[Global Big 3 Hyundai Motor] A Painful Finger in China... The US 'Inflation Reduction Act' Is a Challenge to Overcome

Sluggish Chinese Market, Betting on Premiumization
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U.S. President Joe Biden held a press conference on the Inflation Reduction Act at the White House in Washington, D.C., on the 28th of last month (local time). [Image source=Yonhap News]

[Asia Economy Reporter Kiho Sung] Hyundai Motor Group rose to become the world's third-largest automaker group in the first half of this year, but the Chinese market remains a painful challenge. China is the world's largest automobile market and the fastest-growing emerging market. However, many automakers entering China have struggled due to price competitiveness and preference for domestic brands. Hyundai Motor is no exception. Additionally, the Inflation Reduction Act, which aims to exclude China from the electric vehicle ecosystem, is considered a variable for future growth. The automotive industry expects these changes between the U.S. and China to become both a new crisis and an opportunity for Hyundai Motor Group.

According to the industry on the 17th, Hyundai Motor sold 976,350 units globally in the second quarter of this year, a 5.3% decrease compared to the same period last year. Meanwhile, sales in the Chinese market were 37,000 units, down 60.9% from 95,000 units in the same period last year.

Hyundai Motor has faced difficulties in the Chinese market since the aftermath of the Terminal High Altitude Area Defense (THAAD) deployment in 2016. After peaking at 1,142,016 units in 2016, sales dropped to 785,007 units in 2017 and recorded 350,277 units last year. This represents a decrease to about one-third over five years. Last year, Hyundai sold one of its five local vehicle production plants, Beijing Plant 1, to a Chinese electric vehicle company, but the situation has not significantly improved.

As the global automotive industry enters the electrification era, Hyundai has been increasing its market share in advanced countries such as the U.S. and Europe by gaining recognition for its technology and product competitiveness. However, it continues to struggle in China, one of the world's three largest automobile markets.

However, since China is the world's largest automobile market with rapid growth in electric and eco-friendly vehicles, Hyundai cannot afford to give up. Therefore, it is aiming for a turnaround through a major lineup overhaul centered on eco-friendly vehicles.

The U.S. Inflation Reduction Act is also expected to negatively impact Hyundai Motor Group's global electric vehicle strategy in the future. As the U.S. moves to exclude China from semiconductors, batteries, and renewable energy, the global automotive market is undergoing rapid changes. While sales of eco-friendly vehicles are expected to benefit, Hyundai faces the challenge of increasing North American production while reducing dependence on raw material supplies from China.

On the 7th (local time), the U.S. Senate passed the Inflation Reduction Act, which focuses on building a supply chain that excludes China through subsidy policies for batteries, a key element of energy transition. The $430 billion (approximately 558 trillion KRW) bill stipulates that tax credit benefits provided by the government when purchasing electric vehicles in the U.S. apply only to vehicles produced in the U.S. This essentially means stopping the use of electric vehicle batteries produced in China.

On the surface, the U.S. Inflation Reduction Act is expected to be favorable for Hyundai Motor. This is because it blocks the export path of Chinese electric vehicles, which are rapidly expanding their presence in the U.S. market.

However, looking deeper, the situation remains difficult. Hyundai Motor Group must also solve the issue of final electric vehicle assembly being required in North America. Hyundai plans to invest 6.3 trillion KRW to establish an electric vehicle plant in Georgia, U.S., but construction will only begin in the first half of next year and is expected to be completed in 2025. In the worst case, from the enforcement of the law next year until the completion of the Georgia plant, about two and a half years, Hyundai and Kia will have to sell electric vehicles locally without tax benefits. Hyundai Motor Group plans to locally produce the GV70 electrified model within this year and the EV9 in 2024, but there are no plans yet for local production of the most popular models in the U.S., the Ioniq 5 and EV6.

For the Ioniq 7 and EV9, scheduled for release next year, Hyundai must reach an agreement with domestic labor unions to decide on U.S. production. Conflicts are inevitable during this process. Hyundai's collective bargaining agreement includes a clause stating that "matters affecting employment due to transfer of vehicle models to overseas plants and confirmation of overseas production plans for the same models produced domestically shall be reviewed and resolved through a joint labor-management committee." Kia has a similar clause in its collective agreement.

Experts point out that Hyundai Motor Group needs various transformations to overcome the current difficulties. Hyundai plans to attempt a turnaround with a premium strategy led by the new La Festa electric vehicle exclusive to China and the hydrogen fuel cell vehicle Nexo. To this end, it plans to invest 6 billion yuan (approximately 1.16 trillion KRW) within this year. Since Beijing Automotive Group holds 50% of Beijing Hyundai's shares, Hyundai will bear half of the investment. Two China-exclusive electric vehicle models are scheduled for release next year, with a sales target of 520,000 vehicles in China by 2025.

Regarding the U.S. Inflation Reduction Act, experts advise diversifying key electric vehicle components that have been overly dependent on China. Hanggu Lee, senior research fellow at the Korea Automotive Technology Institute, said, "We must consider that excessive dependence on China could lead to being controlled by China. The U.S. has long been discussing with Canada, Australia, and others to break away from China's supply chain, so Hyundai should turn this crisis into an opportunity."