Hyundai–Kia news. Investment attractiveness of world car industry grows every year. Thus, unlike Japanese (Honda, Toyota, Mazda) and French (Peugeot, Renault, Citroen) car producers, 2011 has been more than successful for Korean car industry and its investors.
What is the secret of their success, according to the companies’ shareholders? What is waiting for them in 2012? What is wrong and what is right about the analysts’ question “Will the whole world switch to Korean cars”?
Fairytale about Korean Khonchhi (Cinderella) for Korean investors
As explained by analysts of Asian community of traders and investors, the story of Korean car industry is a classical story of “the poor girl” Cinderella, or Khonchhi, as she is called in Korea, the story of an untidy girl that became a princess. As remembered from childhood, the necessary elements of this – one of the most favourite fairy plots – are dream, start, rise, challenge, and happy end. The stages of Korean car industry have been exactly the same. The poorest Asian country has turned into one of trendsetters in car industry during the period of one generation (!), and South Korean cars have in a short time taken over the whole world. Korean phenomenon in car industry is a perfect example of success story. Today Hyundai–Kia association is not only a leader of Korean car industry, but also a strong play at global market:
- Hyundai Motor enters the list of 100 largest world brands three years in a row (61st position in 2011). Interbrand’s assessment of its brand has amounted to 6 bln. dollars, which is 19.3 more than in 2010. What does it show? Firstly, that brand value is constantly rising, for example, in 2005 the company occupied 84th position. And secondly, such growth is the best result among all car producers. In the rating of car industry brands Hyundai Motor is at a rather high 8th position;
- according to the volume of sales, last year Hyundai Motor Group has entered the list of five largest car producers. It has become the second player at Asian car market, having conceded only to Toyota Motor. In 2010 the share of Hyundai in global car market amounted to 5.2 percent;
- according to the rate of development, the company ranks second to none for three years already. Interbrand company has given Hyundai Motor the title of "the most dynamic brand" for a reason;
- Moody's forecast. The company has admitted the improvement of Hyundai Motor results in 2011, having raised its forecast from "steady" to "positive" at "Ваа2" point etc.
In general, Korean car industry, which has become the main sensation during recent years, keeps expanding its might, moving forward more and more. Koreans have done their best for the fairytale to come true. However, not all experts and car enthusiasts are ready to sing asana to Korean cars. It is reported that:
- so far Korean cars are out of favour in Europe, brand is different. It is far from Mercedes and BMW. Large-scale production of cars in South Korea started almost one hundred years later than in Europe. So to say, competing with the heavyweights is not for beginners;
- Korean cars are not among top models in car showrooms. They rarely win first prizes at prestige contests;
- they are still worse and cheaper than their Japanese equivalents; they attract consumers only by their affordable price, which is explained by using cheap materials in their production.
Their mini-cars are said to be not cars but the kindest ghosts with an engine around the globe. So to say, this is the source of their competitiveness with recognized world giants of car industry. In other words, “Koreans” are worth a separate discussion at least because information about pluses and minuses of Korean car industry is of current interest to investors. Car industry is known to be among current favourites of stock exchanges. So, will the modern trend change for Korean cars? analysts have suggested their view on investment attractiveness of Korean car industry.
Every year Korean car industry keeps rising
In 2011 global sales of Hyundai Motor Group (in 2010 capitalization amounted to 34.99 bln. dollars), which includes Hyundai Motor and Kia Motors, amounted to 6.6 mln. cars. It is worth mentioning that the company has been showing double-digit growth for 3 years in a row. Sales have risen mostly due to high demand in India and North America. Consequently, the share of Hyundai and Kia in US market has amounted to 8.9 percent, this year it may rise to 9 percent:
■ plans for 2012. Speaking about this year’s plans, the company is going to sell 7 mln. cars. This means that sales uplift will drop to 6.1 percent. Hyundai Motor has sold 4.05 mln. cars around the globe, versus previously expected 3.9 mln. cars (+12.3 percent). Speaking about Russian market, Hyundai has gained the 3rd position – over 163 ths. cars (+88 percent), which means that in Russia last year has been a record one.
■ KiaMotor Corporation among car producers. The company is known to have been bought by Hyundai Motors in late 90-s, but it has preserved its name and relative independence. At present it is the 2nd largest car producer in South Korea and the 7th worldwide.
