Hyundai Cutting Costs

Hyundai Auto-motive Group, which includes Hyundai Motor Co. Ltd., Kia Motors Corp. and supplier Hyundai Mobis, is in a deep cost-cutting mode, asking all suppliers to bite the bullet and lower prices substantially.

In January, group Chairman Chung Mong-koo ordered a 30% reduction in general expenses. In addition, cuts in supplier costs are being negotiated on a company-by-company basis, although no cost target has been announced.

However, a Hyundai insider tells Ward's the company is seeking reductions of as much as 15%, depending on the supplier, volume and parts involved. In some cases, substitution or acceptable modification of existing parts will be considered, so long as quality is maintained.

“We are getting squeezed by higher prices for oil and raw materials, and, on top of that, we have to deal with a rapid strengthening of the (South) Korean won. This is forcing us to take a closer look at our costs,” the company insider says.

“There's not going to be any sweeping cuts across the board. We cannot afford to compromise our quality in the name of reduced costs. Where we find suppliers taking on greater responsibilities for engineering and design and raising quality, we'll gladly pay more.”

Likewise, research and development expenditures will not be reduced and, in fact, have been increased from 2005.

“Last year, we invested 6.2% of our revenue in R&D, which came to 1.7 trillion won ($1.8 billion),” the source notes. “This year, we have targeted 6.5% of revenue, which we estimated at 1.6 trillion won ($1.7 billion).”

Nor will the current cost-cutting programs impact expansion programs in the U.S., China and India. A Kia spokesman says neither the new plant under construction in Slovakia nor the forthcoming West Point, GA, plant in the U.S. (see story, p.11) will be affected by the cost cutting.

“The Slovakia and U.S. projects are crucial investments for securing our long-term prosperity in two of the world's most strategic auto markets,” he says.

Meanwhile, South Korean media reports about the cost-cutting program have caused some alarm among government regulators. The Fair Trade Commission has been studying whether all five of South Korea's auto makers might be unfairly pressuring their suppliers to reduce costs.

The FTC's studies were announced last October, but Hyundai and Kia spokesmen say they have yet to be questioned.

However, an FTC spokesman was quoted in a media report saying the regulatory agency now will focus specifically on Hyundai and Kia to see if undo pressure is being applied to suppliers.

The Hyundai insider says the news stories are “speculation,” and that it is normal for major manufacturers to seek cost cuts from suppliers during tough times.

He denies unnecessary pressure is being applied, stressing the matter is being handled through the normal one-on-one price and quality negotiating process.

“We're asking our 400 first-tier suppliers to join us in this effort on a company-by-company basis,” he says.

Everyone is feeling the pain, he says. For example, executives now must fly in economy class, and all paper must be printed on both sides.

Another austerity measure is a move by managers to freeze their wages at the present level throughout 2006. This affects nearly all management personnel at Hyundai and Kia, from junior rank to senior executives.

The management salary freeze also is being implemented at Hyundai Mobis, a major supplier to both auto makers. However, the company's labor union is crying “foul.”

It asserts a freeze in management wages is a “back door” way of pressuring unions not to seek higher wages when a new contract is negotiated this summer.

Park Yoo-ki, the Hyundai Motor workers' union president, calls the overall management salary freeze “a challenge to unionized workers that was made without discussions with our union.” Sung Byong-lok, Kia's labor union president, complains there was “no agreement between labor and management over the wage freeze.”

Traditionally, both auto makers have given managers raises in line with increases the unionized workers negotiate in their collective agreements.

Union leaders believe company negotiators will use the management wage freeze as a lever to extract a similar voluntary wage freeze from unionized employees, including office workers.

Meanwhile, the South Korean media reports Hyundai Motor, separately from Kia, is seeking to cut parts costs by some 1.3 trillion won ($1.3 billion), reducing the 2006 figure to approximately 20 trillion won ($20 billion). If correct, the figures indicate an overall reduction of 6.1%.

The 2006 business plan for Hyundai Motor projects revenue from sales of domestic plants at 30 trillion won ($31 billion). Of that amount, 13.2 trillion won ($13.6 billion) would be generated by Korean sales and 16.8 trillion won ($17.3 billion) from exports.

Total global revenue in the 2006 plan is targeted at 41.4 trillion won ($42.7 billion). The global figure includes targeted revenue of 11.4 trillion won ($12 billion) from Hyundai Motor's overseas plants in the U.S., China, India and Turkey.

Revenue targets from those overseas plants constitute a 51.6% increase over the 7.5 trillion won ($7.7 billion) generated in 2005.

The 2006 plan calls for Hyundai Motor to sell some 630,000 vehicles in the domestic market, at an average price of 19.6 million won ($20,218) — a unit sales volume increase of 10.6% over estimated 2005 sales of 569,721 units.

The plan targets an export sales increase of just 0.5%, with 1,137,000 units sold at an average price of 11.8 million won ($12,172). This compares with 2005 estimated total export sales of 1,131,136 units. The export sales figures do not include complete-knocked-down kits.

Hyundai anticipates a 5.8% decline in unit exports from South Korea to the U.S. and a 16.9% decline in exports to Canada. U.S. export sales are targeted at 309,000 units and Canadian sales at 49,000 units.

The plan anticipates total North American export sales declining by 7.5%, with 358,000 units sold.

Specifically, the plan targets sales of 275,000 units produced at Hyundai's Montgomery, AL, plant (200,000 Sonatas and 75,000 Santa Fes). That would constitute a substantial increase of 202.2% over 2005 estimated sales of 91,000 units.