The painful restructuring process of South Korea’s automotive industry that came in the wake of the 1997-98 regional economic crisis is far from complete. But it is now becoming clearer what final shape the industry will take. Amazingly, some of the signs are encouraging and some of the larger companies have emerged from the crisis in better shape and with a much brighter future. Among these is the Hyundai-Kia group, which has been integrating at a rate that even Renault-Nissan would envy. This profile of Kia is extracted from just-auto’s exclusive research portfolio.
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Financial performance
Kia Motors’ financial performance is finally back on track after the crisis years of 1997/98, helped by improving sales revenues and shared costs with its new parent company Hyundai Motor. Sales volumes have improved dramatically, thanks to the strong recovery of its domestic market and expanding overseas sales. Its domestic market share has strengthened significantly since it went into receivership in autumn 1997. While the domestic market doubled in size between 1998 and 2000, Kia’s sales volumes have risen 250% during this period. Also, efforts have been in place for some time to strengthen, and in some cases to rebuild, its overseas sales networks. Overseas sales volumes have risen by 66% since 1998. The launch of new, and in fact much stronger products have spearheaded volume growth, and these efforts continue with the close collaboration of Hyundai Motor. In 2000, Kia net return on sales was 3.1%, on revenues of W10.8 trillion.
The company is expected sales revenues to rise by almost 20% in 2001, mostly fuelled by overseas volume and revenue growth. This, we believe, is now an unrealistic target given the current economic weakness, though significant new model launches should help the company continue to gain market share overseas. Operating profits have also improved significantly since the 1997-98 crisis, though we expect it will struggle to meet the W790 billion target set for 2001. As with Hyundai Motor, Kia will benefit from a strengthening of the euro, which should translate into more profitable sales. The launch of key new models should give the company a strong competitive edge both overseas and at home.
Table 1: Kia Motors’ financial performance
(W billion unless stated otherwise)
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1998 1999 2000 2001*
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Vehicle sales (000s units) 481.2 754.9 933.4 1,020.0
Sales revenues 4,510.7 7,930.6 10,806.0 12,900.0
Operating income 674.8 48.9 353.1 790.0
Net income -6,649.6 135.7 330.7 500.0
Assets 6,155.1 7,681.3 8,169.3 9,406.4
Debt 9,896.1 4,584.0 5,107.8 5,856.8
Debt:equity ratio (%)** Insolvent 148.0 166.8 165.0
Net return on sales (%) — 1.7 3.1 3.9
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* 2001 full-year target
** end of year ratios
Source: Kia Motors Corporation.
Like Hyundai Motor, Kia’s improving financial performance has allowed it to gain better access to lower-cost financing. Although debt has risen since 1999, debt servicing costs are expected to fall. The company successfully launched a $200 million bond issue in early 2001, maturing in 2006 and replacing more expensive short-term won-denominated debt. The new funds will also allow Kia to increase working capital. The current low-interest environment will also help reduce loan interest costs. Its debt:equity ratio is still very high, however, with Kia preferring to fund expansion and new product development for the moment. Greater effort is expected to be made to reduce its debt levels, however, now that it is operating on a much leaner basis than before.
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By GlobalDataOverall, Kia Motors is generating good profit margins, and its cost base is falling as more and more synergies are developed with Hyundai. It is in a much stronger position to weather the current global economic slowdown in the short term. It is unlikely to incur a loss in the short term, unless its main markets across the world deteriorate very dramatically indeed. Any subsequent recovery in demand should filter very quickly to its bottom line.
Domestic operations
Having absorbed and integrated the Asia Motors’ Kwangju plant following the 1997 merger, Kia Motors operates from three plants in South Korea. The company employs just under 30,000 people in South Korea, of which 17,400 are production workers, 3,600 are involved in sales, and 8,900 are other employed in other areas. On this basis, it appears over-manned—particularly now that many of the functions are shared with Hyundai. The largest plant is in Hwasung, with a 600,000-unit annual capacity. This plant produces Kia’s mid-to-large sized models as well as the Sportage and Carens RVs. The 340,000-unit Sohari plant makes the C segment Rio and Shuma models and the Carnival and Joice MPVs. Capacity utilisation has doubled since 1998 to over 80% in 2000. Efficiency has been enhanced further as a result of the streamlining of its product range, and progress in sharing platforms and components with Hyundai products has been significant. Kia Motors does not have the economies of scale enjoyed by many of the global manufacturers, and product integration with Hyundai is essential in order to maintain profitability.
So far, the Spectra and Optima models now share platforms with Hyundai models, and the low-volume Pride and Avella lines have been dropped in favour of using the Atoz platform. It is unclear whether Kia will replace its B segment Avella, but given past volumes this would seem unlikely. The Mazda-based Clarus/Credos model line has been superseded by the Optima, and the Enterprise/Potentia models will also eventually share a platform with the Hyundai Grandeur XG. The current Potentia/Enterprise models are based on an old Mazda 929 platform and can only be sold domestically due to licensing restrictions. The company must also continue to strengthen its overseas distribution and marketing networks in order to maximise volume potential. But already, its association with Hyundai is working well on the product front.
The 210,000-unit Kwangju plant has been inherited as a result of its merger with Asia Motors in 1997, although then two companies had strong links well before that. The Kia Pride was until recently produced at this plant and other product cross-sourcing had taken place between the two companies—particularly commercial vehicles. Eliminating the Pride line in favour of sharing Hyundai’s Atoz model has proved very fruitful for both companies. The Retona 4×4 model is based on the original Asia Motors line, and does not meet export specifications. We expect Kia will decide against this model, as it already has the new Sportage and a newly launched Sorrento.
