Hyundai actively considers plan to raise SUV production in US, China

Article by Christian A., on April 28, 2015

Amid dropping profits, Hyundai is considering a plan to intensify production of sport utility vehicles in China and the United States as it faced unfavourable foreign exchange rates and incurred high promotional expenses to boost auto sales. When taken together, Hyundai and Kia Motors is No. 5 when it comes to global sales.

From January to March, Hyundai’s net profit fell by 1% from 1.93 trillion won the previous year to 1.91 trillion won ($1.77 billion). This marks the fifth consecutive quarterly profit decline. Other SUVs have experienced a boom, driven partly by more affordable fuel. However, Hyundai suffered due to a lack of output capacity as well as of new models in this segment.

The company said that earnings are expected to be better in the current quarter, boosted by the overseas release of the latest Tucson SUV. In a conference call, President Lee Won-hee said that it failed to cope with market demand due to capacity limitations in producing SUVs and as a result, its earnings took a dive.

Lee said that Hyundai is “actively” studying a plan to increase capacity in the U.S. and China to keep up with the growth in the market. Lee added that Hyundai is “cautious” about entering the pick-up truck market, a segment led by its U.S. and Japanese competitors. Late last year, Hyundai and Kia raised their 2014 sales goals even with the stall in the demand of their mainstay sedans.

In hopes of clearing its inventory in the quarter, Hyundai increased its promotion incentives by almost 30% in the U.S., to an average of $2,200 for each unit. Overseas earnings also took a hit as the South Korean won strengthened against Brazil, Europe, and Russia currencies. Over 85% of Hyundai’s auto sales are from overseas territories.

To help lessen the impact of weaker emerging market currencies, Hyundai has raised auto prices in Brazil and Russia as well as widened the share of exports from factories in those locations and sourced from local companies. Lee has denied that production in Russia will be frozen.

Rather, Hyundai is seeking to increase market share and come out as a winner when the rouble is stabilized. Lee gave assurances that Hyundai is seriously considering if it will pay an interim dividend in order to continuously increase dividend payouts. After the earnings announcement, Hyundai’s shares ended up 3.2% while the broader index was up 1.4%.

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