News Analysis: Hyundai Motor to boost localization after China-S. Korea FTA

Hyundai Motor, South Korea's Number One automaker, is expected to speed up a strategy of "localization " by expanding its production capacity in China after China-South Korea free trade agreement (FTA) is implemented.

China and South Korea initialed the bilateral trade pact on Feb. 25, about three months after the two countries concluded negotiations on it. Beijing and Seoul began talks on the deal in May 2012.

Under the accord, China and South Korea will eliminate tariffs on more than 90 percent of all products from each other within 20 years after the FTA implementation. The South Korean government aims to sign the pact and get a parliamentary approval by the end of 2015.

In the auto sector, South Korea will abolish tariffs on gasoline buses and trucks from China within 15 years after the implementation. China will eliminate duties on buses and trucks from South Korea within 20 years. Passenger cars were excluded from the negotiation table.

"China excluded passenger cars from the negotiating table to protect its own industry. South Korean carmakers, centered on Hyundai Motor and Kia Motors, will deepen a localization strategy rather than increase exports," Kim Tae-Nyen, executive director of the Korea Automobile Manufacturers Association (KAMA) and secretary general of Seoul Motor Show, said in a recent interview with Xinhua.

Hyundai and its affiliate Kia have a combined production capacity of 1.9 million, which is expected to increase to 2.5 million in the medium term, according to the KAMA data. China is the world's largest auto market, which held 24.2 million in total demand for cars in 2014. The demand is forecast to grow to 40 million in the long term, Kim said.

"China will account for about one third of global production and demand for cars. Now, it is meaningless to think about an auto industry without having China in mind. The China-South Korea FTA would contribute greatly to the development of car industries in both countries," said Kim.

With the FTA, South Korea would become the first car-producing country in the world, which would sign the free trade pact with China. Leading auto-producing nations, including the United States, Germany and Japan, had yet to ink the FTA with China.

It will help enhance South Korean carmakers' access to the Chinese market. Unlike premium sedans from BMW and Mercedes Benz, South Korean models are relatively cheap in price and high in quality. Such combination may be emotionally attractive to Chinese consumers, Kim said.

Chinese automakers would increase sales of trucks and buses in South Korea as those products have much higher price competitiveness than South Korean models. Sales of a bus from China Shenlong, which began to be sold in South Korea from 2014, reached 400 last year. It is expected to more than double to 1,000 this year, Kim expected.

The Shenlong bus would be on display at this year's Seoul Motor Show scheduled to run from April 2 to April 12, the KAMA head said, noting that such exhibit would raise its brand recognition in the South Korean market.

Chinese automaker Beiqi Foton is allegedly negotiating with South Korea's foreign car importers and distributors to make inroads into the South Korean market, Kim said.

HYUNDAI EXPANSION IN CHINA

With the China-South Korea FTA excluding passenger cars from the dialogue table, Hyundai Motor has no choice but to strengthen expansion in China by producing, procuring and marketing more in the Chinese market, which the South Korea's Number One carmaker entered in 2002.

Hyundai currently has three factories in Beijing, which have a production capacity of 1.05 million vehicles a year. It has pushed to build its fourth factory in Chongqing, southwest China, by late 2016 and the fifth factory in Cangzhou in Hebei province by early 2017.

When those are completed, Hyundai's production capacity in China would increase to 1.65 million vehicles a year, the company said in a written interview.

"Hyundai's first three factories were built in Beijing to meet the Chinese government's earlier strategy to develop metropolitan areas. Auto parts procurement, logistics and subcontractors' presence were also considered," the company said.

Hyundai's fourth and fifth factories will be built in Chongqing and Cangzhou to meet the Chinese government's "great" strategy to develop the western region, the company said.

Hyundai has increased its presence in China rapidly. The company's auto sales in China topped 1 million in 2013, about a decade after its entry to the market in 2002. Hyundai's 2014 car sales in China rose 9 percent from a year earlier to 1,120,048 units, a 21-fold expansion compared with 2003 when it sold 53,130 cars.

The 2014 auto sales in China surpassed Hyundai's full production capacity of 1.05 million, leading the company to build additional factories. Including its affiliate Kia Motors, Hyundai- Kia Automotive Group's production capacity in China would surpass 2.5 million in about two years.

With the production expansion, Hyundai aims to become the Number Three brand in China, but it has a weak point of low brand recognition compared with other foreign carmakers such as Volkswagen and General Motors that entered the Chinese market faster than Hyundai.

"Hyundai plans to complete the construction of R&D center in Yantai of China by the end of this year to develop new models that meet needs of Chinese consumers. We will also strengthen design, enhance fuel efficiency and improve product quality aimed at Chinese consumers," the company said.

The outcome of such efforts was Mingtu, launched in 2013, and sport utility vehicle (SUV) ix25, unveiled in 2014. Those are Chinese consumer-targeted products, Hyundai said. With those products, the company aims to sell 1.16 million vehicles in China in 2015.

The company said it plans to expand line-ups especially for mid- and large-sized passenger cars in China, while improving brand recognition by expanding businesses contributing to the Chinese society as well as sports and culture marketing. Endi