," says Koo Young Key, general manager heading the Korean company's China team. The two factories plus an additional $600 million plant to be built by its Kia Motors subsidiary by 2007 will give the Hyundai Motor group an annual capacity of 1 million vehicles in China. "This is part of our goal to grab a 20% passenger-car market share in China by 2011 from 4.6% last yea," adds Koo.

Hyundai is already building a $1 billion plant in Montgomery, Ala., set to begin production next year. And on Mar. 18, Kia signed an agreement with the Slovakian government to build a 700 million euro plant in the country's northern region of Zilina.

That's reminiscent of the expand-at-all-cost mantra of Korean conglomerates until 1997, when the country was hit by the Asian financial crisis. And it prompts one analyst at a European investment bank, who asked not to be identified, to warn: "What Hyundai has to remember is its own parent group that has broken to pieces after succumbing to the temptation to overreaching."


  However, management of Hyundai, 10%-owned by German-U.S. auto giant DaimlerChrysler (DCX ), argues that the aggressive overseas growth is part of its survival strategy. "In the increasingly tough global environment you must achieve an economy of scale, and China will help us achieve that," says marketing chief Choi.

This plan calls for Hyundai to outsell PSA Peugeot Citroen, Renault, and Honda (HMC ) to rank after the Big Three, Toyota (TM ), and Volkswagen by 2010. Officials also point to a pile of $2.1 billion net cash that Hyundai is sitting on to stress that it's not recklessly growing. Most analysts remain bullish at least for the near future, with Merrill Lynch and Goldman Sachs both recommending Hyundai shares as a buy.

Indeed, today it's a company transformed. Last year, Hyundai's net profit rose 21%, to a record $1.48 billion, on sales of $21.2 billion, up 1.6% from 2002. Hyundai's stock jumped 82% last year, far outpacing a 29% rise of the Kospi index, the Seoul bourse's benchmark. "I think the stock has potential to make an additional 33% gain this year," says Suh Sung Moon at Dongwon Securities in Seoul.


  Behind the bullish forecast is booming exports. Korean household credit woes led to an 18.5% fall in domestic sales, to 627,400 vehicles, last year, but overseas sales, mostly in the U.S. and Europe, rose 22%, to 1.35 million units. "If Hyundai could change its poor-quality perception in the U.S., where many consumers had been biased against it, it would have a much easier task convincing drivers with no preoccupation in China," says Chu Wu Jin, professor of motor-industry economics at Seoul National University.

Now, Hyundai is focusing its export push on China. It began selling the Elantra subcompact there this year, setting a target of nearly tripling sales to 150,000 units. "We will keep launching new models in China to stay competitive," says Koo, the China business team leader. If Hyundai can hit its targets in China, becoming a top-tier global carmaker may be within reach.

By Moon Ihlwan in Seoul

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