China Strong-Arms Hyundai Into Building Fifth Plant

The official groundbreaking ceremony for Hyundai’s fourth Chinese assembly plant held April 3 reflected the country’s new hardline stance with foreign automakers.

The troubled history of the $1 billion project in Cangzhou is well known. Hyundai had applied for permission to build its fourth plant in Chongqing in southwest China, a potentially lucrative market with just 54 passenger vehicles per 100,000 residents, compared with 240 per 100,000 in the Beijing region where Cangzhou is located.

Hyundai had hoped to break ground for the Chongqing plant in June 2014. But the Chinese National Government and Reform Commission, which has central authority, insisted Hyundai also invest in Cangzhou in Hebei Province, 135 miles (217 km) south of Hyundai’s three existing plants in Beijing.

The Korean automaker agreed on condition it could proceed with the plant in Chongqing. It plans to break ground there later this year.

Representing Hyundai at the April 3 ceremony was Hyundai Vice Chairman Chung Eui-sun, son of Chairman Chung Mong-koo. Representing Hyundai’s partner, Beijing Automotive Industry Corp., was Group Chairman Xu Heyi, who had led the opposition to Hyundai’s plan to build its fourth plant in Chongqing.

The younger Chung carefully avoided calling the Cangzhou plant a benefit for Hyundai, saying instead it was “a new growth engine of the Chinese economy, which would help China’s new development strategy for Beijing and its neighboring areas.”

It was the same language his father had used in July 2014 when he appealed directly to Chinese President Xi Jinping to intervene and expedite Hyundai’s stalled application for the Chongqing plant.

As for what it meant for the Beijing Hyundai Motor joint venture, Chung said only that it would help increase sales. He could not publicly say it was a plant Hyundai did not want to build, or that company strategists thought it was the wrong investment in the wrong place at the wrong time.

China Sees Hyundai as Korean Government's Proxy

Representing more than 15% of South Korea’s Gross National Product, analysts view Hyundai Motor Group geopolitically, the way the Chinese political hierarchy does – as tantamount to a government enterprise. Because Hyundai has the Korean government’s strong support, China’s central government warily keeps it in check, analysts note.

Foreign automakers operating in China complain that while government agencies’ and regulators’ doors once were always open, it has become increasingly difficult to access key people, and discussions must be held with lower-echelon staffers.

Things were different when Hyundai set up its first plant in Beijing in 2002, turning a failed local light-pickup plant into one of China’s most advanced manufacturing facilities.

Officials in Beijing and the central government eagerly welcomed the new investment, high technology and manufacturing and marketing know-how, as well as Hyundai Group’s many captive supplier companies, which also set up shop there.

Now they have Hyundai and other major players firmly hooked.

To sell vehicles with any sort of success in China, the big players must assemble them there.

Imported vehicles carry a 22.5% import tariff, a 17% value-added charge and a consumption levy based upon engine size.

Foreign automakers can own no more than 50% of any venture in China and so are tethered to their local partners. The foreign JVs account for about 55% of the country’s light-vehicle market, while the rest is held by their Chinese partners’ homegrown companies and more than 100 other local automakers. If low-cost pickups and small utility vehicles are excluded, the domestics account for only about 30% of total sales.

Since 2004, any foreign enterprise wishing to set up an automotive assembly plant in China is required to build an R&D center as well, with minimum investment of $64 million. Hyundai did so at its Beijing plants, but Chinese officials lobbied and pressured for a full-fledged world-class R&D center matching the automaker’s facilities in South Korea, the U.S., Europe and India.

So Hyundai is working on an independent R&D center in Yantai, in the far northeast corner of China. Hyundai spokesmen tell WardsAuto it is on schedule, which means it should be completed this year.

The new R&D operation will be comparable in size to the Namyang Center in Korea and will work in concert with Hyundai-Kia R&D centers in Europe, India and the U.S. However, it will lack any capability to develop new engines and transmissions. Analysts believe this is a safeguard to keep high-tech intellectual property from being leaked and pirated.

Hyundai not only has three high-tech plants at its JV in Beijing, each running at more than its 300,000-unit design capacity, captive suppliers such as Hyundai Mobis and others have set up major manufacturing operations in China.

Each Beijing plant currently exceeds design capacity and they turn out about a combined 1.05 million vehicles annually. One is being expanded to raise annual capacity 50%, from 300,000 units to 450,000.

Hyundai also has a commercial-vehicle JV plant in Sichuan province in Central China.

Dealer Network Expansion Adds to Pressure on Hyundai

As evidence that Hyundai was pressured into building the Cangzhou plant, analysts note Hyundai’s aggressive dealership expansion program focuses on Central China where the fifth plant is to be located, not around Cangzhou.

The automaker is expanding its Chinese dealership network from the current 920 to 1,000 by year’s end. Virtually all of them will be located in Central China, where the Chongqing plant is to be built following Hyundai’s reluctant agreement to build in Cangzhou as well.

It is noteworthy that while Chinese and South Korean negotiators officially initialed a draft of the China-South Korea Free Trade Pact on Feb. 25, the deal as written excludes passenger vehicles. This indicates China is keeping its tight grip on automotive manufacturing operations and will continue to restrict imports with high tariffs.

China hopes to become a global economic powerhouse with the power emanating internally and not from foreign companies. Its long-range goal is to become a producer that exports vehicles to all the world’s markets.

Analysts note China considers itself the owner of all plants and assets of the automotive JVs, regardless of the foreign investors’ legal ownership rights.

One Hyundai source commented while China was making approval of the Chongqing plant contingent upon the automaker building the Cangzhou factory that it was a situation in which “a shrimp’s back is broken if it fights with a whale.”