Hyundai says bigger discounts coming for Chinese buyers

Rose Kim Bloomberg News

Hyundai Motor Co. said the pressure to lower prices will intensify in China as domestic automakers flood the world’s largest car market with more vehicles.

Many local carmakers in China are ramping up production, leading to an increase in overall supply and forcing foreign companies to cut prices in order to compete, Chief Financial Officer Lee Won Hee said on a conference call on Tuesday. South Korea’s largest automaker posted its lowest annual profit in five years after deliveries in China slumped for the first time since 2007.

Hyundai will respond by cutting costs at its plants in China and stepping up production of smaller cars and sport utility vehicles to take advantage of a tax cut in October, Lee said. The automaker plans to introduce newer versions of its Elantra and Verna cars and build more Tucson SUVs.

“China is a very competitive market in the short term, with more capacity than there is demand and it may be difficult to get enough profit in the harsh price competition,”said Motoki Yanase, a credit analyst covering the auto industry at Moody’s Corp. in Tokyo.“When you look at the market in the longer term, China is still the biggest market with the biggest growth. Carmakers need to have a certain share and capacity and the ability to produce cars will be important.”

Hyundai’s plan to focus on selling vehicles with engine displacements of 1.6 liters or less follows the Chinese government’s move to revitalize local demand by slashing the purchase tax on those vehicles as of October. The carmaker is counting on sales in China to help offset its expectation that Russia and Brazil’s currencies will remain stronger against the won, hurting the exporter’s profits.

“You can say 2015 was a year of one bad news after another, to a point where it was almost depressing,” said Lee Sang Hyun, an analyst at IBK Securities Co., before the earnings announcement. “This year, although there’s hope that things may get better as demand picks up in China and unfavorable exchange rates in emerging markets calm down, it still isn’t expected to be a huge improvement from the year earlier.”

The automaker expects low oil and raw-material prices to continue to weigh on Russia’s ruble and Brazil’s real, Lee said. To minimize the impact from the stronger local currencies, Hyundai plans to increase exports from its plants in those countries to nearby markets and increase the ratio of locally made auto parts at those plants, Lee said.

Deliveries in China declined last year as a slowing economy and shift in consumer preferences to cheaper SUVs hurt demand for the automaker’s sedan-heavy lineup. Plant sales in Russia and Brazil dropped 3.2 percent and 2.7 percent, respectively.

Sales in the U.S., its second-largest market, climbed 5 percent, while deliveries at home in South Korea, where it gets the highest profit margin, rose 4.2 percent, helped by demand for Tucson and Santa Fe SUV models.