July 24, 2014 / 5:38 AM / 4 years ago

After profit hit, Hyundai Motor warns of firmer won, may make more cars overseas

SEOUL (Reuters) - South Korea’s Hyundai Motor (005380.KS) reported net profit fell the most in five quarters, hit by the local currency’s strength, and said it may make more vehicles overseas as it braces for a tough second half with the won still strong. Hyundai, the world’s fifth-biggest automaker combined with affiliate Kia Motors (000270.KS), on Thursday reported a 2.24 trillion Korean won ($2.18 billion) net profit for the second quarter, down nearly 7 percent from a year earlier. That was below a consensus forecast of 2.33 trillion won, according to a Reuters poll of 16 analysts.

The logo of Hyundai Motor is seen on the steering wheel of a car at a Hyundai dealership in Seoul April 25, 2013. REUTERS/Kim Hong-Ji

Still, Hyundai’s growing overseas output helped cushion the impact of the rising won, which makes sales outside its home base less profitable. The company said it will now consider adding production capacity overseas - a departure from its previous stance and a move that could help insulate it from the strength of South Korea’s currency.

“We do not have a positive outlook for the exchange rate in the second half,” Chief Financial Officer Lee Won-hee said in a conference call.

“We plan to expand capacity continuously in markets where there is demand,” he said, an effective reversal of previous strategy for Hyundai, which has broadly steered clear of building new factories over the past couple of years.

The second-quarter profit fall is the biggest since Hyundai’s net profit slumped 16 percent in the first quarter of last year, squeezed by massive U.S. recalls and labour disputes in South Korea.

Higher U.S. discounts offered to entice customers also overshadowed a quarter when vehicle sales in China and at home remained robust, the automaker said.

International auto market issues cloud the future. Lee said he expected global auto demand growth to slow in the second half from the first half because of the phase-out of economic stimulus measures in the United States. Demand in emerging markets except for China will decline, while markets in the U.S. and Europe will improve, he said.


The won’s value jumped by 12.9 percent against the dollar in the second quarter compared with a year before, its biggest year-on-year climb since the second quarter of 2011. That saps overseas earnings when converted back into the local currency.

Another factor cutting into profit was growth in financing packages offered to lure U.S. car buyers. Incentives, soaked up by Hyundai, hit their highest level in more than four years as the automaker offered discounts to reduce an inventory of the aging Sonata sedan ahead of the rollout of the model’s new version, according to Edmunds.com.

“The 2015 Sonatas are just hitting (U.S.) showrooms so we can expect that incentive spending will be curbed,” Edmunds.com analyst Jeremy Acevedo said in an emailed statement to Reuters before the earnings were released.

Hyundai’s U.S. vehicle sales rose 4 percent in the second quarter, lagging the wider market’s 7 percent growth. In South Korea, sales grew 8 percent, driven by the redesigned versions of the Genesis and Sonata sedans, while in China sales climbed 11 percent, helped by increased production. Shares in Hyundai Motor ended 1.6 percent higher after the earnings announcement, versus a flat broader market .KS11.

Additional reporting by Choonsik Yoo and Joyce Lee; Editing by Kenneth Maxwell

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