It takes twice as long on average - over 28 hours - for Hyundai Motor Co to make a car in South Korea than in the United States, even though its domestic plants have far more workers for each production line. Add in high wages, frequent industrial action and outdated facilities, and Hyundai's hourly labour costs per worker in South Korea, at 24,778 won ($22.26), are 16 percent higher than at its US factories, and triple what they are in China.
Its seven domestic plants have driven Hyundai to become the world's fifth-largest auto manufacturer, but are now a legacy asset that need to be addressed to sustain profit growth. It may make more sense, economically, for the company to close a plant it built 45 years ago - one of five in Ulsan - that is now its oldest and costliest facility. But Hyundai says it won't give up its Korean base - much as Toyota Motor Corp rejects the idea of stopping production in Japan - and says that fixing productivity issues with its strong domestic union is a top priority.
"People ask us why we don't just produce overseas, given all the labour troubles at home. But our home market is our root and the base for our growth overseas. And there's a risk in building cars overseas," said a Hyundai executive from the team that manages its labour relations.
On Saturday, Hyundai's labour union elected Lee Kyung-hoon, a moderate, as its new president, suggesting a period of steadier industrial relations after the 46,000 strong union, under more militant leadership, staged two strikes in two years. Lee's previous stint as Hyundai's union boss, from late-2009 to 2011, was strike-free. Despite the high legacy costs, Hyundai says it has more to gain than lose in keeping its domestic factories open.
"Our Korean plants will continue to serve as a global manufacturing base, and we plan to increase not just production but also productivity and quality at our domestic plants," the company said in an emailed statement to Reuters. Beyond the obvious emotional ties, Hyundai manages an extensive supply chain and profitable car line-up in Korea, where it sells more of its high-margin large sedans than in any other market.
Hyundai's production base in Ulsan - the world's largest single car complex and the Korean city with the highest per capita income - gives it significant economies of scale and provides the backbone of its global expansion, knitting together 380 suppliers and 5,000 second- and third-tier suppliers around the country. "Korea has a good ecosystem of suppliers, and Hyundai thinks it's better to raise wages than risk taking suppliers to new markets overseas," said Lee Hyung-sil, an auto analyst at Shinyoung Securities. "The time may come when Hyundai thinks it's better to move production overseas. But not yet."
Hyundai, though, is increasingly reliant on overseas production. The portion of vehicles it produces at home has halved to 43 percent of its global output from a decade ago - as it has opened facilities in the United States, China and Brazil. Hyundai produced 4.4 million vehicles globally last year. Hyundai's high cost, low productivity structure is hampering margin expansion just as its near-70 percent domestic market share, with affiliate Kia Motors Corp, comes under threat from rising imports of cars made by foreign rivals such as BMW and Volkswagen.
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