Hyundai Motor launches contingency plan as stronger won knocks Q1 profit

Written by Reuters | Seoul | Updated: Apr 25 2014, 00:52am hrs
South Korea's Hyundai Motor has launched a contingency plan to prepare for further appreciation in the local currency, which pushed January-March profit to the lowest in five quarters.

Hyundai, the world's fifth-biggest automaker when combined with affiliate Kia Motors Corp, has seen overseas earnings shrink when converted into a won hovering near a six-year high against the U.S. dollar.

Price competitiveness has also suffered, as a firmer won makes Korea-made exports more expensive for overseas buyers. The revenue impact of a 1.5 percent first-quarter rise in the won was exacerbated by buying incentives in the United States.

Net profit was 1.93 trillion won ($1.86 billion) in January-March, marginally less than a year prior when Hyundai set aside cash to cover a product recall. The result was also lower than the 2.19 trillion won estimate of 13 analysts polled by Thomson Reuters I/B/E/S.

"A contingency plan is under way to prepare for further won strength, which we expect to persist in the second quarter," said Chief Financial Officer Lee Won-hee in a conference call after Hyundai released earnings on Thursday.

The contingency plan includes cutting vehicle development costs, Lee said, without elaborating.

Shares of Hyundai closed down 1.2 percent after the results, compared with a 0.1 percent decline in the wider market.

"Management tried to give a positive signal to investors, but Hyundai faces a bumpy road ahead. No one can predict how the currency will move, and competition is getting tougher," said E*Trade Korea auto analyst Kang Sang-min.

"It also remains to be seen how well new models will be received by U.S. customers," Kang said.

Hyundai has had a turbulent time in the United States where a product recall last year was followed by lacklustre sales and a management shake-up. The automaker has also had fewer new models in its product line-up in recent years compared with rivals.

Ahead of new model launches, Hyundai increased buying incentives to clear its inventory, Lee said, which contributed to a 3 percent decline in first-quarter U.S. sales.

"We expect the U.S. launches of the new Genesis (in April) and Sonata (in June) to help improve our sales and operating margin from the second quarter," he said.

In China, the world's biggest auto market, Hyundai has been expanding sales and this month tasked its new local chief with expediting the construction of a fourth factory.

Adding capacity at its third Chinese plant helped raise sales in the country by 9 percent in the first quarter, though that was slower than the growth rates of Japan's Toyota Motor Corp and the U.S.'s Ford Motor Co.

At home in Korea, sales climbed 5 percent with the help of the luxury, higher-margin Genesis - revamped late in 2013 - as well as a recovery in production following a labour dispute a year earlier.

Hyundai will begin annual wage talks as early as May with the labour union in Korea, where the automaker builds nearly 40 percent of the vehicles it sells globally.

Domestic sales could get a lift in the second quarter from the introduction late last month of a Sonata redesigned for the first time in five years.

Hyundai's bread-and-butter model, however, is pitted against imports such as Volkswagen AG's Passat and Toyota's Camry which are benefiting from free-trade deals.