Higher material costs, production disruptions offset sales
Hyundai Motor said Thursday that its second-quarter operating profit dropped about 21 percent as rising raw materials costs and production disruptions outweighed record-breaking revenue and robust demand for its hybrid vehicles.
South Korea's largest automaker reported an operating profit of 2.85 trillion won ($1.94 billion) for the April-June period, down 20.8 percent from 3.6 trillion won a year earlier.
Revenue rose 1.9 percent to 49.22 trillion won, marking the highest quarterly figure in the company's history, buoyed by increased sales of hybrid vehicles and a weaker won.
Net profit totaled 2.89 trillion won.
The earnings decline came as Hyundai faced rising material costs, weaker global automotive demand and production setbacks caused by a fire at a parts supplier in March, giving the automaker an operating margin of 5.8 percent.
Hyundai's Chief Financial Officer Lee Seung-jo explained that a fire at a supplier that provides engine valves to Hyundai's domestic plants disrupted output for several high-volume Hyundai models and Genesis vehicles.
"We sought to minimize production disruptions and were able to complete the development and application of replacement engine valves in May," Lee said during a conference call. "However, because most of the models affected by the disruptions were high-value vehicles, the resulting deterioration in our product mix weighed on second-quarter profit."
Lee added that a separate fire at a Hyundai Mobis plant in India also temporarily affected the local unit there.
US tariff costs additionally cut into profitability. According to Lee, Hyundai paid roughly 900 billion won in tariffs during the second quarter, about the same as in the first quarter.
"We paid about 1.8 trillion won in tariffs in the third quarter of last year and about 1.5 trillion won in the fourth quarter," Lee said, illustrating the trend. "We expect the impact of tariff payments to diminish as we move through the second half."
In the second quarter, Hyundai delivered 991,885 vehicles, a drop of 6.9 percent from a year earlier.
Domestic sales dropped 16.4 percent to 157,647 units, partly because of production disruptions caused by a fire at a parts supplier. Overseas deliveries fell 4.9 percent to 834,238 units as demand slowed in several major markets.
Sales in Europe remained sluggish, dropping 10.9 percent on-year as Hyundai's existing Kona and Tucson models aged and competition from Chinese electric vehicles intensified, the company explained.
"The aggressive push by Chinese EV makers has had a significant impact on overall market demand," said Lee. "Our response in the EV market has been limited to models such as the Ioniq 5 and Kona Electric, and we have lacked a B-segment EV that could compete directly with Chinese vehicles."
Lee added that Hyundai is preparing to launch Ioniq 3 in the region, with an aim to sell more than 20,000 units in the second half.
The US remained a relative bright spot for the company, with Hyundai selling 264,587 vehicles in the market, up 0.9 percent from a year earlier, securing a market share above 6 percent.
By powertrain, hybrids performed well, with sales climbing to a quarterly record of 187,661 vehicles, while electric vehicle sales totaled 69,366 units. Overall sales of electrified vehicles, including hybrids and EVs, rose 1.7 percent to 266,627 units.
Hybrids accounted for 18.9 percent of Hyundai's total vehicle sales, while electrified models represented 26.9 percent. Both were record-high proportions.
The expansion of higher-margin hybrid sales, coupled with favorable foreign-exchange rates, helped drive revenue growth despite the decline in overall deliveries.
The Korean won averaged 1,502 against the US dollar during the quarter, weakening 7 percent from a year earlier, which increased the value of Hyundai's overseas earnings when converted into the Korean currency.
Looking ahead, Hyundai warned that difficult operating conditions are likely to continue as macroeconomic uncertainty continues and competition among automakers intensifies.
The company plans to bolster sales with a series of new and refreshed models, including the recently unveiled New Grandeur, a facelifted version of its flagship sedan. Hyundai also plans to launch the New Grandeur hybrid and additional models, including a revamped Avante, in the second half of the year.
The company stated it would keep rolling out contingency measures to offset pressure on profitability, including the effects of tariffs and rising production costs.
Despite difficulties from geopolitical issues and intensifying competition — which have driven a 3.8 percent on-year decline in global auto industry demand — a Hyundai Motor official said that with new model launches in the second half and companywide efforts, Hyundai would achieve the annual guidance it had set at the start of the year.
Hyundai in January set a full-year target of 4.16 million wholesale vehicle sales, along with consolidated revenue growth of 1 percent to 2 percent and an operating margin of 6.3 percent to 7.3 percent.
sahn@heraldcorp.com
