Can Hyundai Motor Afford a High Wage?

People are surprised at the news that collective bargaining over wages and employment contracts reached agreement at Hyundai Motor Company, which will raise wages for 15-year old factory workers, presumably in early 40s, to near 60 million won.

Some raised concerns over the wage increase and wonder “How can the automaker keep its price competitiveness with such a high pay raise?”.

Industry sources are also expressing concerns, saying “Hyundai might be able to afford it right now, but in the log run will face serious troubles if this trend goes unchecked.”

Hyundai Motor can still stay on right track.

The agreement between labor and management will allow Hyundai workers to make 6.7 million won more on annual average. This alone is expected to cost the company with 50,000 staff 335 billion won in additional labor cost this year.

Last year, Hyundai Motor Company achieved 26.337 trillion won in revenue and 1.444 trillion won in net income. Hyundai performed relatively well this year despite sluggish domestic market. For the first quarter this year, running from January through March, the company attained 6.854 trillion won in revenue and 417.6 billion won in net income.

The sound performance of the company has been attributable to its global competitiveness in small to mid-size car markets with high quality and low prices.

Hyundai Motor in Beijing, which began to manufacture Sonata since December last year, has been playing well so far as Chinese consumers` urge to own a car is rapidly growing along with newly emerging middle class in the nation.

Hyundai-Kia Motor is virtually dominating the domestic auto markets with nearly 75% of its market share. Some estimated that Hyundai`s overwhelming status in Korean market enabled the company unionists go on strikes for over a month.

Hyundai will be exposed to risks in the long term.

Nevertheless, industry analysts forecast that the situation will be quite different by 2005. Samsung Securities analyst Kim Hak-ju said “Hyundai will inevitably witness the loss of market share in domestic market in 2005, when GM-Daewoo and Renault-Samsung start to localize auto parts while producing mid to large-size vehicles and SUVs in earnest.” Therefore, he pointed out, Hyundai will have to raise its market share in the U.S. to above 3.1% or face serious problems.

Cho Yong-jun, analyst at Daewoo Securities, found a potential risk factor in Hyundai`s failed negotiation, in which labor flexibility was not secured whereas pay raise was agreed. He said “Given that auto industry is a typical example of cyclical business, it will be seriously hurt without labor flexibility when the economy is sluggish.”

Production of Hyundai Motor will significantly grow when production lines at Alabama, in the U.S. begin full operation in 2005 to produce 300,000 units per year and factories in China increase output from current 100,000 to 300,000 units.

Accordingly, Hyundai is standing at a crossroad, which can give the carmaker a chance to grow further in 2005 with enhancement in productivity, product quality, and brand value. Otherwise, if fails, the company will have to suffer from overcapacity.

Jong sik Kong kong@donga.com