Hyundai Motor Group’s skidHyundai Motor Group stocks have long been forsaken by the Seoul bourse. The market capitalizations of the country’s top 30 business groups have expanded 30 percent on average over the last three years. But the value of Hyundai Motor Group stocks sank 20 percent. Korea’s third largest conglomerate is the only one of the top 10 conglomerates whose market cap shrank. The share price of flagship Hyundai Motor has nearly halved from the peak level of eight years ago.
There are many factors behind the automaking group’s lack of popularity among investors. Its top and bottom lines deteriorated due to sluggish sales in China. Its factories are not known for poor productivity due to high wages and powerful unions. It has failed to impress with its future lineup or its vision. Analysts point to bigger hidden downside risks coming from its corporate governance and ownership structure. They claim there is a serious flaw in the management at the top executive level.
Then there is the concern over Hyundai Motor Group Chairman Chung Mong-koo’s health. Earlier this month, Chung turned 80. The old guards remains at his side. They have all contributed to making Hyundai Motor and Kia Motors combined the world’s fifth biggest car company. But their management decisions in recent years have puzzled and worried the market.
The most perplexing action was a plan to erect an expensive new headquarters in southern Seoul, a project estimated to cost more than 15 trillion won ($14.1 billion). The automaker should be spending more on electric cars, self-driving vehicles and other future technologies. Its capital investment went to the expansion of production lines instead of research and development for cleaner, safer and automated vehicles. When revenue was reduced from poor sales, it dumped the losses on its supply chain by using its dominant position to unilaterally cut supply prices. It did not do much to win back consumers: it raised the sticker price tag on cars without making changes or big upgrades in features.
As a result, the carmaker’s ratio of research and development expenditure-to-revenue is only 2.4 percent, just half the 4 to 6 percent of global competitors. It kept its bottom line above 4 trillion won last year through adroit management. But the steady profit also gave an excuse for the union to keep demanding salary hikes.
On Wednesday, the group finally unveiled an outline to overhaul its governance structure. The plan will not only simplify its complex web of cross-affiliates, but also realign the executive management. It will accelerate the transfer of power from the aged Chung to his son, Vice Chairman Chung Eui-sun. The younger Chung is expected to replace his managing board with younger figures with global credentials.
Hyundai Motor Group is at a crossroads. The entire Korean automobile industry is shaken by its weakened competitiveness and exploitation of suppliers and partner subcontractors. If Hyundai Motor Group threatens to fall, the government would have to bail it out given its huge importance to Korean industry and the economy.
While it is reorganizing, the group should run on emergency management. The first thing it should do is nix the plan to build the wasteful headquarters in Seoul. It must resell the expensive plot of land it bought for the headquarters and reinvest the proceeds into future growth technologies. It should treat suppliers with respect and help build a partnership network on manufacturing as well as research and development for symbiotic growth. It must upgrade its after-sales services and bring down car prices to win back domestic customers.
The bottom line would almost certainly be hurt by such restructuring. A crisis could be felt on the workers’ end as well. So the union must become more cooperative to help a company in troubled times. Otherwise, both the company and its employees cannot avoid a total demise.
The younger Chung said he wishes to work only until the age of 65 and enjoy a normal post-retirement life. He promises not to continue the dynasty. He is 48 this year. I wonder if Hyundai Motor Group might be an entirely different company by the time he retires 17 years from now.
JoongAng Ilbo, March 30, page 36
The author, head of the Economic Research Institute for the JoongAng Ilbo, is an editorial writer.