Hyundai to Target Booming Chinese Provincial Markets

BEIJING – The head of the joint venture between Hyundai and Beijing Automotive says the auto maker is competing for a share of provincial markets in China, which by 2015 will account for one-third of global vehicle sales.

Beijing Hyundai CEO Jae-Man Noh tells WardsAuto here that although sales in China are soaring, margins are tightening and markets outside the largest cities are ripe for growth.

Hyundai’s China JV scores hit with Elantra.

Most demand over the rest of the decade in the world's No.1 vehicle market is expected in smaller cities and rural interior regions, an official with China’s State Information Center told an international forum in September 2010.

Vehicle sales in 2009 in Tier-1 cities, including Beijing and Shanghai, rose 46.6% compared with prior-year, while growth in Tier-2 and -3 cities jumped 56.5% and 67.7%, respectively, the China Automotive Review reported.

Sales in Beijing, where 7% of vehicles nationwide were sold in 2010, are expected to fall by two-thirds this year as a government policy meant to reduce traffic congestion limits new registrations to 300,000.

Noh says the government is reviewing whether to impose similar restrictions in other cities because of concerns about their economic impact.

Hyundai estimates China’s 200 third-tier cities, many of them in the southwestern and western provinces, will account for 60% of vehicle sales nationwide by 2015. To win buyers in those smaller cities and rural regions, Noh believes auto makers must offer cars that buyers find both affordable and satisfying.

Auto makers also must recognize “the performance-to-quality gap has narrowed. So we need to focus more on emotional factors and brand service.”

Noh predicts Beijing Hyundai will claim a 6.4% market share in China in 2011, with Hyundai sister-brand Kia’s JV with Dongfeng accounting for 3.2%.

Beijing Hyundai says it will assemble 1 million cars a year for the Chinese market when a third plant comes online in 2012.

The JV’s 700,000 units sold in China last year comprised one-fifth of Hyundai's global total. China appears likely to remain the Korean auto maker’s leading market, with 365,000 deliveries in the year’s first half, a 10.6% increase over like-2010.

Noh attributes much of the auto maker’s strong sales to its fuel-efficient Hyundai Elantra and China-only Elantra Yuedong compacts. Those models, along with the Tucson and ix35 cross/utility vehicles, have been a “neat fit” for rising consumer demand, he says, adding sales also have been boosted by government subsidies and support for fuel-efficient vehicles.

The JV, which supplies Beijing’s taxi fleet, also has been successful in pitching prices closer to those of domestic rivals than its foreign peers. Noh says that strategy will continue, even as the price brackets between different Hyundai offerings narrow further. “

We aim to get to one price (for the Elantra and Elantra Yuedong).”

While the China outlook for Hyundai looks positive, it presents the question of whether the auto maker has the capacity to meet growing demand. Its Chinese rivals, meanwhile, must deal with overcapacity, Noh says.

Local auto makers upped their market share to 30% between 2002 and 2009, “but that growth has now stagnated,” he says.

The Chinese government has responded with a restructuring plan designed to foster mergers and acquisitions, back research and development, help local suppliers expand to smaller cities and promote improved parts-supply chains.

Noh also says the government sees exports, which totaled 540,000 units in 2010, as a way to absorb excess output of brands such as Chery.

Questioned about Brazil’s recently increased tariffs on imported cars, he contends Hyundai’s planned assembly plant in that country gives the auto maker a clear advantage over its Asian competitors. Latin America remains the top volume market for Chery and other leading independent Chinese exporters such as Great Wall.

China’s average annual wage doubled from 2003 to 2009, from RMB12,496 ($1,959) to RMB26,810 ($4,204). The government has suggested this figure could double again by 2015, Noh says.

Auto makers in China also face challenging labor issues Noh claims last year’s strikes crippling Honda’s Chinese plants will not be an issue for Hyundai, thanks to its emphasis on “communication” with workers.

– with Keith Nuthall