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SEOUL – With South Korea handily containing Covid-19 without imposing an economy-crippling lockdown, Korean carmakers appear to have a reopening edge over their global rivals.
But all is not well in the nation’s crucial auto industry, the world’s seventh-largest and fourth-largest per capita, according to the International Organization of Motor Vehicles Manufacturers.
While firms at the top of the industry appear, so far, to have weathered the coronavirus storm, downward pressure on global demand has cast shadows over smaller carmakers, deepening a chasm that had already bisected Korea’s automaking industry. The nation’s smallest carmaker, moreover, now faces an existential crisis it may or may not survive.
South Korea’s two leading automotive giants, Hyundai Motor and Kia Motors, are run as separate firms but have been united under the Hyundai Motor Group banner since 1998, when the sector consolidated as a result of the 1997-98 Asian financial crisis.
The world’s fifth-largest automaker, Hyundai Motor Group, boasts economies of scale, a hefty capital war chest, and a national flagship status. It’s two firms, the only wholly domestically-owned carmakers in the sector, are known for consistently bringing successful new car models to market by expanding their lucrative SUV and luxury vehicle line-ups.
The group has managed to secure robust standby demand for new vehicles, as seen in the case of the Hyundai Palisade and Genesis GV80. Domestic consumers who made contracts to buy G80, GV80 and another large-size SUV Palisade should wait for around six months to get their cars.
GV80 has received around 11,000 orders from the United States since it was unveiled there in January. Sales commence in the second half.
Although their performance is expected to be sluggish in the second quarter, due to a long hangover of operations suspended earlier in the crisis, Hyundai and Kia Motors both outperformed in the first quarter.
Hyundai posted a 863.8 billion won (US$720 million) operating profit in the first quarter, up 4.7% from the same month of last year. Kia’s operating profit excluding one-off costs increased by 17.1% to 444.5 billion won ($371 million) over last year.
According to Meritz Securities, Tesla, Hyundai, and Kia were the only major automakers that posted a year-on-year increase in operating profits in 2020’s first quarter. The Korean brands benefitted from a strong dollar, which made Korean exports cheaper, and consistent domestic demand for new SUVs and cars.
As of late May, Hyundai and Kia Motors resumed operations globally that were stalled due to parts shortages in European plants, including in Czech Republic and Slovakia. But an industry source who requested anonymity said he is still cautious about the two carmakers’ performance moving ahead.
“We should not overestimate the first quarter result of Hyundai and Kia. Domestic sales sail smoothly thanks to new cars, but their local sales account for less than 30% of the total sales,” said the source.
“I estimate the car sales of Hyundai and Kia fall by more than 10% this year. But. in the worst-case scenario with no recovery of the global automobile market, their sales in this year may decrease by up to 20%, which is an estimated industry average falling rate.”
However, he added, “they are not likely to be in trouble financially as they secured robust cash.”
According to Hyundai Motor Group, as of the first quarter of this year, Hyundai Motor has cash and cashable assets worth 25.6 trillion won ($21.3 billion). Kia and Hyundai Mobis, a major part supplier owned by the Hyundai Motor Group, have 9 trillion won ($7.5 billion) and 11.2 trillion won ($9.3 billion) of cash and cash equivalent assets, respectively.
While the auto giants look secure, concerns still hang over far-flung parts suppliers. And even in that sector – as with the wider automobile sector – there is a substantial gap between the top and bottom tiers.
“First-tier suppliers are likely to be fine given their size and financial stability, but second-tier and smaller suppliers can be hit hard by the coronavirus as their profitability and financial conditions are worse than bigger suppliers,” Lee Hang-koo, a researcher at the Korea Institute for Industrial Economics and Trade, told Asia Times. “If any part suppliers collapse, there will be disruptions in production.”
Collapses, however, look unlikely. Not only are autos a key national industry, South Korean governments, fearful of job losses, are customarily loath to let companies go belly up.
A range of financial aid packages are being rallied: Hyundai Motor Group, local governments and the central government have raised 500 billion won ($417 million) in funds to help part suppliers. The government is also stepping up.
“We are trying to raise funds to support small and medium-sized part suppliers to avoid a collapse in the auto industry’s value chain,” a senior Korean financial official who requested anonymity told Asia Times. “We plan to issue bonds and support the suppliers with the money raised,” he said.
Seoul announced on June 19 a plan to inject up to 5 trillion won ($4.2 billion) to SMEs in key industries, including two trillion won for auto parts suppliers. An industry source said to Asia Times, “more will come if auto parts suppliers’ financial condition worsens.”
Foreign-owned Korean automakers GM Korea, formerly known as Daewoo Motors, and Renault Samsung have suffered from steep downturns in car sales, primarily in overseas markets. Still, neither looks to be in a dire situation.
Renault owns a 79% stake in Renault Samsung, while Samsung Card, a credit card company, holds 19.9%. Samsung spun off its then-nascent auto arm after the 1997-98 Asia financial crisis to focus on core businesses.