Overseas operations
Kia Motors’ global footprint is much smaller than that of Hyundai Motor, although it has made significant progress in expanding its volumes in the last few years. Volumes have more than doubled since the depressed 1998 levels, with strongest growth coming from its domestic market. But its sales have been growing in all regional markets, as confidence in the company grew after it was taken over by Hyundai Motor, and as new models have been released. The company has also worked hard to strengthen its distribution and sales operations overseas, which were hard hit by the company’s bankruptcy.
Outside Asia, its largest regional market is North America. The company is firmly established in Middle-Eastern and North African markets, which account for a significant proportion of CBU exports. The Gulf States in particular are a key source of sales. As new models come on stream, we believe the company has the potential to achieve annual sales of around 1.2 million units in the medium term.
Table 3: Kia Motors’ estimated sales by region
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1998 1999 2000
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South Korea 163,000 339,000 408,000
North America 110,000 136,000 173,000
EU 66,000 70,000 85,000
Asia 31,000 27,000 42,000
Others 111,000 183,000 225,000
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Total Kia worldwide 481,000 755,000 933,000
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Source: Industry sources
Kia Motors has made very significant gains in North America, helped by new models and a renewed marketing effort. The Optima, Rio and Shuma are the company’s best-selling car models in this region. In 2001, it is expected to sell over 200,000 units, as new models are made available including the new Spectra, Optima and Sportage models and the facelifted Carnival. Towards the end of 2001, a new SUV will also be launched slotting above the Sportage, called the Sorrento. The company does not have a manufacturing facility in this region, nor is it likely to in the foreseeable future. Eventually, it may share a facility with Hyundai Motor, but for the moment it has ample capacity in South Korea, and the increasingly weak global automotive markets means that any such decision is some way off.
Table 4: Kia Motors’ estimated sales
in North America by country
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1999 2000 2000* 2001*
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Canada Cars 900 8,400 2,400 9,000
Light trucks 600 5,000 2,000 3,200
Canada sub-total 1,500 13,400 4,400 12,200
USA Cars 82,000 98,000 42,000 76,000
Light trucks 52,000 62,000 33,200 25,500
US sub-total 134,000 160,000 77,000 101,500
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Total US & Canada 135,500 173,400 81,400 113,700
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* Jan-June
Sources: industry sources
In the EU, Kia’s sales are spread over a large number of models, with its RV models such as the Carnival and Sportage, and the Rio sporty estate car, emerging as its strongest products. It is way behind its sister company Hyundai in this region, and will have to strengthen its sales network and brand image to make significant progress. New models are on their way, including the launch of the revised Carnival model, the new Sorrento SUV, and the Optima D segment car. The new Spectra was launched in 2001, as was the updated Sportage model. This rejuvinated range, and a strengthening euro, should help Kia improve its sales volumes and market share in the second half, despite weakening demand in the region.
Table 5: Kia Motors’ sales estimates
in the EU by model
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1999 2000 2000* 2001*
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Pride 17,700 16,600 9,000 0
Carnival 4,400 13,000 6,400 6,100
Sportage 13,200 18,500 9,900 6,600
Shuma 15,600 15,000 8,300 5,200
Sephia 8,400 4,800 3,000 2,000
Clarus 8,900 4,700 3,000 1,500
Joice 0 3,600 2,100 2,000
Rio 0 2,900 100 6,300
Sedona 600 2,600 1,200 1,800
Carens 0 1,500 200 3,300
Retona 100 1,500 1,000 1,000
Magentis 0 0 0 800
Others 900 400 200 200
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Total 69,800 85,100 45,400 36,800
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* Jan-June
Sources: industry sources; just-auto.com estimates
Kia Motor’s presence in Asia is limited, mainly due to a lack of investment in local production facilities. Its distribution in the region suffered significantly during the 1997-98 economic crisis. It withdrew from the Pakistan vehicle market in 1997, and from other markets in the region during this period. Its biggest market in the region is Iran, where it supplies Kia Pride kits to Saipa for assembly under licence. In 1998 it set up a joint venture company in China, called Yancheng Yueda Kia Automotive Company. Sales of a Mazda-based compact saloon car have been disappointing so far, mainly due to a lack of distribution and marketing activity. Hyundai appears to be taking the lead in this joint venture, and is likely to replace the current product with a shared platform model. It is unclear whether the Kia brand will be retained.
Table 6: Kia Motors’ sales in Asia-Pacific by country*
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1998 1999 2000
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China 1,000 2,000 2,500
Indonesia** 0 0 9,275
Iran 22,000 20,000 23,000
Philippines 5,348 2,342 1,810
Singapore 126 123 771
Thailand 0 0 420
Vietnam 185 459 1,238
Others 2,000 2,500 3,000
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Total 30,659 27,424 42,014
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* Includes some estimates
**Excludes sales of Timor imported in 1996
Sources: industry sources
Indonesia has been a major focus of CBU export activity, after the aborted attempt to participate in the Timor national car programme in the mid-1990s. In 2000, it returned to the market with a new distribution network and sells a broad range of imported models, the best selling of which is the Carnival model. This also happens to be the country’s best-selling imported model. The Visto and Carens models are also selling well. Plans for local assembly have been discussed over the last year or so, but have not been carried through so far. In any case, the company seems to be doing rather well with imports, now that tariffs have been brought down. Thailand is also a market that is supplied by CBUs, mostly involving the Carnival model.
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Kia supplies the South American markets mostly with imports, and its volumes are limited as a result. Before the 1997 financial crisis, it had begun construction of an assembly plant in Brazil, and was allowed to import CBUs into this market at reduced tax rates so it could establish a sales network. Bankruptcy in 1997 forced the company to abandon these plans, though these are now being revisited. This is mainly because the Brazilian government has threatened to claim back the unpaid tax, which is said to amount to $210 million, unless the plant is completed and becomes operational by 2003.
