Hyundai Motor has decided to produce cars in Indonesia with auto parts supplied by local partners. It is the first time since the Korean automaker began to produce cars overseas in 2000 that it does not use auto parts from Hyundai Mobis, the parts manufacturing arm of Hyundai Motor Group.
Hyundai Motor will break ground for a car factory in Indonesia within this year. It is the automaker’s first finished car plant in Southeast Asia. Hyundai Motor has decided to operate the plant without modules from Hyundai Mobis, a departure from its practice thus far. Hyundai Motor’s car factory in Indonesia will minimize the proportion of Korean-made parts such as those from Hyundai Mobis.
Hyundai Motor has decided to enter Indonesia for localization and cost reduction. The automaker is determined to achieve thorough localization and strengthen price competitiveness by partnering with local auto parts makers and utilizing local automotive industry infrastructure. Hyundai Motor is half-willingly increasing the use of local auto parts in China where the carmaker is struggling. If Hyundai Motor uses Korean-made auto parts such as those from Hyundai Mobis, unit prices will rise, which will make it difficult for the company to secure strong price competitiveness. Auto industry watchers say that Hyundai Motor drew up a plan to use auto parts from local companies in Indonesia from the beginning, keeping its experience in mind.
“Indonesia has an auto industry ecosystem as Japanese automakers are operating assembly plants there,” said Lee Hang-ku, a senior research fellow at the Korea Institute for Industrial Economics and Trade. “Hyundai Motor has decided to go to Indonesia without Hyundai Mobis for localization and cost reduction, I think.”
A special situation of the Indonesian market is also cited as a factor that led Hyundai Motor to make the decision. Indonesia’s car market has been dominated by Japanese car brands. Toyota and other Japanese carmakers built infrastructure and are now controlling the market. This means that the risk is high when Hyundai Motor makes large-scale investment in infrastructure there.
Hyundai Motor Group is changing its longtime practice of Hyundai Motor and Hyundai Mobis advancing into overseas markets together. In the 1990s, Japanese automakers succeeded in entering overseas markets including North America with their Japanese auto parts partners. Hyundai Motor followed suit in promoting overseas production to ensure a stable supply of quality auto parts.
However, experts point out that large-scale investment can increase risks for automakers at a time when the global automobile market is suffering from a slump. Another disadvantage of the approach is that it is difficult for carmakers to respond quickly to the automobile industry’s paradigm shift to car sharing and eco-friendly cars.