Hyundai has reported a decline in its net profit during the first quarter of 2014 as sales revenues posted only modest growth of 1.3% year on year.
IHS Automotive perspective | |
Significance | Hyundai has reported a 2.9% year-on-year (y/y) fall in net profit to KRW2.028 trillion (USD 1.95 billion) for the first quarter of 2014 as sales revenues gained only marginally by 1.3% y/y. |
Implications | Although the automaker posted an overall increase of 4.8% y/y in its global vehicle sales during the period, its profit was hit by lacklustre sales revenues, which were hit by the strengthening won against other global currencies. |
Outlook | For 2014, Hyundai is banking on the launch of new and updated vehicles, in both the domestic and overseas markets, to help it achieve its goal of selling 4.9 million units globally. Although the product offensive strategy that Hyundai has embarked upon will help it post positive sales growth, sales revenues and profitability will remain under pressure from unfavourable trading conditions due to the strong won and potential labour disruption at its domestic plants during the second quarter of the year. |
Hyundai's net profit fell 2.9% year on year (y/y) in the first quarter ending 31 March 2014. According to the financial statement released by the automaker, Hyundai registered a profit of KRW2.028 trillion (USD1.95 billion) during January-March, down from KRW2.088 trillion in the same period last year. Sales revenues grew by only 1.3% y/y to KRW21.649 trillion during the quarter, from KRW21.367 trillion a year earlier. This is despite the fact that Hyundai managed to achieve impressive growth of 4.8% y/y in its global sales volumes. Globally, its vehicle sales stood at 1.227 million units in the quarter, of which domestic sales accounted for 473,000 units, while overseas sales stood at around 754,000. These figures represent increases of 5.8% y/y and 4.1% y/y, respectively. As far as overseas operations are concerned, sales revenues grew the most at Hyundai's Turkish unit, by 53% y/y to KRW530 billion, followed by its Chinese unit, which posted revenue growth of 11% y/y to KRW5.25 trillion. The automaker's operations in the Czech Republic and Brazil posted sales revenue growth of 8.0% y/y and 3.6% y/y, respectively. However, its operations in India and Russia witnessed declines in their sales revenues during the quarter. Hyundai India's sales revenues fell 15% y/y to KRW1.073 trillion, while the Russian plant saw a 10% y/y fall in sales revenues to KRW623 billion. The keenly anticipated US plant failed to boost Hyundai's overall sales revenues, registering flat growth of 0.3% y/y to KRW1.821 trillion. Hyundai's operating profit received a boost of 3.7% y/y to KRW1.938 trillion during the first quarter of 2014 as the company had set aside around KRW90 billion in its operating profits during the first quarter of last year to cover US recall issues.
Hyundai cited the strong won as one of the main factors resulting in only moderate sales revenue growth, which in turn affected its net profit. The automaker revealed that the won averaged KRW1,085.50:USD1.00 during the January-March period, compared with KRW1,069.90:USD1.00 during the same period of 2013. Another factor cited by Hyundai was the increased sales incentives offered by the company on ageing models as it prepared to bring in new and updated vehicles in global markets. For the remainder of 2014, Hyundai is hopeful of achieving its global sales target of 4.9 million units, which would represent an increase of 3.5% y/y, on the back of new product launches that Hyundai hopes will help create interest among consumers.
Hyundai's shares fell 2.7% to KRW238,500 after the announcement of its quarterly results.
Outlook and implications
Hyundai has been witnessing better-than-expected sales results in most of its key markets since the start of this year, helped by improving consumer interest in its newly launched models, as well as a generally positive global economy. The company is keen to give its entire line-up a fresh look this year and has already started launching new and updated models.
Hyundai is bracing itself for a new growth phase in 2014 (see World: 15 November 2013: Hyundai, Kia gearing up for domestic and overseas product offensive). For the automaker, much is riding on the flagship next-generation Sonata sedan launched in March, with the automaker aiming to sell 228,000 units of the model globally this year. Pre-orders for this model exceeded 18,000 units in less than a month. Among the other models that are expected to drive sales growth are the latest-generation Tucson, Genesis, and Santa Fe. A further boost is expected from the newly launched Grand i10 and Mistra models that have been out on the market for less than a year. On a regional basis, Hyundai is likely to witness an impressive performance in its lead market, China, on the back of improved sales of the Verna, iX35, and Santa Fe. In the United States, which is the automaker's second most important market, Hyundai will gain back sales that it lost following negative consumer sentiment caused by vehicle recalls issued last year. Other markets where Hyundai will see sales gains during 2014 are India, Brazil, the United Kingdom, and Italy, as well as its home market. According to IHS Automotive forecasts, Hyundai's sales in these markets are likely to increase by between 2% and 7% in 2014.
Although Hyundai should manage to achieve some positive sales growth globally, there are a few factors that will continue to place pressure on the automaker's sales revenues and profitability.
- Strong won amid tough competition: The appreciating South Korean won against other global currencies places the export-dependent automaker at a competitive disadvantage by making its vehicles expensive in global markets. This is in stark contrast to Japanese automakers, which are now enjoying a weak and stable yen and are taking advantage of this with their model line-ups. Hyundai is mindful of this, with Lee Won-Hee, Hyundai's chief financial officer, stating, "Competition is expected to further intensify as Japanese rivals, aided by a weak yen, continue to expand global sales efforts and foreign car makers...expand their presence in the domestic market." However, he explained that the automaker was undertaking various contingency plans including cost-cutting measures, which it believes will help to improve earnings during the rest of the year.
- Potential labour union dispute: Hyundai's domestic labour union has already set out its demands ahead of this year's annual wage negotiations, which are scheduled to begin by the end of this month (see South Korea: 22 April 2014: Labour union at Hyundai Group sets out demands ahead of annual wage negotiations). The union is calling for the inclusion of all fringe welfare benefits as well as fixed bonuses in regular pay. In addition, it is also demanding a KRW159,614 rise in workers' monthly wages (which equates to an increase of 8.2% from the monthly basic pay received in 2013), the formal hiring of temporary workers on assembly lines, and sweeping work hour reforms. It has further warned of strike action jointly with the wider Korean Metal Workers' Union (KMWU) at Hyundai's domestic plants should the company fail to meet its demands. Hyundai depends on its South Korean plants for around 50% of its global vehicle sales. Given its uncompromising statement about expanding "ordinary wages" (see South Korea: 26 March 2014: Hyundai reacts to South Korean court's new ruling on wages), the company is at risk of potential production stoppages affecting vehicle supply should the workers stage any such strike action.
For 2014, IHS Automotive maintains a conservative forecast for Hyundai's global vehicle sales, expecting moderate growth of 1.5% y/y to around 4.4 million units, compared with 4.3 million units during 2013. The automaker's net profit and sales revenues will remain under pressure throughout this year.