Desperate to Reinvigorate Slumping Sales in China
Hyundai Motor Co. is transforming its Chongqing Plant 5 in China into an electric vehicle (EV) plant in a bid to reinvigorate its slumping Chinese business. Hyundai Motor is struggling in the Chinese market as demand for cars in China is on the decline due to the U.S.-China trade dispute.
Hyundai Motor has begun to retool the production lines at Chongqing Factory 5 in Sichuan, China, to produce EVs along with gasoline engine cars. Hyundai plans to ramp up production of EVs instead of reducing production of internal combustion engine models.
The Chongqing plant suffered a low operation rate as it was completed when China’s retaliation against South Korea peaked. Hyundai's annual sales in China fell to the 790,000 unit level in 2018 from 1.16 million units on average before 2018. The drop was attributed to the enhanced competitiveness of Chinese automakers and a surge in demand for small SUV EVs. Last year, Chongqing Factory, which can produce 300,000 units a year, sold only 70,434 units in total -- 39,870 units of the Reina and 23,971 units of the Lafesta. The utilization rate was below 30 percent.
Hyundai Motor increased the capital of its Chinese subsidiary in April, and has since been turning Chongqing Factory from an internal combustion engine car factory to an EV plant. Production of internal combustion engine vehicles requires a lot of manpower as some 30,000 components are assembled. If the utilization rate drops below 70 percent, the plant cannot make profits, so securing certain sales volume is important. By contrast, an electric vehicle production process involves fewer workers as the number of required components is about 10,000. Process automation is far easier.
This is a strategy to substantially scale back the capacity of Chongqing Factory 5. As for the Encino, the Chinese version of the Kona, Hyundai Motor will only produce its EV version in China after launching it next month. In addition, Hyundai Motor is currently carrying out a massive plant restructuring to produce the Lafesta (Sonata in Korea) EV model. When Lafesta production begins in September, half of Chongqing Factory 5’s lineup will be EVs.
On top of that, Hyundai is carrying out a major overhaul of its Beijing factory to ramp up production of plug-in hybrid electric vehicles (PHEV). Not even one unit of the Sonata (LF) HEV model sold in China from March to June after it lost local subsidies. On the other hand, sales of the PHEV model increased from 140 units at the beginning of this year to 140 units in June. As a result, Beijing Factory 2 will increase production of the Sonata PHEV and Lingdung PHEV. Then, Chongqing Factory (internal combustion engine cars + EVs) and Beijing Factory 2 (internal combustion engine cars + PHEVs) will be reorganized to zero in on eco-friendly car production. Hyundai Motor is employing a strategy to meet China’s new energy regulation that makes it compulsory for carmakers to make up for 12 percent of their total sales with green cars, dial up sales, and boost the efficiency of production processes by significantly expanding eco-friendly car production lines this year.