In 2011 the corporation sold 2.53 mln. cars around the globe (+19.2 percent). Sales uplift has mostly resulted from foreign markets (+24.3 percent). Kia has gained 5th position in Russian market – almost 153 ths. (+47 percent). Stocks at Korean stock exchange amount to 61 dollar:
Therefore, the share of Korean cars sold worldwide has considerably risen during 2011. Moreover, “Koreans” have successfully pressed Japanese and German cars, which used to be dominating.
Every year Hyundai Motor Group keeps rising
In 2011 the profit of the group of companies amounted to about 7.17 bln. dollars (+35.1 percent),
- earnings reached 68.8 bln. dollars (+16.1 percent),
- operational profit reached 7.8 bln. dollars (+36.4 percent).
Last year Kia Motor Corporation gained the record profit of 3.1 bln., having risen by 30.4 percent. Not only the rise of dollar rate and the growing popularity of the brand enabled to considerably increase the financial results of Hyundai Motor Group, but also… earthquake in Japan. Rivals from South Korea have used the benefit of Japanese plants downtime, having made their world positions much stronger. In general, earthquake makes some people reach. As observed from the chart, the company’s stocks are traded at about 200 dollars each:
What can turn Korean golden carriage into a pumpkin
Meanwhile, not everything is so cloudless and fairy about Korean car industry, as it may seem at first sight. It has enough weak points and dangerous places, which may hold further development of Hyundai Motor Group in case of force majeure. Below follow the most evident ones:
■ narrow domestic market. It is well known that the population of South Korea amounts to about 49 million, and its territory is smaller than Cuba. In other words, local market is rather small; last year’s domestic sales have amounted to 17.8 percent, and this January they have dropped by 18.5 percent in comparison to January 2011, whereas global sales have risen by 3.5 percent during this period. Therefore, Korean car producers have to orient at export (at present over ⅔ of their products go abroad) and, consequently, rise their dependence on external markets. And what is the present situation at these markets? That’s right. Slowdown of developing countries, low demand in advanced countries, as well as price rise for raw materials with all negative consequences related to it;
■ increase of labour cost. The matter is that wages in South Korea have almost reached western ones. This means that the country’s benefit of cheap labour force is not topical any more. This is proved by endless strikes at Hyundai Motor. Petty savings from wage payments and uncompromising management often lead to a company’s loss that amounts to millions dollars. Thus, strikes in November have resulted in the loss of 24 ths. cars, total cost of which amounts to 289 mln. dollars, and fall of stocks;
■ severe competition. At present potential threat to South Korean car producers is provided by Malaysia, Thailand, and, certainly, China. Relying on cheap labour force, they may within time force South Korea out of the market of budget cars. Besides, as recently Hyundai-Kia has considerably risen prices at domestic market, locally assembled cars are now more expensive than imported ones; consequently, the number of the latter ones keeps rising every year;
■ narrow segment. Budget cars still prevail in Korean car industry. It is evident that there are enough unpicky car enthusiasts worldwide, and US, Chinese, Indian, and Russian markets are so large that Korean car producers will go a long way. So, they content with minor modernization of Japanese models, but the world is going forward, and there is a threat that they may not catch up with changes and lose their current markets;
■ exhaustion of production capacity. Exhaustion of Hyundai capacity is one of the reasons for this year’s sales slowdown. Meanwhile, the company is not going to build new plants in the nearest future;
■ major claims to cars. It is evident that sooner or later all cars break down or get out of order, as there is nothing everlasting in this world. Thus, Nissan currently calls back 250,000 cars worldwide. In this reference, major minuses of Korean cars include:
- lack of environmental friendliness. In particular, it is mentioned that cheap and low quality plastic may be used for interior trim. Further follow results of the recent research, held by American company Ecology Center, which focused on checking cars for toxic substances that are used in interior trim materials. Consequently, the top-10 of worst cars with high concentration of the substances, in descending order, included Kia Soul at the 3rd position, Hyundai Solaris – at the 6th, and Kia Sportage – at the 8th. It’s hard to object to the fact that three out of ten is too much for one company. However, the top-10 of cars with lowest concentration of toxins had no Korean cars;
- poor durability. Korean cars are known to have one of the shortest service lives in the world – 7.5 years; to compare, service life of Japanese cars is15 years, American ones – 16.2 years. This refers to questionable quality of steel (the body starts rusting rather quickly), weak fixation, low quality of assembly work, etc. Even Koreans themselves have ironic attitude to their mini-cars, and mini-car Daewoo Tico is often joked about ("if your Tico won’t move, check is a gum is not stuck to its wheels"). It is evident that many problems of Korean car industry have resulted from a range of simplified samples, borrowed from European and Japanese car industries; by the way, this enabled Hyundai to have low production cost and high competitiveness of its products for a long time.
