[Hyundai Motor's Russia Business Crossroads]② 2 Million Units Produced Over 10 Years... Operating Rate Plummets to 29% Due to Ukraine War

Sustained Losses for 1 Year of War but Reached Limit
Russia is the Largest Market by Share... Difficult to Abandon
Factory Asset Value Approaches 2 Trillion Won
Hyundai Motor Considering Various Scenario Responses

As the Russia-Ukraine war drags on longer than expected, Hyundai Motor Group's concerns are deepening. Since the war began, global automakers have been leaving Russia one by one. Hyundai Motor Group also faces a crossroads. They have managed to endure for the past year, but they cannot continue to bear large-scale losses. At the same time, they cannot easily give up the Russian market, where they have achieved the number one market share. It is truly a dilemma.

In August 2021, Hyundai Motor and Kia (including Genesis) held a combined market share of 28.7%, securing the number one position in the Russian automobile market. This was a result achieved 10 years after Hyundai Motor entered Russia by building the Saint Petersburg plant (HMMR) in 2011. The Saint Petersburg plant served as an advanced base for Hyundai's entry into the Eastern European market. The plant, which was always operating beyond capacity, played a major role in steadily increasing the market share in Russia. By 2020, cumulative production exceeded 2 million units. The plant's asset value alone reached 2 trillion won.

Three years ago, Hyundai Motor even acquired the Russian GM plant. They planned to establish an annual production base of 300,000 units by combining the existing Hyundai Motor Saint Petersburg plant and the nearby GM plant in Shushary. After the acquisition, they intended to supplement facilities with large-scale investments and produce popular models such as the multipurpose vehicle (MPV) Staria, the mid-size sport utility vehicle (SUV) Tucson, and the large SUV Palisade.

However, all plans were disrupted by the outbreak of war. As of the third quarter of last year, Hyundai Motor's Russian plant produced 42,821 units, with an operating rate of 29.3%. This performance was less than one-third of the usual production volume. Since the suspension of operations in March last year, the production line has been running only for equipment inspection purposes. The Russian GM plant never operated properly after the acquisition. The Hyundai Wia Russian engine plant, painstakingly built over three years, had to close just five months after starting operations.

Hyundai Motor and Kia's market share in Russia, which once approached 30%, shrank to 4.2% in February this year. Chinese brands such as Haval (12.7%) and Geely (9.7%) filled the gap left by Korean cars. The Russian automobile market size last year was 630,000 units, a 57% decrease compared to the previous year. This was due to economic sanctions causing many European and Asian automakers to leave the Russian market.

It seems difficult for Hyundai Motor to sell its assets at a low price like other companies such as Renault, Nissan, and Ford. This is because the asset scale is large and Russia's share in Hyundai's regional sales is not insignificant. Renault and others sold their joint venture shares to Russian state-owned companies at absurd prices like 1 ruble or 1 dollar. They attached a buyback option to repurchase the shares within 5 to 6 years, when the war is expected to end. Although conditions were attached, no one knows how the situation will change after five years. Due to the nature of the automobile industry, which requires large-scale facility investments, the industry believes that once withdrawn, re-entry is practically difficult.

Hyundai Motor Group did not give up the Russian market even under Western economic sanctions following the forced annexation of Crimea in 2014. This was when the ruble's value plummeted, reducing Russian consumers' purchasing power and rapidly shrinking the automobile market. In 2016, Chung Mong-koo, Honorary Chairman of Hyundai Motor Group, visited the Saint Petersburg plant and said, "The Russian market will have opportunities again, so we must not give up even if it is difficult."

Currently, Hyundai Motor Group is considering various scenarios and response plans. The response scenarios include factory sales, business withdrawal, as well as endurance strategies. The only way to purchase Korean-made passenger cars in Russia now is through parallel imports. Russian dealers are increasing parallel imports via third countries such as China and Iran to avoid sanctions. Of course, if sanctions are strengthened, even this may become difficult. A KOTRA Moscow Trade Center official said, "Professional research organizations are predicting the market with an emphasis on the possibility of continued sanctions against Russia this year," adding, "Our companies must also devise strategies considering this."