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Hyundai clashes with partner BAIC over suppliers
Reuters | 2017/9/8

BEIJING - Hyundai Motor Co. is at odds with partner BAIC Motor Co. over efforts to cut supplier costs, as they grapple with cutthroat competition and the impact of a diplomatic dispute between Beijing and Seoul.

Hyundai and BAIC -- whose joint venture is a 50-50 partnership -- are divided over how to solve the problem, according to four sources with knowledge of the dispute. 

Hyundai wants to protect its South Korean supply chain, while BAIC favors shifting to cheaper Chinese suppliers to cut costs, the sources said.

¡°BAIC wants to solve this aggressively and is ... asking Hyundai to change its sourcing strategy significantly and immediately,¡± said the chief of a Hyundai supplier headquartered in Seoul. The idea was to source more locally from cheaper suppliers in China, the source added.

Hyundai wants to solve this more gradually ¡°over perhaps 5 to 10 years and do so in phases,¡± the person said.

BAIC declined to comment.

A Hyundai Motor spokesperson told Reuters: ¡°Hyundai Motor and Kia Motors have been continuously trying to source competitive parts in China.¡±

The dispute comes as Hyundai and affiliate Kia Motors Corp. are suffering from plunging sales amid China¡¯s diplomatic protests against South Korea¡¯s decision to deploy a U.S.-made missile defense system. 

Until last year, Hyundai and Kia ranked third in China by sales. But Hyundai¡¯s sales alone have slumped 41 percent from January to July, fraying relations with BAIC and making this the biggest crisis since Hyundai entered China in 2002.

Last month, Hyundai suspended production at its four Chinese assembly plants for a week after a French supplier refused to provide fuel tanks when its bills went unpaid. On Tuesday, Hyundai suspended production at one of its plants in China after a German company went unpaid.

The standoff underscores the depth of the crisis facing Hyundai¡¯s suppliers in China, who rely heavily on sales to Hyundai and Kia.

¡°China has started to become a grave for South Korean automakers and suppliers,¡± said Lee Hang-koo, a senior research fellow at Korea Institute for Industrial Economics & Trade. Suppliers have been hit hardest, he added.

South Korean companies are squeezed between cheaper Chinese suppliers and European rivals that are technologically more advanced, making it challenging for them to diversify their customers beyond Hyundai, he said.

South Korean suppliers¡¯ components are 30 to 40 percent more expensive than those from Chinese suppliers, industry sources say.

Price war
In a rebound bid, Hyundai last week replaced the chief of its China operations. It also has plans for a local ¡°brand¡± store, and it wants to assemble its premium Genesis cars locally. The automaker also wants to accelerate the launch of an SUV for China.

But sales keep falling, aggravating an underlying rift at Beijing Hyundai over supplier costs as local suppliers improve their quality.

In China, Hyundai relies heavily on Korean suppliers that have set up shop there, despite higher costs. As of last December, 145 members of South Korea¡¯s automotive supplier association had 289 plants in China.

¡°We can¡¯t beat [local suppliers] in terms of price,¡± a senior executive of a South Korean supplier to Hyundai told Reuters, adding that BAIC was pressuring Hyundai to switch to Chinese components.

A second supplier said some suppliers have not been paid since May, while BAIC is pressing Hyundai to cut prices 20 percent before payment. That could push some suppliers into a loss, the executive said.

Growing pressure
Pressure from BAIC to cut supplier costs has grown after a parts procurement study two years ago compared Beijing Hyundai¡¯s supplier costs with those of Chinese rivals such as Changan Automobile Co. and Great Wall Motor Co.

These carmakers have made big strides by taking advantage of global automakers¡¯ and suppliers¡¯ engineering expertise. That has helped them produce competitive SUVs and win market share.

BAIC wants to switch to local suppliers, and use that supply chain to press overseas suppliers to reduce their costs. But this would hurt Hyundai suppliers that serve the Korean automaker globally.

An official at the South Korea suppliers¡¯ association said some of Hyundai¡¯s vendors in China were obtaining loans and laying off staff.

¡°This is not an easy one to solve,¡± said another source close to Hyundai. He added that the carmaker would seek to avoid changing its supply chain policies in China. ¡°But if sales of Hyundai cars keep falling, then perhaps Hyundai will have no choice but to accept BAIC¡¯s solution.¡±

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