Hyundai deal not yet high and dry

Hyundai Getz

Could one of the biggest foreign investments in the Czech Republic since the fall of communism be under threat? Plans by the South Korean car manufacturing giant Hyundai to build a major plant in the small town of Nosovice have been beset by last minute problems. On Monday the South Korean news agency Jonhap unexpectedly reported that Hyundai management had decided to postpone construction work on the plant. That is even though they approved the investment just a few days ago. This also comes just as the company's chairman has been indicted in Seoul over a cash-for-favours scandal and is being held in custody.

There was a good deal of surprise in the Czech Republic at Monday's agency report, coming just a month before building work is due to begin. At this stage it is just speculation, although a company spokesman did appear to confirm the delay on Tuesday. It seems very unlikely that the whole deal will be sunk; the Koreans are probably simply waiting to find out the immediate fate of their chairman Chung Mong-Koo. With him behind bars there is a leadership vacuum in the company.

Nosovice is to be a major plant, eventually producing 300,000 cars annually, and it is central to Hyundai's current European strategy. As far as we know, they are not negotiating with anybody else apart from the Czech Republic over the investment, so there would be no immediate alternative, should the deal fall through. Another significant factor, which makes it very unlikely that Hyundai would back out at this stage, is the huge loss of face it would involve to a company that is already facing a major image problem with its leadership crisis back home.

Milan Urban
The Czech Trade and Industry Minister, Milan Urban, is travelling to Seoul this week to sign the deal officially, and he insists that all is going ahead according to plan. On Tuesday he said that Hyundai's management had given him assurances that the first car would roll off the production line in Nosovice in 2008 as agreed.

Prague-based automotive journalist Lyle Frink, who has been following developments closely, says he is confident that the management crisis in Hyundai is not going to lead to the kind of collapse that recently occurred with another South Korean automotive giant, Daewoo. That collapse led to several hundred job losses here in the Czech Republic a couple of years ago:

"This is not a Daewoo-style explosion of investment and then an implosion of the company. This is connected basically with the transfer of ownership between the Hyundai chairman and his son."

So this is simply a question of individuals within the company.

"Correct, but there is a fear that because so much management involvement is on this legal problem, it might affect things two years down the road. But it's not connected with how we make Hyundai cars today."

It's interesting that this comes just a couple of weeks after the opening of another major car plant in neighbouring Slovakia, in Zilina, just a few dozen kilometres from Nosovice, by Kia, Hyundai's sister company. Is there a direct connection between these two deals?

"Yes, there is a direct connection. The Zilina plant in Slovakia will be making the engines for the Czech plant, and the Czech plant will be making transmissions for the Zilina plant. Also, both plants will be sharing the same supplier pool. There is a Korean company created in Ostrava, which will be doing stampings for both factories."

What does it mean, having these two major plants so close to one another here in Central Europe?

"This is a hub. This is where everything you need to make a car can be found within a radius of about 150 or 200 kilometres, and this hub includes the western flank of Slovakia, the Czech Republic and also a bit of Southern Poland."

And it is clearly quite a major onslaught by the Korean automotive industry.

"Absolutely - and it is not something that is predicated on cheap labour. The labour cost on a car - and it depends on the actual car - is between 15 and 20%. So that's not where all of the cost is. In the Zilina factory, it is amazingly modern. There are over 300 robots putting the cars together. So this is a warning signal to other auto-makers in Western Europe, not only that their labour costs are higher, but also, perhaps, that their production plants are less modern than these new ones going in."