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Hyundai woes cast shadow over car sector


The indictment of Hyundai Motor Group chairman Chung Mong-koo on Tuesday sent shock waves through the executive ranks of South Korea's largest - and the world's seventh-largest - carmaker at a time when the country's car industry faces multiple challenges.

While the two largest players, Hyundai Motor and affiliate Kia Motors, are grappling with the absence of their group chairman, the sector as a whole - which is rounded out by GM Daewoo Auto and Technology, Ssangyong Motor and Renault Samsung Motor - is watching in dismay as the ever-strengthening won hurts their exports, the domestic automotive market remains weak and the perennial issue of militant labour is raising its head during the annual collective bargaining season.

Chung, who was detained on April 28, was formally charged on Tuesday with breach of trust and misuse of company funds - charges related to alleged slush funds the company created to buy political favours and to murky wealth transfers to Chung Eui-sun, his only son and president of Kia.

The younger Chung remains at large but is also expected to be indicted and faces an exit ban from the country.

'We are very concerned at developments. Many things are being delayed,' said Hyundai spokesman Oles Gadacz. 'The chairman has one foot in the detention centre and one foot in the boardroom - he is allowed one visitor for 15 minutes a day - and nobody here wants to pre-empt his decisions.'

While Czech government officials in Seoul on Thursday signed a contract with Hyundai on the carmaker's 300,000-unit capacity plant in the country, the actual start of construction of the Euro1.1 billion ($10.9 billion) plant awaits the chairman's seal of approval.

Mr Gadacz added that other major investment decisions were being delayed, although he declined to give details.

Kia is also hurting. The groundbreaking and start of construction of Kia's plant in Georgia in the United States has also been indefinitely delayed.

Chung has always been a strong, hands-on boss. He is widely credited with the turnaround in Hyundai's brand image. In the early 1990s, Hyundai cars were a byword for cheap and nasty among American late-night comedians but by 2004 the brand had achieved a second-place ranking - behind Toyota - for quality in the authoritative JD Powers survey.

However, Chung is also known to monopolise decision-making, and with Korean companies' management featuring steeply hierarchical decision-making processes, the removal of the top voice can be catastrophic. His absence could also have an impact on the leadership of the Hyundai Motor Group as a whole.

'Hyundai Motor Group is composed of Hyundai Motor, Kia Motors and Hyundai Mobis and there is a lot of conflict of interest inside the group,' said Kim Hak-joo, a vehicles sector analyst at Samsung Securities.

Pundits wonder whether anyone besides Chung has the force of personality to overcome these.

The charges against Chung each carry a maximum sentence of 10 years. But with Hyundai and Kia accounting for almost 10 per cent of Korea's total exports, there are strong precedents suggesting that Chung, even if guilty, would not languish behind bars for long.

SK Corp chairman Chey Tae-won served seven months of a three-year stretch for an accounting scam before being bailed out of prison and reinstated as the head of the country's largest refiner. Despite losing an appeal against his conviction last year, he remains the company's chairman.

Meanwhile, the car sector is staggering under the impact of a strong won. The currency has appreciated 25 per cent in the past two years and has surged more than 8 per cent against the US dollar so far this year. It hit an eight-year high this week at 927 won to the greenback.

Nick Reilly, the president and chief executive of GM Daewoo, said the country's third-largest carmaker had expected 970 won to be a conservative estimate for the year. Currently, the gloomiest forecasters are predicting a possible rise to 800 to the dollar.

'Hedging has protected us from the rise of the won but that cannot last forever,' Mr Reilly said. 'Naturally, the profit margins of our exports are getting severely squeezed.'

GM Daewoo says it loses a potential US$50 million in profit from exports for every 20 won rise against the dollar. The company exports 90 per cent of its output.

'What is very difficult is the very fast change in the exchange rates,' Mr Reilly added. 'We need stability so we can plan.'

Last year was a record performance by the sector - Korean carmakers sold 2.58 million units overseas, according to the Korea Automobile Manufacturer's Association - but there are concerns that a muscular won could hammer volumes and margins.

Already this year, exports are marginally down. In the first quarter of last year, they were 285,017 and for the first three months of this year, they were 276,738. Hyundai saw its margins in the first quarter erode to 4.9 per cent from 7.2 per cent in the same period in 2004.

And on Thursday, Hyundai announced that it was delaying the mass production of its hybrid vehicles for three years because of the rising won.

'It's a loss-making proposition - given that the currency is hammering us, it would squeeze the bottom line,' Mr Gadacz said. 'There is a good case for the hybrids technically but our marketing and especially our finance people are giving it the red light.'

Hyundai and Kia's strategy for dealing with currency risk had been to expand in Europe, China and the US, but the jailing of Chung has cast a shadow over these plans.

Adding to the importance of exports is the continuing weak local sector. Despite an economic upturn at the beginning of this year, carmakers are not moving the volumes they would like to.

'There has been a very weak domestic market for 2? years and it is still about 30 per cent below what we would expect,' Mr Reilly said.

Labour is a further, perennial problem. In a nation notorious for militant unionists, car workers are known as some of the toughest. Hyundai's union, which represents some of the country's best-paid workers, is known locally as 'the aristocracy of labour'. This year, the sector's umbrella union has demanded a 9 per cent wage rise.

Mr Reilly said the Korean tradition of highly confrontational wage bargaining every year was a serious managerial strain, compared with negotiations every two to four years in other markets.