However, Korean cars are not considered to be reliable and durable any more. And although they fall short of the quality of Japanese cars, modern Korean models leave the impression of high-quality cars.
Every tale has a secret
The history of Korean car industry has a number of peculiarities, which analysts find very interesting. Indeed, who does not want to find out the secret of sudden success of Korean car producers? Hyundai has been showing annual sales rise of over 10 percent for last several years, even the critical year of 2009 has not broken the trend. Experts of Masterforex-V Trading Academy explain this phenomenon by several factors, the combination of which has generally presupposed the rise of car production in South Korea:
1. Direct intrusion of the government into the development of the industry. This government has formulated two major principles of the country’s development: export orientation, which was the only way to succeed for the country with no natural resources, and maximal concentration of capital. This was not only formulated, but all necessary conditions for the best realization were also created. These included numerous privileges, credit incentives; limitations on import of constituents (importers had to prove that their details could not be produced in Korea), which resulted in domestic production of over 90 percent of details by 1980; high customs fees, due to which foreign cars could not be imported for a long time, etc.
2. Maximal concentration of production. Establishment of South Korean car industry was accompanied by such high concentration of production and capital, which is hard to find. It was the government that favoured the establishment of large companies – chebol – a family of multi-type holdings of widest profile. For example, Hyundai Kia Automobile Group has its own blasting furnaces (Hyundai Steel is currently building its third blasting furnace) and construction corporation. On the one hand, this secures car industry during critical years; on the other hand, gives independence from global metallurgical prices, and control the quality of raw material. Tale is known to require harmony and integrity.
3. Large-scale borrowing. Up till late 80-s the majority of Korean models have only been licensed copies of foreign cars, mostly Japanese ones. Thus, by 1995 Korean car producers have signed 488 license agreements.
4. Initial orientation to unpretentious mass demand, which has brought Koreans success at international car markets.
5. Korean mentality. Koreans are known to be most hard-working people on the globe. They believe that one has to work hard in order to become rich, as it is unlikely to happen by lucky circumstances. Even Cinderella had to work hard, in addition to her good looks and fairy godmother. The hint of the tale is evident – work hard, and you are bound to succeed! In general, as the genius fairy tale writer Hans Christian Andersen said, the best fairy tales are written by life.
And Korean tale will come true
It is high time to figure out the perspectives of Korean car industry, which has world-wide popularity. This is of major importance on condition of possible shortage of demand for cars. According to Hyundai Motor Group, in current circumstances it is going to choose several directions:
■ further brand-building worldwide by means of:
- recalling part of production outside the country and modernizing foreign production plants. Thus, Кia already has 13 plants in 8 countries – Malaysia, Indonesia, China, Pakistan, Philippines, Slovakia, USA, Russia, and others. At present Kia Motors is planning to launch, jointly with local companies, its third plant in China by 2014, having thus satisfied the growing demand for Korean cars (Kia will be able to raise its production volume in China to 730 ths. cars per year). In general, Kia is one of the most dynamic companies in China, and its share has already risen to almost 5 percent of the market. Hyundai Motor has 6 plants in China, India, Turkey, USA, Czech Republic, and Russia.
