This North Korea Thing Has Major Implications for Hyundai

Hyundai Motor Co. is squabbling with its Chinese partner, BAIC Motor, over efforts to reduce supplier costs. The automaker has already faced a myriad of problems with its Korean workforce and witnessed reduced volume in both China and North America this year.

However, its newest problem in the Far East isn’t simply a matter of tweaking its lineup. The issue also has political undertones as the North Korean missile crisis has pitted Beijing and Seoul at odds with each other.

Hyundai Motor said on Tuesday it had suspended production at one of its Chinese factories due to supply disruptions. BAIC Motor had apparently denied payment to suppliers on vaguely political grounds. Hyundai had only recently resumed assembly at four Chinese plants less than a week ago — citing similar issues as the cause for the stall.

According to Reuters, the core issue is Hyundai’s desire to maintain existing supplier relations while BAIC hopes to shift to cheaper Chinese firms in the face of intense competition. The conflict is only bolstered by tensions between the two automakers’ home countries.

South Korea’s implementation of a missile defense system to protect itself from North Korean aggressions has proven to be a hot button issue in China. So hot that, until last year, Hyundai (combined with Kia) was the third largest automaker in China by sales. But Hyundai’s deliveries have dwindled roughly 41 percent between January and July.

“BAIC wants to solve this aggressively and is … asking Hyundai to change its sourcing strategy significantly and immediately,” the head of a Hyundai supplier based in Seoul told Reuters. Hyundai wants to solve this more gradually “over perhaps 5-10 years and do so in phases,” the supplier explained.

Hyundai backs up this claim, stating that it has attempted to source more from Chinese suppliers without abandoning its established network wholesale. But that hasn’t been happening quickly enough for BAIC and may have no bearing on the Chinese public, which has begun turning its back on South Korean products.

“China has started to become a grave for South Korean automakers and suppliers,” said Lee Hang-koo, a senior research fellow at Korea Institute for Industrial Economics and Trade.

BAIC’s motives aren’t purely political. Chinese suppliers are significantly cheaper than their South Korean counterparts — thirty to forty percent cheaper, according to industry experts. “We can’t beat [the local suppliers] in terms of price,” stated a senior executive from a Korean supplier to Hyundai.

However, the Chinese-half of the partnership’s tactics have been downright nasty. BAIC hasn’t paid some suppliers in months and has been aggressively pressuring most to cut their prices all year.

Hyundai’s options on the matter are limited. Chinese automakers have made major strides in recent years and are able to keep costs down by sourcing cheap parts and labor. While its workforce, at least in China, is less likely to press for wage increases, there isn’t much more it can do about its suppliers. Hyundai may have to adhere to BAIC’s wishes if it wants to remain afloat in China, which would have global implications.

The factory in Cangzhou, Hebei province, that was stalled this week is waiting on deliveries of air intake system from a German supplier that halted shipments after nonpayment. Last month, Hyundai suspended production at its four other China plants after a French-based supplier refused to provide fuel tanks when its bills went unpaid.

[Image: Hyundai]