Hyundai may suspend production at oldest China plant as slowdown bites

By Hyunjoo Jin

SEOUL (Reuters) - Hyundai Motor Co is considering plans to suspend production at its oldest plant in China as it reels from tumbling sales and massive overcapacity in its biggest market.

The move by Hyundai, which together with affiliate Kia Motors was the No.3 automaker in China until 2016, highlights the reversal of fortunes in the world's biggest auto market that suffered its first contraction in decades last year.

Hyundai and Kia face major risks from the slowdown with the duo already grappling to fend off competition from local rivals and global players in China.

Hyundai "is reviewing production to enhance competitiveness and profitability", the South Korean company said in a statement on Wednesday. The plan includes "suspension, not closure of Plant 1 in Beijing", it added.

The company, which has three manufacturing plants in Beijing, said it has yet to decide when a suspension would start. However, the Korea Economic Daily newspaper reported that suspension could start as early as next month.

All of Hyundai's five factories in China are operated by its Chinese joint venture with BAIC Motor Corp, at which about 2,000 employees have taken voluntary retirement or transferred to other factories, the statement said.

BAIC told Reuters that the joint venture, Beijing Hyundai, was currently discussing internally how to use existing capacity to build new energy vehicles. It did not comment on the possible suspension of the plant.

"In the next few years, Beijing Hyundai will continue to increase the proportion of new energy vehicles," a BAIC spokeswoman said.

Hyundai shares, which rose as much as 3.6 percent on Thursday, were trading down about a percent at 0456 GMT.

"My view is that Hyundai is taking steps to closing the plant. It has been dragging its feet over a shutdown, and it is positive that they are finally taking action," Samsung Securities analyst Esther Yim said.

Hyundai's redesigned Sonata sedan, which was unveiled on Wednesday, has also sparked hopes that the automaker would be able to regain ground in its mainstay sedan segment, she said.

OVERCAPACITY

Hyundai's sales in China amounted to only half its total production capacity in the country last year.

China's auto industry has been slowing after a period of strong growth, hit by a weakening economy and the fallout of trade frictions with the United States.

For Hyundai, its troubles have been exacerbated by a diplomatic row between Seoul and Beijing that hit demand for South Korean products in China over the past few years.

A lack of attractive models and strong branding also makes Hyundai vulnerable to competition, analysts and dealers say.

Hyundai will start to produce its new ix25 SUV at its latest plant in Chongqing from September, according to an internal document seen by Reuters.

The current ix25, Hyundai's second-biggest selling SUV, is made at the Plant 1 factory built in 2002.

Hyundai CEO Lee Won-hee last week said the company was considering cutting capacity in China, sources said.

(Reporting by Hyunjoo Jin; Additional reporting by Hayoung Choi in Seoul and Norihiko Shirouzu in Beijing; Editing by Richard Pullin and Himani Sarkar)