This North Korea Thing Has Major Implications for Hyundai

Matt Posky
by Matt Posky
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]

Join the conversation
  • Kuruma Kuruma on Sep 05, 2017

    Hey forget about NORKO - just how much Chinese sourced parts are in Hyundais and Kias? I was thinking about a Hyundai but if the Chinese parts content is over 3% - I won't consider it anymore. It's hard enough to find German sourced parts for Volkswagen. My mechanic and I have to always ask if the parts are German or Chinese sourced. If I am going to pay sky-high prices for German auto parts - may as well be from Germany and yes we check for Chinese made parts packaged as German suppliers.

    • See 1 previous
    • Nels0300 Nels0300 on Sep 06, 2017

      My Elantra Sport window sticker says 97% Korean parts content.

  • Conundrum Conundrum on Sep 05, 2017

    Read this on Reuters this morning. French fuel tanks in Hyundais made in China got my attention. The other point, missing here, was that there were over 150 South Korean parts suppliers with plants in China serving Hyundai, and they are in a quandary with these constant main assembly plant shutdowns - they'll go broke too if this carries on. The fact that BAIC claims it could get parts cheaper from its local suppliers, and is asking for a 20% haircut from foreign based or foreign owned suppliers in China on EXISTING bills to Hyundai/BAIC, or it won't pay - that is the real problem. And why there are shutdowns. Hyundai disageees and says to get quality from Chinese suppliers will take five to ten years. Stalemate. All those Western companies who hied themselves off to China to get cheap labor to bolster the quarterly report bottom lines twenty years ago are now reaping their rewards on our behalves. Meanwhile, people who cannot read or fail to comprehend that our own capitalists screwed us, would rather blame China Inc and forget what started this mess in the first place. Now off to WallyMart for a new Chinese trashcan; the old one has seen better days.

  • Dusterdude @El scotto , I'm aware of the history, I have been in the "working world" for close to 40 years with many of them being in automotive. We have to look at situation in the "big picture". Did UAW make concessions in past ? - yes. Do they deserve an increase now ? -yes . Is their pay increase reasonable given their current compensation package ? Not at all ! By the way - are the automotive CEO's overpaid - definitely! (That is the case in many industries, and a separate topic). As the auto industry slowly but surely moves to EV's , the "big 3" will need to be producing top quality competitive vehicles or they will not survive.
  • Art_Vandelay “We skipped it because we didn’t think anyone would want to steal these things”-Hyundai
  • El scotto Huge lumbering SUV? Check. Unknown name soon to be made popular by Tiktok ilk? Check. Scads of these showing up in school drop-off lines? Check. The only real over/under is if these will have as much cachet as Land Rovers themselves? A bespoken item had to be new at one time. Bonus "accepted by the right kind of people" points if EBFlex or Tassos disapproves.
  • El scotto No, "brothers and sisters" are the core strength of the union. So you'll take less money and less benefits because "my company really needs helped out"? The UAW already did that with two-tier employees and concessions on their last contract.The Big 3 have never, ever locked out the UAW. The Big 3 have agreed to every collective bargaining agreement since WWII. Neither side will change.
  • El scotto Never mind that that F-1 is a bigger circus than EBFlex and Tassos shopping together for their new BDSM outfits and personal lubricants. Also, the F1 rumor mill churns more than EBFlex's mind choosing a new Sharpie to make his next "Free Candy" sign for his white Ram work van. GM will spend a year or two learning how things work in F1. By the third or fourth year GM will have a competitive "F-1 LS" engine. After they win a race or two Ferrari will protest to highest F-1 authorities. Something not mentioned: Will GM get tens of millions of dollars from F-1? Ferrari gets 30 million a year as a participation trophy.