Hyundai Rotem losing growth momentum

A subway train produced by Hyundai Rotem runs on a railway. The company is calling for the government’s support to win momentum for a rebound amid declining sales due to weak domestic demand and fiercer competition with Chinese rivals. / Courtesy of Hyundai Rotem

Company calls for state support to survive

By Park Si-soo

Kim Seung-tack Hyundai Rotem CEO

Hyundai Rotem, Korea’s leading railway vehicle maker, is seeing faltering growth in the face of falling domestic demand and intensifying competition from foreign rivals, especially from China Railway Rolling Stock Corp. (CRRC).

Hyundai Motor’s affiliate reported a 13 billion won ($11.5 million) operating loss in the first half of the year.

Its operating profits in 2014 were 6.6 billion won, down from 174.4 billion won in 2013. Sales have been falling in recent years.

The government’s revised rules on railway vehicle maintenance that took effect early last year have undermined the company’s bottom line significantly.

The revised rules have enabled the domestic subway operators ― Korea Railroad Corp. and Seoul Metro ― to keep using subway cars for more than 25 years.

The extended lifespan has led to a sharp drop in domestic demand for new subway cars, according to market observers.

They said it was hard to expect domestic demand to increase anytime soon because there were no planned subway or railroad projects.

Hyundai Rotem is also battling falling sales in key overseas markets, including the U.S., Brazil, India and Turkey.

The company has had continued growth in these markets for years. But it started losing its luster when the Chinese government expanded its subsidies to domestic manufacturers, including the CRRC, which gave them greater room to slash prices.

As a result, despite advanced technology and a better track record, Hyundai Rotem lost to the CRRC in recent bidding in Hong Kong.

“The CRRC appeals to customers with prices that are nearly 20 percent lower than ours,” a Hyundai Rotem spokesman said. “With the technological gap narrowing quickly, Chinese makers are expanding recklessly with their competitive prices.”

He said Chinese makers’ expansion in this field is difficult for Hyundai to overcome.

“We have generated the majority of our sales and profits overseas,” the spokesman said. “But China’s reckless expansion has undercut this significantly. Our situation is very serious indeed.”

He said the government’s support was urgently needed to keep the company afloat.

“Although the government may have limited influence on overseas deals, it is able to turn domestic market conditions favorable to us,” he said.

The spokesman called on the government to revive the ban on the use of subway cars older than 25 years.

“It’s not a fundamental solution, but it will give us momentum for a rebound,” he said. “And if possible, the government should pay more attention to our overseas business.”

Investors have a grim outlook for Hyundai Rotem. They expect the hardships for Hyundai Rotem to continue for awhile.

KDB Daewoo Securities recently advised investors to refrain from buying Hyundai Rotem shares, citing its sluggish growth.

“At the current pace, it’s hard to expect that Hyundai Rotem will make a dramatic turnaround next year,” said Sung Gi-jong, a KDB Daewoo analyst.