Under pressure, Hyundai clashes with China partner over suppliers

Hyundai Motor Co is at loggerheads with its Chinese partner over efforts to cut supplier costs, as they grapple with cut-throat competition and the impact of a stand-off between Beijing and Seoul, four people familiar with the dispute said.

Hyundai, along with affiliate Kia Motors, has been caught up this year in a political row over a missile defence system deployed in South Korea but opposed by China. That came against the backdrop of increased competition from local automakers, already making life tough in the world’s biggest market.

Until last year, Hyundai and Kia ranked third in China by sales. But sales for Hyundai alone have slumped 41 percent from January to July, making this the biggest crisis since Hyundai entered the Chinese market in 2002.

Hyundai and its local partner BAIC Motor Corp Ltd are divided over how to solve the issue. Hyundai wants to protect its South Korean supply chain, while BAIC favours shifting to cheaper Chinese suppliers, the people said.

“BAIC wants to solve this aggressively and is aggressively pursuing it by asking Hyundai to change its sourcing strategy significantly and immediately,” said the head of a Hyundai supplier based in Seoul familiar with the matter. He added the idea was to source more locally from cheaper suppliers.

Hyundai wants to solve this more gradually “over perhaps 5-10 years and do so in phases,” the person added.

BAIC declined to comment.

A Hyundai Motor spokesperson told Reuters: “Hyundai Motor and Kia Motors have been continuously trying to source competitive parts in China.”

The stand-off underscores the depth of a crisis facing Hyundai and its suppliers in China, heavily reliant on sales to Hyundai Motor and Kia Motors.

South Korea approved the full deployment of the Terminal High Altitude Area Defense (THAAD) system on Monday – a day after North Korea conducted its sixth and most powerful nuclear test – and says it is needed to counter growing threats from North Korea.

China has strongly opposed the system and says its powerful radar poses a threat to its national security.

“China has started to become a grave for South Korean automakers and suppliers,” said Lee Hang-koo, a senior research fellow at Korea Institute for Industrial Economics & Trade, adding suppliers were being hit the hardest.

South Korean firms are squeezed between cheaper Chinese suppliers and European rivals which are technologically more advanced, making it challenging for them to diversify their customers beyond Hyundai Motor, he said.

Parts from South Korean suppliers are around 30-40 percent more expensive than those from local Chinese suppliers, industry sources say.

Hyundai last week replaced the head of its China operations, following months of tumbling sales. It was forced to suspend production temporarily at its four China plants last month over issues of non-payment to a supplier.