Hyundai Raising Stakes in Struggle for China Market

Huang Qifan, mayor of Chongqing Municipality, and Seol Yong-heung, vice chairman of Hyundai Automotive Group, on March 27 signed a “strategic cooperation agreement” between the Central China city and the Korean automaker’s Beijing Hyundai joint venture to develop a new vehicle-assembly plant with annual capacity of 300,000 units.

Featuring a location that connects the markets of China's coastal cities, Europe and Central Asia, “Chongqing is the best location for automobile manufacturing," Hyundai Group Chairman Chung Mong-koo says in a statement released by the city’s Liangjiang New Area industrial zone.

Under the agreement, Chongqing will provide tax breaks and other incentives for the plant, Beijing Hyundai’s fourth in the country. Construction could begin late this year, with production launching in 2016.

Hyundai will invest 1 trillion won ($929 million) in the new facility, helping the automaker protect its share of the world’s biggest car market, Reuters reported.

The Beijing Hyundai plants, combined with sister brand Kia’s separate JV, will help the parent company meet its 2016 Chinese sales target of 1.82 million vehicles, the Liangjiang statement says.

Neither Hyundai Group nor its JV is offering specifics of the proposal. But analysts believe Beijing Hyundai would build and operate the plant and finance construction and equipment while Chongqing provides not only local-tax abatements but also infrastructure development, assistance in recruiting and training workers, and possibly other incentives.

Though the existing JVs’ combined production capacity is 900,000 units, output in 2013 totaled 1.03 million. “We need to expand badly to meet market demand,” a Beijing Hyundai source tells WardsAuto. “We need a fourth plant and more news will come out about it soon. Our three factories are operating at over capacity.”

Plant Targeted at Protecting Hyundai-Kia Market Share

In a Korean-language news release issued in Seoul, Hyundai states a new plant is essential to safeguard the combined market position of Beijing Hyundai and sister brand Kia’s Dongfeng Yueda Kia JV.

In 2013 Beijing Hyundai sold 1.03 million vehicles for a 6.8% share of the China market. Dongfeng Kia sold 546,766 vehicles for a 3.6% share.

After attending the March 27 signing ceremony in Chongqing, Hyundai CEO Chung visited the Dongfeng Kia JV’s third and newest plant the next day. Located in Yancheng in Jiangsu province, where the two other factories are located, the new facility has initial capacity to produce 200,000 vehicles and engines annually, with flexibility to increase yearly output to 300,000 vehicles.

The three Beijing Hyundai plants, all located in the capital city, assemble a full range of Hyundai cars and CUVs, including the Accent, Elantra, Verna, Yue Dong, Lang Dong, Moinca, Sonata, Tucson, Santa Fe and others. Beijing Hyundai also has a network of about 700 full dealerships and 200 representative dealerships and is expanding distribution capability steadily.

The original Plant 1, which produces all models in the JV’s China portfolio, is running two 8-hour shifts daily, with occasional Saturday schedules. Plants 2 and 3, which build selected vehicles in the portfolio, are running flat-out on 10-hour day shifts and 11-hour night shifts, with overtime regularly scheduled for Saturdays.

Chongqing, better known to the world by its former spelling as Chungking, was the nationalist Chinese capital during World War II when China was at war with invading Japanese forces. The megalopolis on the Yangtze River in Western China for several years has been competing with other major inland industrial centers for investment.

Chongqing is one of five municipality regions directly governed by China’s national government, which is shifting the country’s export-dependent economy to one that is more strongly driven by domestic consumption.

Gross domestic product growth in the region last year was 12.3%, compared with the national average of 7.7%, and 8% in Beijing, the capital.

The proposed Chongqing facility neatly fits the strategy of both the Korean automaker and the Chinese government.

Analysts note other new business takes root around Beijing Hyundai plants. Parent Hyundai Group typically signs on major suppliers, including Hyundai Mobis, to locally produce and supply parts and systems.

Beijing Hyundai, a 50-50 JV with Beijing Automotive Group, operates three major plants in the Shunyi district on the outskirts of Beijing. The district is heavily polluted and further industrial expansion there is difficult because of ecological considerations.

The market potential of China’s interior, which is luring hundreds of thousands of people away from rural areas and the congested, polluted large cities, is attractive to Beijing Hyundai. Demand for both cars and commercial vehicles is booming in the Chongqing region, where five domestic and five foreign automakers, as well as more than 1,000 suppliers, operate.

According to Chinese news reports, Chung indicated to South Korean President Park Geun-hye when the Hyundai Group CEO and other industrialists accompanied her on a state visit to China in July that he would be investing in a new plant in the country’s western interior.

The automaker already is expanding on another front in China, joining Sichuan Nanjun Automobile Group in a 50-50 JV called Sichuan Hyundai Motor. Serial production of trucks begins in a few weeks, with initial annual capacity of 150,000 units and the flexibility to increase output to 300,000. The JV also plans to build 10,000 buses a year at the existing Nanjing Automobile plant nearby.

The Sichuan Hyundai JV targets sales of 170,000 units by 2017, to take 3.6% of the China medium and fullsize commercial truck and bus market.