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South Korea’s Hyundai Motor (005380.KS) said it had suspended production at one of its China factories on Tuesday after a supplier refused to provide parts due to delays in payment – its second such incident in as many weeks.
Frayed relations with suppliers to its venture with BAIC Motor Corp Ltd (1958.HK) are adding to headaches for Hyundai in China, where it has seen sales slump due to diplomatic tensions between the two nations and fierce competition from local brands.
Supplier sources familiar with the matter say that BAIC is in charge of payments and has been responsible for the delays.
The partners are fighting over their supplier strategy with BAIC favoring shifting to cheaper Chinese firms in the face of intense competition, while Hyundai wants to protect its South Korean supply chain, people familiar with the dispute said.
Hyundai declined to comment on the reason for the failure to pay suppliers. A representative for BAIC could not be immediately reached for comment.
Their joint venture had only just resumed production at four China plants on Aug. 30 after a suspension of about a week because one French supplier refused to provide fuel tanks due to non-payment.
This time, a German firm has refused to provide parts for air intake systems, a representative for Hyundai said, declining to identify the supplier. The joint venture’s three other Chinese factories remain operational.
Any loss of production from this one factory is unlikely to have a major sales impact as Hyundai probably has sufficient inventory at the plant because its cars have not been selling well, said Ko Tae-bong, an analyst at Hi Investment & Securities.
“30 after a suspension of about a week because one French supplier refused to provide fuel tanks due to non-payment.”
“That is manageable. But if Hyundai’s Chinese partner is refusing to make payments, that’s a different story,” he said, adding that the issue could occur time and time again.
Scrambling to tackle problems in China, Hyundai said this week it had appointed a new head for its China operations. Tao Hung Than, who is of Chinese descent, took the helm effective Friday replacing Chang Won-shin, who lasted less than a year in the job.
The new China CEO, however, has a huge task in front of him if he is going to get Hyundai back on track in the world’s biggest auto market – one that accounted for nearly a quarter of Hyundai’s revenue in the last financial year.
A weakening brand image and a product line-up without attractive SUVs are only adding to pain from diplomatic tensions. Hyundai’s sales from its Chinese factories plummeted 64 percent in April-June first quarter, when the automaker posted its smallest quarterly net profit in five years.
South Korean firms have been hit by a Chinese backlash over Seoul’s decision to deploy a U.S. missile defense system to counter threats from nuclear-armed North Korea. China says the system poses a threat to its national security.
Hyundai and BAIC were also due to start operations at a fifth China car factory late last month but the timetable has been pushed back. Hyundai has declined to comment on the postponement.
Hyundai Motor shared fell 1.4 percent to their lowest level since April 19 on Tuesday and have declined 4.2 percent since the first reports of the supply disruptions emerged a week ago.
Questions & Answers
Q.Which company is responsible for the payment delays to suppliers?
Which company is responsible for the payment delays to suppliers?
Supplier sources indicate that BAIC is in charge of payments and has been responsible for the delays. The partners are reportedly fighting over their supplier strategy, leading to these payment issues.
Q.What caused the initial production suspension at Hyundai's Chinese plants in late August?
What caused the initial production suspension at Hyundai's Chinese plants in late August?
The initial suspension occurred because a French supplier refused to provide fuel tanks due to non-payment. Production resumed briefly on August 30 after about a week-long halt.
Q.What is the reason behind the dispute between Hyundai and BAIC regarding supplier strategy?
What is the reason behind the dispute between Hyundai and BAIC regarding supplier strategy?
BAIC favours shifting to cheaper Chinese firms in the face of intense competition. In contrast, Hyundai wants to protect its South Korean supply chain, leading to disagreements over strategy.
Q.What factors are contributing to Hyundai's sales slump in China?
What factors are contributing to Hyundai's sales slump in China?
Hyundai's sales have plummeted due to diplomatic tensions between South Korea and China, fierce competition from local brands, a weakening brand image, and a product line-up lacking attractive SUVs.
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