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Strong Won Hurting Korean Carmakers

Posted January. 08, 2007 03:01,   

한국어

Hyundai and Kia Motors set this year’s won-dollar exchange rate to 880 won, 70 won down from last year, and launched an emergency management system. Every year, corporations set a standard foreign exchange rate on their own and establish an export strategy.

The above exchange rate is significantly lower than the exchange rate prospects the country’s major economic research institutes announced for this year (910-929 won). This shows how difficult Hyundai Motors expects its exporting condition to be this year.

At a sales promotion meeting attended by branch managers nationwide held at the head office in Yangjae-dong, Seocho-gu, Seoul on January 5, the vice chairman of Hyundai Motors, Kim Dong-jin warned of possible crisis for the company, saying, “The won-dollar exchange rate will go down to the 880 won level, the lowest since the financial crisis in 1997,” and added that if won remains strong, it would be hard to make profits abroad.

The Hyundai Motors says that every time won-dollar exchange rate drops by 10 won, its operating profit decreases by 139.8 billion won. If the won-dollar exchange rate falls by 70 won as vice chairman Kim forecasted, a 978.6 billion won loss on foreign exchange would incur.

Considering the operating profit of 1.5 trillion won Hyundai Motor made last year, which was estimated by security businesses, Hyundai Motor goes through about two thirds of its operating profits.

The foreign exchange rate is Hyundai’s pivotal variable as it holds sway the business performance of Hyundai Motors, whose overseas sales account for nearly 76 percent of its entire business.

Even if it exports the same volume, it has to increase its product price to make profits since its export earnings converted into won decrease by the gap in exchange rate. However, raising the price is not an option for Hyundai Motors because it has to compete against Japanese automakers, which surpass Korean counterparts in both brand recognition and technical prowess.

Besides, Japanese carmakers, including Toyota Motor Corporation, are lowering their exporting costs thanks to the rise in yen-dollar exchange rate (yen depreciation). Some Japanese compact cars such as Toyota’s Yaris being sold in the U.S. already sell for lower than Hyundai’s Verna.

For its part, Hyundai Motors has no option but to turn to domestic sales, but it can’t be assured of strong domestic market sales at a time when the economic prospect for this year is gloomy.

The ongoing effort to reduce cost at Hyundai that started last November is also insufficient. For this reason, Hyundai launched an emergency management system, including company-wide efforts to cut down cost and expanding domestic markets.

However, some are worried that Hyundai Motors could face a real risk as the labor union of Hyundai Motors says it will have a strike following the commotion at the opening ceremony of the year earlier this month.

Vice Chairman Kim urged the labor union to cooperate in overcoming crisis, saying, “However difficult it currently is, the company can make profits once the labor-management relations become stable.”



bell@donga.com changkim@donga.com