IHS Global Insight Perspective | |
Significance | Kia has announced its highest quarterly net profit since the final quarter of 2003. This is thanks to the favourable South Korean won, which has boosted its sales revenues in overseas markets, and the South Korean government's market stimulus incentives, which have fuelled demand at home. |
Implications | Kia's expansion overseas, coupled with domestic hits such as the Morning and the Soul models, is boosting its revenues and sales. The weakness of the won is expected to continue throughout 2009, offering further advantages to the automaker in the coming period. |
Outlook | The coming months will be a critical period for the automaker as it tries to increase its global market presence through a series of new product launches and continued investment in research and development. However, its militant labour union at home has already staged several partial strikes and recently warned of further action this month, and this could place pressure on the automaker's finances during the coming quarters. |
Hyundai affiliate Kia Motors, the second-largest South Korean carmaker, has reported a dramatic jump in its net profits during the second quarter of 2009. During the three months ending June, the automaker achieved a net profit of 347 billion won (US$280.13 million), compared with 86 billion won during the same period of 2008. Operating profit also increased, by 182.4% year-on-year (y/y) to 330 billion won, compared with 117 billion won during the second quarter of 2008. A senior official from Kia's public-relations (PR) department said that, "Government tax incentives and the weaker won helped Kia post a profit despite the unstable circumstances in the global auto industry." During the quarter, Kia's sales revenues increased by 11.5% y/y from 4.195 trillion won to 4.676 trillion won. Of this total, domestic sales revenues stood at 1.869 trillion won, up 46.4% y/y; however, export revenues fell slightly by 3.8% y/y to 2.808 trillion won. The company's global sales volumes increased by 6.6% y/y to 290,000 units, split between 113,000 units in its local market and 177,000 units overseas.
Kia's Q2 Financial Results | |||
(bil. won) | Q2 2009 | Q2 2008 | % Change |
Sales | 4,676 | 4,195 | 11.5 |
Operating Profit | 330 | 117 | 182.4 |
Net Profit | 347 | 86 | 303.8 |
The financial improvements during the second quarter boosted the automaker's first-half net profit to 444 billion won, compared with just 61 billion won during the first half of 2008. Operating profit also improved, by more than half from 219 billion won to 419 billion won. Its sales revenues, however, increased slightly by 3.3% y/y to 7.914 trillion won, due to a fall of 5.7% y/y to 5.449 trillion won in export revenues, although it managed an increase of 23.3% y/y to 2.465 trillion won in its domestic market. For the six months ending June, the company sold over 192,000 units in South Korea, up 24.6% y/y; nevertheless its overseas sales volumes declined by 14% y/y to 370,000 units, which pulled down overall global sales by 2.7% y/y to 524,000 units.
Outlook and Implications
Although the global downturn in vehicle demand has pressurised many automakers, Kia seems better placed than some of its rivals thanks to various government market stimulus packages. Kia's impressive second-quarter performance, like that of affiliate Hyundai, was due to a variety of factors, although Hyundai did report a fall in its operating earnings and sales revenues (see South Korea: 26 July 2009: Hyundai Motors' Net Profit Jumps 10.4% Y/Y During H1). Kia's bottom line benefited from a more favourable model mix following competitive new launches. Moreover, the average value of the South Korean won fell by 20.8% against the U.S. dollar during the second quarter of 2009, and it is expected to remain weak in the short term, which should give Kia an additional advantage over its international competitors in export markets in the coming period.
Domestically, the automaker is reaping the benefits of the South Korean government's market stimulus incentives, which started at the end of April (see South Korea: 26 March 2009: South Korean Government Announces Support Package for Automotive Industry). The company is witnessing strong demand for models such as the Morning and the Soul, which achieved domestic sales of 49,744 and 11,936 units, respectively, during the first half of 2009. Kia recently began selling its first ever hybrid-electric vehicle (HEV), the Forte Liquid Petroleum Injection (LPI) Hybrid, in South Korea (see South Korea: 15 July 2009: Kia Puts Forte Hybrid on Sale). This model puts the automaker one step closer towards meeting the new fuel efficiency and emission regulations being put in place in South Korea (see South Korea: 7 July 2009: South Korean Government Details New Vehicle Fuel Economy and Emissions Standards). It has also announced, alongside affiliate Hyundai, that it will invest around 4.1 trillion won in research and development (R&D) activities in order to meet these standards (see South Korea: 22 July 2009: Hyundai Group to Invest 4.1 tril. Won in Eco-Friendly Projects Through 2013). Kia held around 31% of the South Korean vehicle market in the first half of 2009, up from 27% during 2008, and is aiming to achieve a market share of 35% in the domestic passenger car market during the second half of 2009. The company launched its Forte Coupe during July and has a large sedan (VG) in the pipeline this year, which should help it snatch additional market share throughout 2009.
Among the other markets where Kia has expanded is China, where vehicle sales increased by 21.3% y/y to 91,000 units during the first half of 2009. Dongfeng Yueda Kia, its Chinese joint venture (JV) with Dongfeng Motor, is aiming to sell 190,000 vehicles this year. Similar to its affiliate Hyundai, Kia is looking to establish itself as a premium but affordable automaker in the Chinese market and this is apparent in the changes that have been made to the designs of its vehicles, as well as the reorganisation plans it has for its sales outlets. It recently launched its Forte hatchback model in China, developed for local tastes and known as the Fu-Rui-Di (see China: 18 June 2009: Kia Launches Localised Forte Model in China). Kia plans to launch its Koup sedan in the Chinese market by the end of this year and aims to increase the number of 4S dealerships in the country from 34 to 37 during the period. The automaker will also begin manufacturing operations at its new plant in West Point, Georgia (United States) by early 2010.
Lee Jae-rok, Kia's chief financial officer (CFO), has revealed that the company is aiming to sell around 1.49 million units globally during 2009. Nevertheless, the situation regarding its South Korean workforce is posing serious questions of late. Increasing tensions between management and workers and higher-than-inflation wage demands have resulted in a spate of strike action since the last week of June. The labour union has warned of further action throughout August until management reaches an agreement with the workers. Kia has to finalise an amicable wage deal at the earliest opportunity, otherwise its vehicle productivity and export viability might be hurt. Furthermore, Kia relies on overseas markets for almost 75% of its sales revenues and a sustained global economic recovery is not expected until after 2010. Additionally, there is no guarantee that the government stimulus packages will continue to provide momentum to the automaker's sales for the rest of this year, despite the initial flurry of demand. In light of this, IHS Global Insight expects global demand for its vehicles to fall slightly in 2009, by 4.9% y/y to 1,766,242 units, although this forecast is well above the company's own sales expectations for the year.