Decline in overseas demand forcing South Korea’s auto giants opt for ‘strategic’ production halts, says GlobalData

Following the news that South Korean vehicle manufacturer Kia Motors plans to shut three production units due to drop in overseas demand;

Animesh Kumar, Director of Automotive Consulting at GlobalData, a leading research and consulting company, offers his view:

“South Korea was among the initial countries that were impacted by the coronavirus (Covid-19) outbreak. The country was in a deep turmoil in February and early March as the country practised social distancing and most businesses, including automotive plants and dealerships remained temporarily shut. The situation, however, has now improved as around 70% Covid-19 positive patients have now recovered and there has been a decline in the number of new cases.

“In February 2020, vehicle exports from South Korea witnessed a decline of 25% year-on-year. OEMs encountered supply chain disruptions, primarily for components sourced from China. Automotive assembly lines were temporarily shut down due to the outbreak of virus across South Korea.

“Despite normalising market situation and recovering domestic demand in March 2020, key Korean OEMs including Hyundai and Kia continued to feel the impact of Covid-19 as the demand plunged in key export markets – US and Europe. Overall exports of vehicles from South Korea fell by 17.6% to 479,388 units in the first three of months of 2020.

“Both Kia and Hyundai, the two major exporters of built up vehicles to the US and Europe, have indicated plans for temporary production halts once again. Kia will be suspending production at three of its nine vehicle assembly plants in South Korea from 23-29 April 2020. Kia plans to halt production at two factories in Gwangmyeong, south of the capital city Seoul, and one in Gwangju for one week starting on 23 April 2020. These three plants are responsible for producing most of Kia Motors’ export models, including the Sportage and Soul SUVs.

“The decision is strategic and has not been warranted by the lockdown or workforce safety.  Kia has made the decision in order to combat the oversupply amid declining overseas demand. Kia’s passenger car exports from Korea declined by 33.3% in first three months of 2020.  

“Earlier this month, Hyundai Motor had announced its plan to suspend production at its assembly plant in Ulsan. The two companies have also suspended production at most of their overseas plants in the last two months, including in India, China, Europe and US. It is a ploy to overcome the situation of oversupply and to avoid the resultant issues like unsold goods and inventory management costs.

“Passenger vehicle exports from South Korea is expected to remain impacted by Covid-19 in the first half of 2020. Moreover, cutting down of production by OEMs will lead to a domino effect on components demand. OEMs, which are heavily dependent on exports, need to optimise/re-plan production considering the existing uncertainties.”

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