Gwangju car factory will disrupt market

The agreement between the southwestern city of Gwangju and Hyundai Motor late last month to open a car factory in the city with reduced wages for workers could disrupt the domestic auto market.

The so-called Gwangju employment plan is intended to create jobs in the city and help Hyundai Motor be more competitive. It’s a novel business model. Gwangju will own the largest stake in the company and offer housing and welfare support to workers to compensate for their comparatively low wages.

The Gwangju factory is supposed to produce 70,000 to 100,000 Hyundai Motor mini-class SUVs annually starting from 2021.

That will change the local car market in a big way - with Hyundai getting a big competitive advantage over rivals in the mini-vehicle market, a segment dominated by local automakers.

Vehicles in Korea are categorized largely by engine size. The mini class refers to cars with an engine size of less than 1,000 cubic centimeters (1 liter), and are distinguished from small-class vehicles, which have an engine size of between 1,000 cubic centimeters and 1,600 cubic centimeters.

Last year, 127,429 mini-class vehicles were sold domestically. Considering that the market is expected to remain at similar levels past 2021, for the Gwangju factory to maintain production levels at full capacity and be deemed a success, Hyundai Motor will have to capture 80 percent of the mini-class segment.

Hyundai Motor’s sister company, Kia Motors, is current king of the mini segment in Korea, holding 67.5 percent of the market share last year with its Morning. (Other top mini-class models include Kia’s Ray and GM Korea’s Spark) There are concerns that the mini SUVs coming out of the Gwangju factory will simply wipe out Kia’s success in the segment.

And sales of cheaper mini models can have a ripple effect on other segments, especially in a market that is declining overall. Domestic sales of all local cars dropped last year to 1.546 million units from 1.6 million units in 2016.

GM Korea, which struggled last year and even closed one factory, relies on mini vehicles. Last month, 42.8 percent of the automaker’s domestic sales were of vehicles in that segment.

Meanwhile, Hyundai Motor is starting production of a new small-class vehicle, the Venue, as early as June at its Ulsan plant. The vehicle is slightly smaller than its Kona SUV but is categorized in the same small class.

As Hyundai Motor Group bolsters its small-class lineup with the Kona and Venue and Kia Motors’ Stonic, the small-class vehicles could threaten the market competitiveness of the mini-class vehicle from the Gwangju plant.

Hyundai Motor claims its small-class vehicles won’t compete with the mini SUVs from Gwangju.

The Gwangju plant’s success ultimately relies on increasing the market for mini vehicles. Hyundai Motor will try to recreate its success with its small-class Kona SUV, released in 2017. The local small-class SUV market, which was 9,215 units in 2013, grew to over 150,000 units last year. The growth of the market was largely due to the popularity of SsangYong Motor’s Tivoli and Hyundai’s Kona.

If the Gwangju plant finds success in exporting its vehicles, the plan could become a sustainable business model.

Hyundai Motor gave up on domestic mini-vehicle production in 2002 as the manufacturing cost was greater than the selling price. But in Gwangju, it will be paying factory workers 35 million won ($31,100) in annual salaries - less than half what it pays workers in other factories.

“If the vehicles sell well, the Gwangju employment plan could expand across the country as a new business model,” said Sung Tae-yoon, an economics professor at Yonsei University. “If it fails to appeal to customers, the plant will have to shut down in five years.”

BY MOON HEE-CHUL [chae.yunhwan@joongang.co.kr]