The company has now chosen European market as its top-priority area. Last year export of Korean cars to Europe has risen by 40 percent due to free trade agreement between EU and South Korea, which resulted in lower import duties. The share of Hyundai Kia Automotive Group at European market has reached 5.7 percent, whereas the share of Toyota amounts to 4.1 percent. Europe has called this Korean expansion;
- expanding domestic market. It is favoured by several factors. Firstly, Koreans enjoy changing cars, average exploitation of a new car is considered to be the shortest worldwide – 3-4 years, and then the car is sold for about 20-30 percent of its initial value. Secondly, Koreans are very patriotic, consequently, their prefer driving domestic cars. Thirdly, Korean import duties on foreign cars have been reduced, but their owners pay high taxes, so, the share of such cars remains extremely small. In such a way, domestic producers are secured against competitors;
- redirecting at higher segment. Koreans are certain that the idea "Korean means cheap" is in past, and that their technologies make it possible to produce cars of international standard. Hyundai has claimed about its decision to produce cars "of modern premium class". The company is going to improve construction and design of its cars to compete at the market of expansive cars on equal footing with Japanese and European companies. In order to achieve this, the company may even sacrifice its sales volumes. At the same time Hyundai is not going to refuse from cheap models, on the contrary, it is going to raise its share of the market;
- releasing new models and variations. It is often said that every new car model brings the impression of all previous ones having been a mere mistake! It is not related to Hyundai, though. The company seems to have the widest lineup, and it keeps growing. For example, Hyundai Motor Company has introduced its new Veloster Turbo at the last car show in Detroit. The car is characterized by 204 horsepower, 1.6-liter gasoline engine, six-speed gearbox, new fog lamps, and so on and so forth. Speaking about variations, fifth generation of Solaris and Elantra, for example, are available in 34 variations each, so that any customer could choose a car that would satisfy his tastes and priorities;
- rising competitiveness of the brand. In this reference, in 2012 Hyundai Motor is going to make record investments of 12.2 bln. dollars (+15.6 percent) into its own development. Its priorities will include:
● high-quality production. In order to achieve this, Hyundai is striving for a concentration of entire process chain – from the recovery of raw material to a ready-made car – in its own hands. Unlike other car corporations, here almost all constituents are made by their own means and under their own supervision. For example, having built one of the largest steel plants in the world, Hyundai has rapidly improved the quality of corrosion-resistance body coating and car safety as a whole. At present the company gives a car guarantee for three years, just as most car producers worldwide do;
● environmental friendliness and efficiency. Hyundai is promising to set large-scale output of hybrid cars already in 2015. Wholly electrical compact cars are planned to be released at about the same time;
● safety and security. Hyundai i40 sets a good example in this reference; it was the first Asian model to win EuroCarBody Award, having beaten Audi, BMW, Mercedes, Nissan, Volkswagen, and other respectful models. Its ultrastrong steel and improved junctions received duly assessment. Before this i40 model has also gained the maximal five-star rating in EuroNCAP crush-tests. Hyundai Elantra is also worth mentioning, as it has gained the highest award "Car of the year 2012" at North American car show in Detroit. Kia Optima may also be mentioned; in 2011 it entered the list of "Top 10 selling cars", according to Auto A Fondo magazine. Insurance Institute for Highway Safety in US has called this model "The safest car". In general, this is the case of a motorists’ talk: – I have an icon in my car for good luck. – And I have a kewpie doll on a sucker. – And I have brakes and airbags for good luck;
● combination of affordable price and satisfactory quality. Hyundai cars seem to have a perfect balance between its prestige and price.
And here crisis is for the benefit of Hyundai, as it encourages consumers to have higher demand for price-quality balance. However, current prices for Korean cars are close to the ones for European or Japanese cars;
● elegant lineup. It stands beyond doubt that Hyundai cars stand out in any flow of cars because of their attractiveness and originality. For example, Hyundai Veloster has gained 4th position in the rating for "Most beautiful cars of 2011". It is hard to resist its extravaganza, modern look, and bright colours.
So, what are the perspectives of Korean car industry? In brief, they are rather promising. The strength of Korean car producers is provided by their constant progress, as they are raising their sales volumes and market share and becoming a serious competitor at world car market. Therefore, the tale about car producers of South Korea can be finished with a standard final phrase of fairy tales – "they will live happily ever after", if they put maximal efforts into this.
"Market Leader" and Masterforex-V Trading Academy hold a questionnaire at Forex forum for traders and investors: in you opinion, will the whole world switch to Korean cars?
● yes, as Korean cars already have good reputation;
● no, Korean cars can only occupy a certain niche;
● hard to say.
