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Customer LoginsHyundai posts 1.5% y/y decline in Q2 net profit
Hyundai's decline in net profit is mainly due to the slowdown in emerging markets and increase in marketing and research expenses.
IHS Automotive perspective
- Significance: During the second quarter of 2016, Hyundai's net profit declined 1.5% year on year (y/y) to KRW1.76 trillion (USD1.54 billion).
- Implications: Hyundai depends on overseas markets for nearly 85% of its global sales volumes and has experienced severe pressure owing to emerging markets' slow economic growth.
- Outlook: For 2016, Hyundai is banking on the launch of new and updated vehicles, in both its domestic and overseas markets, to achieve its goal of selling 5.01 million units globally.
Hyundai today (26 July) announced that its net profit declined 1.5% year on year (y/y) to KRW 1.76 trillion (USD1.54 billion) in the second quarter of 2016 ended on 30 June, down from KRW1.79 trillion during the same period of 2015. Operating profit grew 0.6% y/y to KRW1.76 trillion, while sales revenues climbed 8.1% y/y to KRW24.68 trillion. Automotive division sales revenues gained 9% to KRW19.42 trillion, while the division's operating profit slipped 5.8% to KRW1.34 trillion.
In terms of wholesale dispatches, Hyundai registered a 4.3% y/y increase to around 1.29 million units during the second quarter of 2016. Domestic plants accounted for around 461,000 units (down 7.4% y/y) and overseas plants accounted for around 825,000 (up 12.2% y/y). Sales from Chinese plants grew 27.5% y/y to 294,000 units while sales from Hyundai's Indian plant gained 4.6% y/y to 163,000. Shipments from the company's US plant rose 15% y/y to 104,000 units, and sales from the company's Czech production plant climbed 11.5% y/y to 97,000. Turkey's output declined 3% y/y to 58,000 units. Sales from Russian production slipped 5.1% y/y to 56,000 units, while Brazilian plant dispatches sank 6.3% y/y to 40,000 units.
By Hyundai's segment classification, the company sold 884,000 passenger vehicles (down 3.6% y/y) in the quarter, accounting for 68.8% of its total wholesale dispatches. Sales of 'recreational vehicles' (SUVs and MPVs) came in at 320,000 units (up 37.3% y/y), giving them a 24.9% share, while commercial vehicle (CV) sales (including light and heavy commercial vehicles as IHS Markit classify them) totalled 81,000 units (down 2.4% y/y), for a share of 6.3%.
H1 2016
Hyundai's net profit during the first half of 2016 (January-June) stood at KRW3.53 trillion, representing a decline of 6.4% y/y. Operating income was also down by 7% y/y to KRW3.1 trillion, while sales revenues stood at KRW47.02 trillion, up 7.5%. At the end of the first half Hyundai's total assets totalled KRW169.72 trillion (up 2.6% y/y), while its liabilities were KRW100.54 trillion (up 2.1% y/y).
On a wholesale basis, Hyundai's global plants achieved sales of 2.39 million units in the January-June period (down 0.9% y/y). Of this total, domestic plants accounted for 861,000 units, representing a decline of 8.2% y/y, while sales from Chinese plants were up 2.5% y/y to 523,000 units. Sales from its plants in India stood at 309,000 units (up 3.5% y/y); in the United States at 198,000 units (up 10.6% y/y); in the Czech Republic at 187,000 units (up 12.1% y/y); in Turkey at 120,000 units (up 5.3% y/y); in Russia at 97,000 units (down 11.9% y/y); and in Brazil at 74,000 units (down 13.6% y/y). By segment, Hyundai sold 1.62 million passenger vehicles in the first half, which accounted for 67.8% of its total sales (wholesale basis), while representing a 10% y/y decline. Sales from the recreational vehicle segment came in at 613,000 units (up 34.7% y/y), giving it a share of 25.6% of total sales, while commercial vehicle sales stood at 157,000 units (up 1.8% y/y).
Outlook and implications
The decline in the net profit during the first half of this year can be attributed to the decline in sales volume (wholesale basis), mainly due to weak sales in the emerging markets. Furthermore, the decline can also be attributed to the increase in cost of goods sold (COGS; as a percentage of sales revenues) expenditure and the increase in marketing expense for new models, warranties, and research expense on future product development. The automaker recorded an 8.6% y/y increase in COGS to KRW37.77 trillion during the first half, mainly due to rise in fixed costs caused by decline in utilisation rate in South Korea, Russia, and Brazil. As far as selling, general, and administrative expenses (SG&A, also as a percentage of sales revenues) are concerned, Hyundai witnessed 18.1% y/y increase in marketing expense to KRW1.64 trillion during the period, 12.1% y/y increase in research on new product development to KRW418 billion, 32.1% y/y increase in warranties expenses to KRW814 billion during the first half, although the salaries expenses went down by 1% y/y to KRW1.35 trillion.
Further headwinds are looming for Hyundai in the shape of the current wage negotiations with its labour union, which as usual are fractious and could result in downtime, increased expenditure, and loss of production. Unionised workers at Hyundai Motor started four-hour partial strikes on 19 July and continued this action on 20, 21, and 22 July. The union is demanding an increase of KRW152,050 (USD133.65) in the monthly basic salary, 30% of the automaker's net profit last year as a bonus, and other job-related benefits. Hyundai said that the partial strikes on 19, 20, and 21 July have resulted in a production loss of 3,500 units worth KRW79 billion.
The increase in R&D is a trend expected to continue if Hyundai aims to fulfil its ambitions to become a global leader in connected and intelligent cars. In this regard, it recently launched a Project IONIQ Lab in Pangyo (South Korea). The centre will lead the automaker's research and development (R&D) projects for future vehicles. It has also announced a "road map" for connected-car development. The plan is intended to help the group move to the next level in connectivity, mobility, autonomous vehicles, customer experience, and big data. Furthermore, the automaker has partnered with Cisco Systems to jointly develop technology for connected vehicles and has formed a connected-car alliance with Chinese internet search company Baidu to sell cars with connected services.
To achieve future expansion, Hyundai, along with its key automotive affiliates, has set aside as much as KRW81 trillion in capital and research and development (R&D) expenditure through to 2018. In addition, about KRW2 trillion of investment is being planned to boost the group's presence in the global commercial vehicle segment.
Hyundai further plans to launch the IONIQ series of hybrid/electric vehicles in Europe during the third quarter of 2016 and also aims to launch refreshed versions of its Elantra sedan and Grand Santa Fe sport utility vehicle (SUV) this year in Russia. Around 22 new or refreshed models will be launched in the different markets (Europe, Greater China, Japan and Korea, Middle East and Africa, North America, South America, and South Asia) in the coming months of 2016, according to IHS Automotive data.
The automaker and its affiliate Kia are now targeting combined global sales of 8.13 million units in 2016, down slightly from their 2015 sales target of 8.2 million units. Of this total, Hyundai is aiming to sell 5.01 million units and Kia 3.12 million.
According to IHS Automotive forecasts, Hyundai will face a difficult year in 2016, mainly due to tough competition from global automakers and slow economic growth in emerging markets. We expect sales of Hyundai-branded light vehicles and CVs to decline by 2.9% y/y to 4.63 million units in 2016. Hyundai's light-vehicle sales are predicted to slip 2.9% y/y to 4.59 million units this year, while its medium/heavy commercial vehicle sales grow 2.5% y/y to 35,700 units.
About this article
The above article is from IHS Automotive Same-Day Analysis of automotive news, events and trends, and is a deliverable of the World Markets Automotive Service. The service averages thirty stories per day and also provides competitor and country intelligence. Get a free trial.