Renault Samsung, the South Korean arm of the Renault-Nissan-Mitsubishi Alliance, lost consignment production of the Nissan Rogue in March this year. That was a significant blow. Currently, the firm is seeking to secure production of the new crossover XM3, which will be released in Europe under Renault’s badge.
But Renault Samsung was the group’s sole plant to maintain full operations in the first half of 2020. And according to the Ministry of Trade, Industry, and Energy, its exports decreased around 69% through to May this year. However, domestic sales rose about 43% during the same period thanks to rising sales of SUV and crossover models.
GM Korea, which was similarly acquired by GM as a result of predecessor Daewoo Group’s catastrophic Asian financial crisis-induced collapse, is also suffering from sluggish business amid the Covid-19 pandemic. Its domestic sales rose 6.5% during the first five months of this year, but exports fell 34.3% during the same period, according to the industry ministry.
Still, GM Korea’s finances look sound, as it underwent intensive restructuring in 2018. GM invested $6.4 billion in 2018 on the condition that state-run Korea Development Bank (KDB) support its controversial managerial decision to shutter a plant in the southwestern city Gunsan.
The closure caused mass unemployment and a severe downturn of the local economy, but GM still called for the KDB to lend a helping hand. KDB did so with an 800 billion won ($667 million) capital injection, justifying the decision on the grounds that it is GM Korea’s second-largest shareholder.
But KDB would have a harder case to make in assisting Korea’s smallest and most troubled carmaker, Ssangyong, to which it is merely a creditor not a shareholder.
An SUV specialist manufacturer, Ssangyong Motor was a key arm of Ssangyong Group, which imploded amid the Asian financial crisis. It underwent a series of acquisitions, at the hands of local player Daewoo and then, after Daewoo toppled, China’s SAIC Motor, before being bought up by India’s Mahindra & Mahindra Limited, which now holds 75% of the firm.
But even before Covid-19, Mahindra – a long-time Indian carmaker and largest tractor maker worldwide – was not able to lift Ssangyong’s fortunes. The Indian owner now calculates that Ssangyong needs 500 billion won ($417 million) over three years to steady the company, including funding the development of new cars.
Ssangyong seeks financial support from the government via KDB, Ssangyong’s main creditor. However, Seoul has made clear that Ssangyong’s woes are unrelated to the pandemic. Ssangyong posted losses for 13 consecutive quarters through the first quarter of this year, impairing its capital position significantly.
Now it must repay 390 billion won ($325 million) in debt by next March, of which 254 billion won ($211.8 million) is due this year. KDB holds 190 billion won ($158.4 million) of Ssangyong’s debt.
Mahindra had planned to inject 230 billion won (191.8 million), but eventually injected only 40 billion won ($33.4 million) in May as the pandemic froze India’s car market. Ssangyong itself has secured 110-120 billion won ($91.7-$100.1 million) through wage cuts since August last year, and 206 billion won ($171.8 million) through asset sales in April and June.
“We have secured money to cover operation costs through our self-rescue plan,” Kwak Yong-sup, a Ssangyong Motor spokesperson, told Asia Times. “But we still need government support to develop new cars.”
Ssangyong plans seven new car models between 2021-2025, including an electric SUV with a 400-mile running capacity. On June 17, KDB head Lee Dong-geol said that the state-run bank would roll over 90 billion won ($75 million) of debt due next month.
Even so, Ssangyong is still widely expected to solicit state funds. “We believe that the company wants around 200 billion won ($166.7 million) in funding,” an industry source said. That is unlikely to come from private capital markets.
“Ssangyong has made a loss for longer than ten quarters,” a senior Korean financial authority who requested anonymity added. “It seems difficult to expect financial institutions to support it or for it to borrow money on markets.”
Ssangyong’s future thus now looks like a game of chicken between Seoul and Mahindra.
“If its parent company does not take action, there will be no solution,” said the industry source. “The parent company’s stance matters most in the government’s decision on whether to support Ssangyong or not.”
But Mahindra seems to have its eye on the exits, with managing director Pawan Goenka recently telling media, “Ssangyong needs a new investor. We are working with the company to see if we can secure investment.”
Anish Shah, a deputy managing director of Mahindra, was blunter. “If a new investor comes on board, that automatically takes our stake down,” the Mahindra executive told Reuters. “Or, they may even buy our stake.”
Shah added that Mahindra was reviewing loss-making units under an overall restructuring effort and would seek partnerships for, or close, unprofitable businesses.
This, of course, is the last thing Ssangyong wants to hear.
“What Goenka said last week does not differ from what he said in April when Mahindra decided to invest only 40 billion won ($33.3 million),” Ssangyong’s Kwak said in late June. “Shah’s remark does not mean Mahindra wants to leave Ssangyong either.”
Kwak, however, could not say if a new investor was on the horizon.
“When Mahindra purchased India’s Ford plant, it suggested that Ford, Ssangyong, and Mahindra jointly develop new SUVs, with Ford buying some Ssangyong shares owned by Mahindra,” Kwak said. “But discussion stalled due to the coronavirus.”