Hyundai's Net Declines 38% Amid Strong Won [Asia WSJ]
By SEON-JIN CHA and LINA YOON
May 5, 2006
SEOUL -- Hyundai Motor Co., South Korea's dominant auto maker, reported a 38% decline in first-quarter net profit as the strong local currency slashed export revenue, while rising raw-material costs ate into the company's bottom line.
At the same time, adding to the company's legal problems, South Korea's antitrust watchdog confirmed that it had found signs that Hyundai Motor may have unfairly coerced parts suppliers to cut prices. If it is determined Hyundai Motor broke competition rules, the company could face a maximum penalty of twice the auto parts' cost.
With Hyundai Motor's chairman under arrest on embezzlement charges and the South Korean won continuing to strengthen against the U.S. dollar, the auto maker might lose ground in moving toward its goal of becoming a major player in the global auto industry, analysts say.
Hyundai Motor posted net profit of 318.8 billion won ($341.2 million), compared with 509.8 billion won a year earlier.
Sales rose 11% to 6.86 trillion won as the company sold more vehicles such as the Sonata sedan and Santa Fe sport-utility vehicle in the local market. Revenue from domestic sales rose 33% from a year earlier, offsetting a 0.8% drop in export revenue. Operating profit rose 3.9% to 335.3 billion won.
High steel and oil prices also hurt profitability; Hyundai Motor's material cost-to-sales ratio rose to 67.3% in the first quarter, compared with 66.9% a year earlier.
Hyundai Motor shares rose 2% Thursday in Seoul to 81,900 won apiece, rebounding from recent losses. The stock fell as low as 79,300 won on March 27, the day after prosecutors raided the company's headquarters.
To compensate for the hit on profits from the stronger Korean currency, the company said, it is taking measures including introducing more new models, improving the product mix and cutting costs. It is also aggressively expanding production outside Korea; it currently operates four plants in China, India, Turkey and the U.S.
But, Hyundai Motor added in a statement, "all those efforts are falling short of preventing profitability from deteriorating further."
The strong won has taken a toll on others in the sector: Hyundai Motor affiliate Kia Motors Corp., South Korea's second-largest auto maker, reported last week that first-quarter net profit fell 80% from a year earlier despite stronger sales.
A stronger local currency reduces the value of dollar-denominated earnings repatriated to Korea, and also hurts price competitiveness abroad by making Korean vehicles more expensive in dollar terms. Hyundai Motor relies on exports for about 60% of revenue.
In the latest quarter, the U.S. dollar traded at an average 976.38 won, 4.5% weaker than the average 1,022.10 won a year earlier.
The won further strengthened as the dollar closed at 934.3, Wednesday, a level not seen since October 1997. But the won fell back Thursday as the dollar rose to 939.6 won. Still the won's recent rise is fueling worries that Hyundai's profitability will continue to weaken.
"Market participants had expected Hyundai Motor's earnings to hit the bottom in the first quarter and to improve from the second quarter, but now I'm not sure about the recovery," said Cho In-Karp, an analyst at Seoul Securities.
Meanwhile, South Korea's antitrust watchdog said it had completed the investigation into Hyundai Motor and Kia Motors for allegedly violating competition rules by exerting pressure on parts suppliers to cut delivery prices.
The Fair Trade Commission found "signs that make us think Hyundai Motor coerced its suppliers to cut prices," an FTC official said.
If Hyundai Motor is found to have broken the rules, the commission could order the company to correct its practices or face a maximum penalty of twice the auto parts' cost. The official said the commission panel would bring the case before the regulatory committee by next month.
Jake Jang, a spokesman at Hyundai Motor, said the company wasn't notified of the results of the investigation. Oles Gadacz, another spokesman at Hyundai Motor, said that " this is what the FTC does. We have to continuously review our contracts and find ways to do it cost-effectively and efficiently. All the companies do it. We are not different."
A Kia representative declined to comment.
The FTC in November launched the probe of five local auto makers to determine whether they had unfairly sought to pass the burden of higher raw-materials prices and a stronger local currency on to their suppliers. The investigation is part of a broader look at big Korean companies, including makers of cellphones and liquid-crystal diplays, suspected of abusing their power to pressure smaller firms.
In addition to Hyundai Motor and Kia Motors, the commission's investigation of auto makers included GM Daewoo Auto & Technology Co. A spokesman at GM Daewoo declined to comment. It also included Renault Samsung Motors Corp. and Ssanyong Motor Co., both of which were found not to have broken any rules, according to the official.
The antitrust probe's conclusion comes as Hyundai Motor is already embroiled in a matter with potentially far more serious consequences. Chairman Chung Mong Koo was recently arrested and charged with embezzlement and breach of trust. South Korean prosecutors say they are examining the alleged creation of slush funds used to buy influence and what they call the improper transfer of assets between Mr. Chung and his son, Chung Eui Sun, the president of Kia Motors.
Because the chairman makes critical management decisions such as on overseas investment, the company's global growth strategy could be in limbo following his arrest, the company and analysts said.
In its statement, the company said, "The key of global management is prompt decision-making. We could face difficulties in overseas performance going forward if we lose our quick decision-making process and optimal timing for the decisions." |
