Hyundai Motor Trims Costs, Perks as it is Blindsided by SUV Boom

Scaling back on business class flights and annual family home trips for overseas employees, Hyundai Motor is trimming its cost fat as it is headed for a fourth straight annual profit decline.

just as SUVs have become more popular across many global markets, a product line-up that features more sedans than sport utility vehicles and its exposure to weak emerging markets, has hit the South Korean automaker.

Aimed to buy Hyundai time to prepare new models and a design revamp is the belt-tightening – which also includes cutting back on printing and fluorescent light bulbs.

“We’re trying to address a mismatch between the market trend and our product line-up,” said one Hyundai insider, referring to a need for more SUV models. “That’s a longer term plan. For now we’re trying to save every penny,” he said, declining to be identified because the plans are not public, the media reported.

Noting the first such move in seven years, since October, Hyundai Motor Group executives have taken a 10 percent pay cut. In five years, there has been a rise of 44 percent in the number of executives at Hyundai Motor and last year alone it rose to 293.

The group is encouraging video conferencing as a cheaper alternative to travel and has also downgraded hotel rooms for executive travel.

“We’re in emergency management mode,” said another insider, who didn’t want to be named as he is not authorized to speak to the media.

In a response to Reuters Hyundai Motor said it is “making various cost-saving efforts”, with shrinking global demand and growing business uncertainty, but did not elaborate.

Noting Hyundai needs also to spend more on research and development in self-driving and other new technologies, Ko Tae-bong, analyst at Hi Investment & Securities, said other costs, such as low-margin supplier parts and labor at the heavily-unionized automaker, are tougher to pare back.

Regulatory filings show that its costs as a proportion of revenue have risen for five straight years, to 81 percent so far this year while Hyundai remains cash-rich.

“Cutting expenses are stopgap measures, and won’t do much to improve its bottom line,” Ko said, calling them more “symbolic”.

With brisk sales of its Sonata and Elantra sedans, Hyundai grew quickly after the global financial crisis. In 2009, it was the only major automaker to increase sales in the United States.

But as rivals’ sales of SUVs have boomed and emerging market economies have weakened, it has struggled to maintain that momentum. Noting the worst performer among global automakers, Hyundai Motor shares have fallen 40 percent in the past three years.

The South Korea sales chief and China head have been replaced and the automaker’s top U.S. executive has resigned.

Ko, the analyst said that a first decline since Hyundai bought its smaller domestic rival in 1998 could happen as sales of Hyundai cars, and those of its affiliate Kia Motors, could drop to 8 million this year.

Sales to pick up again for the nest year, Hyundai-Kia Executive Vice President and research head Park Hong-jae, expects.

“It was a difficult year this year. Things will get better,” he told reporters on Thursday, citing recovery in markets such as Brazil and Russia.

(Adapted from Reuters)

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