The atmosphere in Hyundai and Kia headquarters is at an all-time low amid sluggish domestic sales compounded by an unofficial Chinese boycott.
Domestic sales fell 8.2 percent and China sales 9.4 percent in the first half of this year compared to the same period of 2016, and no end to the slump is in sight.
Korea's entire car industry is suffering a triple whammy of slow exports and domestic sales compounded by strikes. Exports in the first six months of this year fell to an eight-year low, while output dwindled to the lowest in seven years.
◆ Poor Sales
According the Korea Automobile Manufacturers Association, domestic carmakers exported 1.32 million cars in the first half, the fewest since 2009. Hyundai and Kia suffered more than a 40-percent drop in China.
Domestic sales by Korean automakers in the first half of this year totaled 785,297 cars, down four percent on-year and the first decline in three years. Output has also shrunk. Cumulative production in the first half stood at 2.16 million vehicles, the lowest in seven years.
Labor relations are strained. Unionized workers at Hyundai decided Tuesday to vote on a strike to seek higher pay, while staff at GM Korea agreed last week to down tools, and workers at Kia are considering a similar move.
◆ Volume Over Quality
Market analysts blame Hyundai-Kia's dominance of the domestic market, which overemphasizes quantitative growth and leads to a neglect of quality improvements.
Lee Hang-koo at the Korea Institute for Industrial Economics and Trade said, "The Korean auto industry posted phenomenal growth from 2010 to 2014, when U.S. and European carmakers were reeling from the global financial crisis, while Japanese automakers were suffering from a massive slump as Toyota was hit by huge recalls. But Korean automakers focused on quantitative growth while their global rivals started boosting productivity and quality, so the now the tide is changing."
Hyundai and Kia have blamed Chinese retaliation over the stationing of a U.S. Terminal High-Altitude Area Defense battery here for their sales slump in China, but the institute said in a recent report that a bigger reason is weakened competitiveness.
"Chinese consumers are turning their backs, because Korean cars lag behind Japanese models in terms of brand image, while Chinese cars have improved drastically in terms of quality and safety," it said.
Hyundai chairman Chung Mong-koo has been a vocal proponent of quality improvements, but Hyundai has been plagued by recalls both in Korea and overseas. Last month, the government forced Hyundai to recall 238,321 cars spanning 12 models, including the premium Genesis and Equus as well as the bread-and-butter Sonata.
Analysts say Korean automakers should be more enthusiastic in research and development as well. Last year, Japan's seven automakers spent around W29 trillion between them on R&D, compared to only W4 trillion at Hyundai and Kia (US$1=W1,152).
Kim Pil-soo at Daelim University said, "Domestic automakers failed to invest in R&D for new trends or to tap new markets, while also failing to forecast changes that resulted in a realignment of the market centering on SUVs."
And another expert said if Hyundai spent W10 trillion on R&D instead of using the money to buy an expensive new headquarters in downtown Seoul, its competitiveness would have improved massively.
Another problem is that Korean automakers lag behind in developing electric and self-driving cars. Kim Ki-chan at Catholic University said, "In the future, the automobile industry will be characterized by automated and modular production and increased cooperation between carmakers and IT companies. We need to ditch the notion that a single automaker can handle all of these things on its own and take a more open view toward cooperation."
A worker checks a car on a Hyundai assembly line in Cangzhou, China in October 2016. /Courtesy of Hyundai Motor