Hyundai Eyes Contract Manufacturing to Cut Costs

Hyundai Motor Group is taking a cautious approach to launching a Korean vehicle on a contract-manufacturing basis in a plant not owned by the automaker.

Hyundai announced June 1 it was studying buying into a proposed plant to be built in the city of Gwangju’s Bitgreen National Industrial Complex. The plant would be operated by management set up by the city administration.

The new plant reportedly would pay its workers about 40,000,000 won ($36,000) annually, about half the wages paid by Hyundai and Korea’s other domestic automakers. This would give Hyundai some relief from the high costs and low worker productivity of the quick-to-strike Korean Metal Workers Union (KMWU), which represents workers at all its domestic plants.

Hyundai would hold a minority stake, and Gwangju city would hold the bulk of ownership, possibly augmented by outside investment.

A Hyundai Motor Group spokesman says nothing substantial has been achieved since the automaker’s June 1 announcement. But Korean media report the KMWU, which opposes Hyundai building a vehicle in a non-Hyundai plant, will sue the automaker for breach of trust if it signs an agreement with the Gwangju group.

Gwangju sources say Hyundai will invest 52 billion won ($72 million) in the 700 million won ($630 million) plant, a 7.4% stake. They say it will have annual capacity of 100,000 vehicles – likely a new small 1.0L utility vehicle – with production launching in 2020.

The Hyundai Group spokesman says no investment amount has been determined, nor have the capacity of the plant, construction start date or launch target been set. “Details on the model to be produced will be determined later in due course only after the establishment of the factory is finalized,” he says.

Hyundai already is established in Gwangju; its Kia affiliate has operated there since 1998. It produces the all-new Soul and Soul electric vehicle, the new Carens van and the Sportage SUV. It has the highest productivity rating of all Kia plants.

The Hyundai-owned Wia and Mobis subsidiaries also operate in Gwangju, supplying chassis modules and cockpit and front-end modules to the Kia plant.

Additionally, Hyundai and Kia jointly established the Creative Economy Innovation Center in Gwangju in 2015. The center focuses on assisting startup automotive operations and conducting research on fuel-cell vehicles.

The Hyundai spokesman says it has not been determined how much of the plant’s production capacity would be allocated to Hyundai. “The factory can produce any car,” he says.

Hyundai’s domestic venture into contract manufacturing requires navigating potential union roadblocks and backlashes.

Under Korean labor law, the KMWU can only strike at Hyundai’s seven Korean plants in local situations involving wages and working conditions. However, the union does have some legal clout under its current collective bargaining agreement. Management cannot reassign any model from a unionized Hyundai-owned plant to another plant without union approval.

Analysts believe building a new model at the Gwangju facility would get around that hurdle. But they also doubt vehicles from Hyundai and a competing brand would be produced in the same facility and think only a Hyundai model would be assembled at Gwangju.